Investing in Latin America

South-AmericaMarket Overview

Although roughly 175 million people in Latin America are still living in poverty, the region has experienced tremendous growth over the past five years and has seen improvements for even the most vulnerable segments of the population. While the investing climates vary widely by country, many Latin American countries present attractive investing opportunities due to their comparatively favorable regulatory conditions.

Opportunities

  • Favorable Regulatory Environment. Through the North American Free Trade Agreement and other foreign investment treaties, many countries in the region—like Mexico and Colombia—have attracted significant investment inflows and established clear regulations governing foreign investments in local companies.
  • Consumer Base. In countries like Mexico, 70% of the population lives above the poverty line, earning between $2 to $8 a day. This earning level creates an excellent opportunity to introduce market approaches to poverty reduction.
  • Government Support. Investment projects in economically disadvantaged areas or areas undergoing industrial redevelopment are usually eligible for regional aid, such as corporate tax exemptions, low-cost or free industrial land sites, and financing from federal, state, and municipal governments.
  • Geography. Proximity to the US and small time-zone differences make it easier for investors to visit and work more closely with entrepreneurs than in other regions.

Demand Dividend in Action. Maya Mountain Cacao (MMC), a 2013 Agora Partnership Impact Enterprise, was recently funded by three Toniic members using the demand dividend alternative investment structure. MMC sources premium cacao from small-holder Belizean farmers for their clients – makers of fine chocolate products. Their model delivers exceptionally high-quality cocoa, a growing source of income for farmers while also contributing to reforestation efforts and promoting sustainable organic agricultural practices. This investment was structured by the Eleos Foundation through their LLC model. Pi Investments, which has a specific emphasis on community empowerment and ownership, joined the LLC. PI has been working with the entrepreneur to build a fully inclusive model, with all stakeholders, from farmers to buyers, having the opportunity to participate in both governance and ownership structures. Their hope is to create a model for the cacao industry that goes beyond a fair trade premium model to fully share upside potential with all parties. The fact that the investment was structured as a demand dividend also played into Pi’s decision. The variable obligation implied in this investment offers a clear and mission-preserving path to liquidity for investors, while providing the flexibility required for MMC to achieve growth.

Challenges

  • Corruption: According to the Transparency International Corruption Perception Index, two-thirds of the region’s 32 countries are ranked on the low end of the list placing them among the most corrupt nations on the planet. Brazil and Mexico were highlighted in the 2012 report as working on much needed reforms.
  • Exchange Controls. Various exchange controls are imposed by countries in Latin America and these are often accompanied by tax implications for the investor. Brazil, for instance, requires registry in the Central Bank in order to make a capital investment. To avoid legal and bureaucratic complications, many investors fund ventures through a feeder fund as opposed to directly.
  • Instability. The rules of law change frequently and unexpectedly in some countries in the region, making investments riskier. Venezuela and Bolivia have suffered political upheaval and/or revolution. Argentina, and Brazil have stable governments, but dynamic currencies or economic policies, which make compliance with all the norms and licenses especially challenging in sectors such as health and the environment. Chile and Colombia have some of the most stable investing environments; Chile boasts perhaps the best-developed VC scene in Latin America.
  • Liquidity. Few acquisition opportunities exist for selling smaller firms through third-party sales, and the likelihood of an IPO is even lower. Therefore, alternative investment structures should be considered that allow exits based on the firm’s cash flows. Given the limited exit opportunities, investors in the region usually prefer to use debt as opposed to equity.
  • Partnership Building: In the US and Western Europe, investors trust the rule of law and the legal system, allowing partnerships and agreements to be completed quickly. In Latin America, however, investors must rely on partners to navigate the local culture and business environment as a strong regulatory framework does not always exist.
  • Tax Laws. Due to the complexity of various tax regimes in the region—and a high-level of noncompliance—it can be difficult to be competitive if your investment is not structured in a tax-efficient fashion.

Resources

  • Adobe Capital. An impact investment fund that provides a mix of financing and technical assistance to promising, high-impact small and growing businesses (SGBs). The company provides flexible financing solutions, from working capital loans to support day-to-day operations, to equity-like investments to finance the purchase of long-term assets, company expansions and/or acquisitions. http://www.adobecapital.org/
  • Agora Partnerships. The accelerator program is the main activity, but Agora also acts as an incubator, a venture fund, and a mentoring partner. Focused only in Latin America, Agora targets companies with mature customer base and expected growth of 20% within 3 years. http://agorapartnerships.org/index.php
  • The Aspen Network of Development Entrepreneurs (ANDE). A global network of organizations that invest money and expertise to propel entrepreneurship in emerging markets. http://www.aspeninstitute.org/policy-work/aspen-network-developmententrepreneurs
  • Banco de Desarrollo de America Latina (CAF). A financial institution dedicated to the regional development of Latin America. Focused on areas such as infra-structure, social development, and environment, CAF offers loans and other types of financial and technical advisory. http://www.caf.com/en
  • Banorte. A bank from Mexico with a special focus on SMEs. http://www.banorte.com/portal/pyme/home.web
  • Endeavor. Endeavor helps high-impact entrepreneurs by providing a network of seasoned business leaders, who provide mentorship, strategic advice, and inspiration. www. endeavor.org
  • Fundacion Avina and Avina Americas. Both non-profit organizations, Fundación Avina identifies tipping-point opportunities in the region, then shares these with Avina Americas in an effort to build regional alliances. Fundación Avina employs its resources, local presence in 13 countries, and relationships with thousands of allies to build shared strategies with the potential for continent-wide impact. http://www.avina.net/esp/
  • IGNIA. A venture capital firm based in Mexico that supports the founding and expansion of high-growth social enterprises that serve the base of the socio-economic pyramid. http://www.ignia.com.mx/bop/
  • Inter-American Development Bank (IDB). The bank has formed partnerships with institutional investors, wealthy individuals, foundations and companies to advance projects that generate social and financial returns. As well as providing technical assistance, it has arrangements to co-finance projects through equity investments, syndicated loans, and partial credit guarantees. http://www.iadb.org/en/inter-american-development-bank,2837.html
  • NESsT. A catalyst organization for social enterprises in emerging markets, providing financial capital, training and mentoring, and access to markets for a high-impact entrepreneurs. In Latin America, NESsT works in Argentina, Brazil, Chile, Ecuador and Peru. http://www.nesst.org
  • New Ventures. Founded in 1999 by the World Resource Institute, New Ventures operates in three Latin American countries (Brazil, Colombia, and Mexico) providing business development services to environmentally-focused SMEs. New Ventures prioritizes enterprises that seek biodiversity conservation, energy efficiency, natural resource conservation (non-water, non-energy, non-agriculture), pollution prevention and waste reduction, sustainable energy, and water resource management. http://www.wri.org/project/new-ventures or http://www.nvm.org.mx/
  • Pipa. Brazilian accelerator focused on projects that generate shared value. Based in Rio de Janeiro, the company offers capital and mentorship to entrepreneurs who want to make a positive impact in the world. http://www.pipa.vc/
  • Start-up Chile. A program from the Government of Chile to attract world-class early stage entrepreneurs to start their business in Chile. http://startupchile.org/
  • Toniic LatAm. Toniic is a global network of action-oriented impact investors. http://www. toniic.com
  • Vox Capital. A young venture capital fund in Brazil focused on business at early stages of development, directed to low-income Brazilians and with profound positive social impact. Their preferred areas are education, health and housing. http://www.voxcapital.com.br/

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