In the U.S. alone, private equity had reached a record $944.4 billion worth of deals in 2021 until November, according to Dealogic. With 2.5 times the volume compared to 2020, and more than double that of the previous record in 2007, the Wall Street Journal recently proclaimed that “big leveraged buyouts are back, and this year’s (2021) crop might be a taste of things to come.”
One of those recent operations was an $11.8 billion deal to buy San Jose, California-based cybersecurity-software firm McAfee by a group led by private equity firms Advent International and U.K.-based Permira. With the recent spike in ransomware incidents and other cybersecurity attacks, the security sector around the world urgently needs such major cash infusions to take on well-funded criminal syndicates. It’s a sweet-spot sector for Advent.
In geographic terms, Latin America has also been calling Advent’s attention due to its immense and still unexplored potential in many of the firm’s areas of expertise.
In 2021, until October, VC investments in LatAm alone have surpassed $11.5 billion – nearly double the $6.2 billion in total private investments (both venture capital and private equity) that spilled into LatAm back in 2011, says LAVCA, the Association for Private Capital Investment in Latin America.
Latin America is now a global hotspot for private equity
According to a new study commissioned by Auxadi, a company that provides accounting, tax, and payroll services to private equity multinationals, “the level of interest among GPs in Latin America as an investment destination has outstripped Asia Pacific and the Middle East” for cross-border capital deployments planned during the next five years.
Along with a growing appetite for LatAm, private equity investors noted some issues to confront as well – with 44% citing “myriad jurisdictional differences in law and regulatory frameworks and compliance regimes” and one in three (33%) flagging “cultural differences and the misalignment on valuations between buyer and seller” as the primary challenges to overcome.
To better understand the private equity landscape and the investment opportunities that lie ahead in Latin America during 2022, LABS sat down with Advent’s partner and managing director for Latin America, Brenno Raiko.
Advent International is one of the largest and longest-serving private equity partnerships. Since its founding in 1984, the firm has invested $58 billion in more than 380 private equity deals across 42 countries. Raiko manages more than 40 investment professionals and he oversees all of Advent’s tech-sector assets in Latin America.
Advent’s recent investments in Latin America include Nubank, the world’s largest independent digital bank; EBANX, a Brazil-based fintech unicorn that processes payments for global companies in Latin America and owns LABS; CI&T, a global provider of digital transformation services; Grupo Farmacéutico Somar, a leading generic drug manufacturer in Mexico; and Canvia, a leading IT services provider in Peru.
And its recent exits from LatAm include Grupo BIG (formerly Walmart Brazil), the third-largest food retailer in Brazil; Easyinvest, the largest digital investment platform in Brazil acquired by Nubank; Grupo Biotoscana (GBT), a leading biopharmaceutical company; and Grupo Fleury, Brazil’s largest provider of premium medical diagnostic services.
Here are the main excerpts from our recent conversation with Brenno Raiko:
LABS – Brazil was quite a nascent market a decade ago compared to today. Are you surprised at how well the region is doing in terms of the high level of investment, the size of the rounds, exits, and IPOs for Brazilian companies, especially in the midst of a global pandemic and the economic fallout because of it?
Brenno Raiko – Certainly more GPs and global investors are looking at the region, and the pandemic accelerated that even further. Even pre-pandemic, there was a more active tech and growth environment. It started its ascension about three to four years ago when the market started to accelerate in terms of more money coming in, more success stories, and exits.
I think we’re in a very interesting moment today, and the flywheel just keeps going. This is a record year for new investments in LatAm, and hopefully, that momentum will continue over the next few years – and we’ll see even more success stories in the region. With more success stories, more returns, and more great entrepreneurs running growing companies, the flywheel will continue on and keep the game interesting.
LABS – Fintechs have been the leading sector for LatAm investors for many years now. Which sectors do you see emerging in terms of investor interest and innovations to solve big challenges in 2022?
BR – Fintech is the densest sub-sector and because of the investments and market dynamics, they are profit pools. In Brazil, there are big opportunities ahead to continue investing in LatAm companies leading the market in cybersecurity, health tech, consumer tech, software, and digital services.
