Insight 2013: Latin America’s tech story

Gramercy executives David Britts and Gustavo Ferraro are encouraged by the development of tech-based improvements to mid-market companies in Latin America.

The macroeconomic factors fueling Latin America’s burgeoning private equity market are easy to spot – a growing middle class, a greater awareness of the asset class among local financial institutions and the emergence of Brazil as a consistent, stable economy all come to mind.

But one element that is rarely discussed – and poses a great opportunity for investors in the coming years – is technology-enabled growth in the region’s mid-market.

For context, consider the last two decades in the US, where the productivity gains of many mid-market portfolio companies across industry sectors was spurred by investments in technologies that increase efficiency and improve labor production (among other things).

This emphasis on technology-fueled growth created stronger business models and higher EBITDA margins – all of which strengthened the returns of private equity firms who invested in these companies.

Although historically it has been behind the curve compared to US and European investment in technologies at the enterprise level, Latin America’s mid-market is poised to take a similar leap in the coming years.

The focus on technology as a conduit for mid-market growth is relatively new, and as such, Latin America lacks qualified managers to supervise the selection, implementation and exploitation of low-cost, high return on investment technology.

Large telecom companies throughout the region have been investing very heavily over the past few years in Internet infrastructure and wireless infrastructure. These investments are enabling small and medium sized enterprises to fully take advantage of technology such as cloud-based services, supply chain management and customer relationship management, for the first time. That, in turn, has created a space in which operationally focused firms can use their capital and expertise to further stimulate growth.

For firms, the investment process is further aided by the fact that more and more family-owned mid-market companies are led by second or third generation owners, many of whom were educated in the US and are familiar with the ways in which private equity can help facilitate growth.

These owners realise that their companies have taken a parochial view of markets, operations and governance which, by nature of a globalised marketplace, makes it more difficult to achieve returns when they try to sell their companies to third parties. By partnering with appropriate private equity firms, these companies can gain access to capital and technological expertise that will improve those components of their business.

Of course, obstacles do remain. The focus on technology as a conduit for mid-market growth is relatively new, and as such, Latin America lacks qualified managers to supervise the selection, implementation and exploitation of low-cost, high return on investment technology.

That being said, pockets of growth within the technology sector in places like Sao Paulo, Santiago, Buenos Aires and Mexico City are encouraging. As these pockets continue to grow, management talent should expand and mid-market firms active in the region will likely be encouraged.

Gustavo Ferraro and David Britts are managing directors  at emerging market specialist Gramercy, where they co-head the firm's Latin American private equity arm.