The Tech Opportunity in Latin America

We at Brunel have been doing lots of work on the on the burgeoning tech / VC space in Latin America that we want to share some of what we've been seeing. Tech in LatAm is an area that, despite regional economic and political issues, continues to deliver outstanding opportunities, which have for a long time been being overlooked by most investors internationally.

For example, did you know the world’s most valuable digital bank is LatAm based Nubank?

Latin America is a market where many aspects of daily life are painfully inefficient and bureaucratic, held back further by poor logistics infrastructure and until more recently weak internet connectivity. Mobile usage has exploded, with Latin Americans being among the most prolific users of social media and internet globally. The success of PIX, the Central Bank led mobile payments system that went from 0 to 110 million users in a year, shows the propensity for Brazilians to adopt new technology. Nevertheless there remains a lag in the broader adoption of technology for other purposes, as shown by low e-commerce penetration and the relatively small share tech companies constitute within local indices (see charts below).

Made possible by rapid tech adoption across the population, a talented generation of entrepreneurs is now taking aim at the inefficiencies that have frustrated Latin Americans across sectors across retail, banking, health, travel and property.

Whilst the opportunity set here has started to gain international recognition (see articles from the FT, the Economist, TechCrunch, NBC), it remains relatively under-capitalized versus the US and Asia. The volume of VC funding into Latin America has grown substantially, breaking records this year (see chart below). This has been driven by large international players like Sequoia and Softbank, who have been increasing their bets in the region, as well as a thriving ecosystem of local players backed by a rush of local money fleeing low interest rates and searching for growth.

Whilst the absolute value of VC flows in LatAm is increasing dramatically, it remains small compared to more developed tech markets of the US & China, even India. Although hard to compare like-for-like, we have taken VC funding versus GDP and even more crudely versus tech unicorns below to give an illustration of how the market here remains considerably under-capitalized on a relative basis. From what we are hearing anecdotally from investors looking across the US and LatAm, valuations for VC deals here are considerably cheaper than in the US as a result. Given how far behind LatAm is in terms of development, there remains a good deal more ‘unclaimed areas’ for firms to target.

Whilst Latin America, and Brazil in particular, continues to face economic and political headwinds, it remains a much more ‘free’ market for tech companies than many EM peers. It is rare to hear substantial criticism of tech firms from LatAm governments or the wider population with both seeming broadly supportive of the disruptive improvements that tech can bring (including crypto) . We have had several conversations with investors who had invested heavily in China, now looking elsewhere, concerned about the recent political treatment of the CCP towards tech companies. Even in India, by comparison the government’s approach towards tech companies seems fickle and conditional.

We are always trying to balance the negativity we read in the news versus not just the optimism we see when speaking to investors and entrepreneurs participating in this tech story, but the transformations we are seeing in our daily lives as tech radically improves the lived experiences of millions across Latin America. What is clear to see is that whilst the overall picture is not (yet) resulting in high headline GDP growth figures, there is a huge transition story happening as old-economy incumbents get dethroned by new tech-forward entrants:

• New challenger digital banks (Nubank, Inter, XP) replacing old stodgy incumbents.
• E-commerce – platforms (Mercado Libre, now LatAm’s most valuable company and Magazine Luiza) racing away from brick-and-mortar retail.
• Social media and digital advertising dethroning oligarchic media dynasties.

Besides the more obvious sectors, there are Latin American success stories emerging across AgTech, Healthtech, Crypto, Renewable Energy and Plant-Based Protein.

We at Brunel are close to many of the main players in this ecosystem as advisors, investors and connectors to capital allocators. As the market deepens, there is a diverse and growing number of ways to access this market from pre-seed focussed firms, through traditional VC, growth equity and cross-over public equity managers. Whilst in many ways the pandemic and Zoom have reduced geographical limitations, we firmly believe in the value of local specialists – especially in countries where in-person social interactions and personal relationships remain paramount. We are always open to entertaining discussions with investors and helping to connect them with players down here so they can participate in this transformation.

Disclaimer: Opinions expressed are in a personal capacity. This information is not intended to be, nor should it be used as financial or investment advice or an offer to sell, or a solicitation of any offer to buy or sell and securities.