LABS – We have seen an uptick in startups focused on new approaches to improve healthcare while reducing costs. In part due to efficiencies created by Brazil’s decision to allow telehealth tech to be used during the pandemic, Brazilian health techs like Klivo and Sami are experiencing fast growth and larger rounds from global investors. What’s your take on the health-tech opportunity ahead?
BR – It’s important to have the understanding and conviction to invest in these new intersections to help solve big challenges such as improving the quality of healthcare in Brazil. At Advent, we know both sides very well – from the incumbent or traditional healthcare sector to the health-tech companies that are trying to disrupt the sector. We continue to be bullish and will invest in healthcare leaders, biotech, health tech, and pharmaceuticals where we have deep expertise and knowledge across Advent’s global network.
LABS – You mentioned cybersecurity earlier, and malicious attacks of all kinds continue to be a massive problem in Latin America, especially in Brazil where a cyber-attack occurs about every 11 seconds, according to the CyberLabs Group. What’s most intriguing to you about the sector today?
BR – Cybersecurity remains a core part of our investment thesis, and we have been investing a lot in the space including a recent hallmark transaction in the U.S. with the purchase of McAfee. Since we saw a huge digital transformation during the pandemic (including a sharp uptick in remote work from home), there’s been an urgent need for better ways to protect companies and people. At Advent, we follow the global trends from LatAm, alongside our tech team in the U.S. – and, together, we pursue and make investments in companies in Latin America and beyond that are tackling many cybersecurity issues.
LABS – Tell us more about how Advent is structured and how you operate and cooperate across markets.
BR – Today at Advent, we have three main active programs: GPE, or Global Private Equity that mainly focuses on making buyouts globally that is now on fund number nine; our Latin American program that is purely dedicated to this region – which is currently focused on fund number seven; and three years ago, we started our first tech-sector program called Advent Tech, which is based in Palo Alto, California.
In Latin America, we have more than 40 investment professionals, so it’s a very sizable team across São Paulo, Mexico, and Colombia. We combine our people in Latin America with other teams on the ground in Asia, Europe and the U.S. That’s part of our culture at Advent; to work shoulder-to-shoulder and build investment squads in a very collaborative, open way in order to bring the best of Advent to each opportunity. Oftentimes, our entrepreneurs don’t even know where the money is coming from because we put all the resources in front of the team, and we can have one or multiple programs investing in a company.
LABS – For your entrepreneurs, do you also provide value-added services – often called ‘founder services’ in the VC world – such as providing counsel and assistance with operations, marketing, strategy, etc?
BR – It’s a good question. A couple of points there: One, given our buyout background, we’re very hands-on. Two, even for growth deals where we have a minority stake, we have all the tools and resources to help out our entrepreneurs day-to-day. Based on that, we typically build a more concentrated portfolio.
Second, in terms of portfolio support, we have a team of professionals who don’t make investments; instead, their full-time jobs are to support the entrepreneurs and management teams at our companies, and to help them with their value-creation planning. The investment-decision process is handled by our local teams, in coordination with gaining global or sector-specific expertise across the Advent network.
LABS – One huge macrotrend we’ve seen during the pandemic, especially in Latin America, is the digital acceleration that leapfrogged LatAm several years ahead of where it would be otherwise. What types of investment opportunities has the fast adoption of digital payments, for example, presented since 2020?
BR – Advent has been one of the largest investors in financial services and payments for decades now. Since the financial crisis (that began in 2008), we have made many investments in payments. For example, we were an investor in WorldPay, a leading payments company in the U.K. Others have included Concardis, Nexi, and Vantiv.
[In Latin America] We invested in Prisma, which is the largest acquired in Argentina. More recently, we invested in EBANX over the summer. With our deep sector knowledge, we see a humongous opportunity in cross-border payments, local and hybrid payments. That’s what EBANX does; it makes drop-dead simple for global brands and merchants from China, Europe, and the U.S. or wherever to gain access to more than 400 million consumers, across Brazil, Argentina, Chile, Colombia, multiple countries in the region. [E-commerce] penetration is still relatively low. We have a big population [in Latin America], even bigger needs, a lot of complexity. That’s what EBANX solves.