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Even with the sharp declined in equities early this year, Nubank’s market cap sits way above conservative estimates for the fintech’s valuation prior to its IPO on NYSE (photo) and B3, the author points out. (Photo: Nubank)
Wednesday, February 23, 2022
Perspectives

Latin America’s Venture Capital Boom


Latin America’s investment boom and the pitfalls of American jurisdiction.

 

BY ANDRE THIOLLIER

 

The year of 2021 may have marked Latin America’s golden gate towards innovation and economic prosperity.

 

Global benchmarks indicate that Latin America was the fastest-growing region in the world for venture funding in 2021 according to the most recent data coming from Crunchbase. Early and late-stage venture technology growth investors poured in the region an estimated $19 billion. That represents a staggering threefold increase in volume compared to previous years.

 

The scenario is equally similar in the M&A market. Deals in 2020 were valued just under $63 billion. But a record number of deals were announced in 2021 with a combined value of $133.7 billion, the highest annual value in a decade.

 

Private equity deals also increased substantially. The number of buyouts increased more than threefold in value. Exits volume more than doubled with their value rising almost sixfold, surpassing the previous record set in 2019. Perhaps being the largest economy in the region, Brazilian companies were selected in eight out of ten of the biggest transactions with Colombia and Mexico coming second and third.

 

Looking to this type of activity, it comes with no surprise that late-stage funding in the region was largely driven by late-stage series rounds. According to recent data also released by Crunchbase, $13.3 billion in 2021 went to late-stage deals, which accounts to more than two-thirds of the total funding.

 

These totals were boosted by a small number of mega late-stage rounds.

 

Brazil’s Nubank raised $750 million Series G-II extension led by Warren Buffet’s Berkshire Hathaway fund in June prior to its IPO in late 2021. Mexican Kavak, the automobile used cars marketplace and stores, raised $700 million in its Series E led by General Catalyst with participation of major funds including SoftBank. Argentina’s retailtech Nuvemshop had the highest Series E in Latin America, a $500 million round co-led by Insight Partners and Tiger Global Management. Colombia-based Rappi, a provider of fast delivery services across much of Latin America, raised $500 million in a series F round led by T. Rowe Price in July. And, Brazil’s Loft, a marketplace for the residential real estate market, raised a Series D tranche of $425 million led by New York-based D1 Capital Partner in early 2021.

 

As investors are writing bigger checks, valuations have risen substantially. Latin America has now at least 27 unicorns with some of those companies surpassing decacorn valuation levels.

 

The region also witnessed a most awaited unicorn exit, as Nubank made its double debut both in the New York Stock Exchange and the São Paulo B3 Exchange in the end of 2021. And, even with the sharp declined in equities early this year, Nubank’s market cap sits way above conservative estimates for the fintech’s valuation prior to its IPO.

 

Seed and early-stage rounds saw a huge $5.5 billion of investments from $1.2 billion in 2020 according to the latest Sling Hub report.

 

Crunchbase reported a total of 242 Series A and B rounds in 2021 up from 136 in 2020. Investors are writing bigger checks for early rounds. Payment tech provider EBANX received almost half a billion dollars and Brazil’s crypto exchange Mercado Bitcoin cashed in $200 million for their Series B round.

 

Seed rounds received near $1 billion in 2021 up 50 percent from a year earlier. SafeSpace, a Brazilian digital misconduct in the workplace whistleblower-platform topped seed investment in women-led startup in Latin America backed by ABSeed Ventures and DGV Investimentos.

 

Large investment funds are now looking closely at opportunities in the seed and early-stage rounds. The Beyond the Law.News has reported that SoftBank picked three Brazilian startups to begin its deployment of a $300 million early stage fund announced last September.

 

As record highs are broken in Latin America, and new opportunities are created with lucrative exits and M&A activities which feedback the ecosystem in a typical Silicon Valley model, the stakes are intrinsically higher. 

 

LEGAL PITFALLS


Investors and entrepreneurs must be cautioned,
as noted in an earlier article, that not all Latin American countries are equal and that each have its own legal system, requiring the direct involvement of local attorneys and advisers.

 

On the other hand, and most importantly, much of the capital flowing into the region comes from foreign investors based in multiple countries and jurisdictions. A typical investment or deal agreement will involve directly or indirectly applicable laws and regulations of several countries.

 

Directly, because those agreements will have election clauses as to the applicable laws to interpret such documents. Indirectly, because investors and invested companies (and the deals themselves) may be subject to laws and regulations of the countries where each of those parties have been incorporated in or are residents of.

 

No matter if a deal involves a Brazilian or a Mexican company, where the investment agreements have elected the laws and the courts, for instance, of the Cayman Islands to regulate the transaction, but where American companies are involved in, that an Agency of the United States would have no saying as to whether such deal is adhering to American laws.

 

For a long time now the arms of jurisdictions such as the United States have gone beyond its borders.

 

This extraterritorial application of US laws is of much concern in transactions where US investors or residents are a party to and local counsels may not be privy to laws and regulations in effect (or soon to hit the books) outside of their countries and most of all to political negotiations to change and update them.

 

A classic example is how US tax laws may apply to companies and persons (thus potentially creating tax inefficiencies or contingencies) that are not operating in the US, depending on tax elections or even the percentage of equity held, directly or indirectly, by US tax residents. Another good example comes with the current negotiations going on in the Congress of the United States to modify certain regulations, which could impact even more deals taking place outside the United States. The same applies to European investors in view of the broaden application of European jurisprudence and laws.

 

The investment boom in Latin America will certainly continue to bring immense opportunities to Latin American entrepreneurs and to investors riding this wave of prosperity and innovation in the region.

 

Nonetheless, as Latin American deals become increasingly mature, more complex transactions will require carefully drafted and elaborated investment and acquisition agreements considering the peculiarities of each deal, the parties involved and the laws and regulations which may affect them.  

 

Andre Thiollier is a Partner at Foley & Lardner.

 

 

RELATED LINKS


Latin America M&As Grew 114% Last Year

 

Latin America: Record IPOs

 

CEO of the Year: David Velez, Nubank

 

 

 

 

 

 

 

 

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