VC Trends in Global and Latin American Markets - How to attract institutional investors in Latin America?
Boris Daniel Lancheros Monsalve
Lanchmon │ Multi-Strategy Fund Manager │ Harvard M&A TA │ Ex Endeavor Catalyst │ Mentor
Last week, Carta hosted a webinar titled "VC Fund Performance: New Benchmarks for 2024," where Peter Walker , Head of Insights at Carta , and Elizabeth "Beezer" Clarkson , partner at Sapphire Partners —a fund-of-funds that invests in venture capital firms—discussed key information about the performance and data collected from more than 1,800 venture capital funds in the US, as well as the current state of the market, based on data gathered through the first quarters of 2024.
While the information focuses on #GlobalMarkets, I’d like to highlight some important lessons for emerging markets, especially in Latin America, from the conversation.
I invite you to read my analysis and share your thoughts in the comments. Let’s open a discussion about how these insights apply to our region and what strategies we can use to adapt and thrive!!!
One of the most interesting aspects highlighted in the webinar was the growth in VC activity in the second quarter of 2024. There was an increase in both the volume of VC deals and the capital raised. The average time for startups to move from seed rounds to Series A decreased during this period. However, the most revealing aspect was that the frequency of bridge rounds decreased in rounds following the seed stage, indicating an improvement in market stability.
M&A activity also continued its upward trend in the second quarter, rising from 151 acquisitions in the first quarter to 158 in the second quarter of 2024. Although the quality of these transactions was not detailed, it is clear that there has been market movement, even though many actors are waiting for the IPO market to reignite and elections to conclude, which could bring greater stability to the landscape.
An interesting observation from this data is that many investors are waiting for new raising companies to emerge rather than continuing to invest in established ones. This shows a shift in market dynamics, where LPs are interested in seeing how new companies navigate a challenging macroeconomic environment rather than focusing solely on companies with longer histories.
Another conclusion discussed was the distinction in the composition of Limited Partners (LPs) depending on the size of the funds. Funds under $25 million have a median of 27 LPs, mostly made up of high-net-worth individuals (HNWIs), family offices, and funds of funds. In contrast, larger funds, over $100 million, have a median of 75 LPs, with the 75th percentile reaching 109 LPs. These larger funds tend to aggregate larger institutional checks from major financial institutions. They may also include a mix of 30-40 CEOs with smaller checks and other General Partners (GPs).
This difference in LP composition has important implications for emerging funds in markets like Latin America. Smaller funds face greater difficulty attracting large institutional checks in their early stages and typically rely more on high-net-worth individuals and family offices. As these funds grow and demonstrate their ability to identify unicorns and generate solid returns, they attract the attention of institutional investors, which typically happens in their second or third fund.
This gradual growth of the LP base raises a fundamental question: When should an emerging fund start seeking institutional investors? The evidence suggests that institutional LPs are more reluctant to invest in a manager without a proven track record, so early funds usually depend on more personal networks or LPs willing to take on greater risks. The big question is why an institutional investor should support someone without a proven track record when they could opt for a manager with solid experience, and this is a challenge many emerging managers must overcome.
Furthermore, a key aspect for managers is deciding how concentrated their LP base should be: having a small group of large investors can provide stability, but it also increases risk if one of those LPs decides to withdraw. On the other hand, a more diversified base, though less dependent on a few large LPs, may require more management in terms of communication and alignment of expectations.
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One of the most important points for fund managers is how to build effective relationships with LPs. A key approach is ensuring that managers do their homework before approaching LPs. It is crucial that fund managers thoroughly understand potential investors, their expectations, and how the fund’s strategy aligns with those expectations. It’s not just about securing capital but about finding a “good fit” between both parties.
For emerging managers in Latin America, this strategic preparation is even more important. They must demonstrate that they have thoroughly researched the LPs and are ready to engage in a dialogue where investors can share their priorities while managers highlight how their approach can meet these expectations. This preparation not only strengthens trust but also lays a solid foundation for a long-term relationship.
Capital recycling is an interesting strategy of a fund's lifecycle. This process refers to the ability to reinvest the capital distributed to LPs rather than distributing it immediately. In venture capital funds, where investment cycles are often long, recycling is key to maximizing returns and ensuring the fund has enough capital to continue investing in new opportunities. This practice is essential in low-liquidity environments like the current one, where LPs are increasingly pressing for early Distributions to Paid In (DPI).
However, capital recycling can be a more effective long-term strategy to maintain fund performance. In emerging markets like Latin America, where exits through IPOs or M&As can take longer, the ability to recycle capital is an interesting approach to continue fueling the growth of investment portfolios and building confidence among financiers. It is crucial for fund managers to decide clearly when to distribute capital and when to recycle it, depending on the portfolio’s health and the fund's overall strategy.
During the webinar, it was highlighted that the performance of venture capital funds varies significantly depending on their year of creation. Funds created in 2017 had an average Internal Rate of Return (IRR) of 30.6% in the 90th percentile, while funds from 2022 had an IRR of 11%. In the 25th percentile, many recent funds showed negative IRRs, reflecting a challenging macroeconomic environment. This reinforces the idea that a fund’s early years are not the best indicator of its success, as venture capital is a long-term game.
The Total Value to Paid In (TVPI), which measures the value generated relative to the capital invested, showed a similar trend, with 2017 funds reaching a TVPI of 3.63x, while more recent funds had more modest values. It is essential for managers to maintain open communication with their LPs about the financial health of the companies in their portfolios, as a high TVPI does not always reflect solid health if the companies have not yet completed additional financing rounds.
As for DPI, which reflects the actual return of capital to investors, recent funds have struggled to generate distributions due to low liquidity activity in markets like IPOs and M&A. However, proper capital recycling can help offset this lack of liquidity, allowing funds to continue investing and eventually generate greater returns.
At Lanchmon , we understand that finding the right LPs is one of the biggest challenges for emerging managers in Latin America. Diligence and strategic focus are crucial not only to attract capital but also to establish relationships that endure and support the long-term growth of funds in the region. The adoption of global best practices, such as capital recycling and strategic preparation for working with LPs, is essential for fund managers in emerging markets to thrive.
As the venture capital ecosystem in Latin America continues to mature, the implementation of these practices will not only improve fund performance but also contribute to the professionalization and sophistication of the regional ecosystem. We are committed to guiding fund managers in emerging markets on this journey, providing them with the necessary tools to bridge the gap between local capabilities and global expectations. Through a clear and disciplined strategy, emerging funds can successfully navigate the challenges of venture capital and contribute to the sustainable growth of the ecosystem in Latin America.
Boris Lancheros
CEO & Founder Lanchmon