Although there may be declines in valuations and restrictions on the scope of financing, and of course note must be taken, Latin American entrepreneurs should not let the noise of the situation make them lose focus of the symphony they are building.
The main stock market indices in the United States have had double-digit falls since the beginning of the year and the outlook is undoubtedly one of higher financial cost and less liquidity. The expectation in the markets is that the Federal Reserve will increase short-term rates by about 200 points in the year and private capital negotiations will hardly be left out of the effects of this review.
According to PitchBook, if the markets are correct on that forecast, the average interest coverage ratio for recent purchase deals would fall 2.2 times, assuming EBITDA does not change. Going forward, it would have to lower leverage, which has boosted yields in recent years or valuations.
However, the change in the financial cycle must have a differentiated impact depending on the regions, sectors and stages of development of the companies to be financed, apart from the numbers and strength of each one.
In the first quarter, funding activity actually fell in the United States and Asia, as well as in Latin America, where, in fact, we have experienced three consecutive quarters of slowdown.
According to figures from CB Insights, the investment of venture capital in the region it fell by 25% between the fourth quarter of 2022 and the first of this year, and in Mexico, 59 percent. However, we continue to see investment rounds with excellent results and projections for both entrepreneurs and investors. As TechCrunch has pointed out, the decline in global venture investing might not be bad news for the region.
In the US, early-stage deals hit record valuation highs in the first quarter, suggesting start-ups may be more insulated from the turmoil. While shares of new companies that are already public are down substantially, along with the average of late-stage valuations, there isn’t a week that goes by that we don’t see successful funding rounds of startup from Brazil, Mexico, Argentina, Colombia, Chile and other countries, including initiatives from the United States and Spain focused on the region.
These signals, which at first glance seem contradictory, may well reveal powerful reasons to hope that risk investing will continue to flow. Furthermore, we are still in an extraordinary moment for its expansion and an unrepeatable opportunity, both on the side of investors and entrepreneurs.
The financing boom has not responded solely, or even mainly, to rates close to 0% in developed countries, although, of course, it has helped. It resides in much deeper factors that are the ones that matter to undertake and invest in the long term.
In addition, rates in developed countries remain historically low and the spread with respect to emerging countries will continue to be wide, and while the shares of technology companies in the United States may be overvalued and in correction, given the massive amount of money that migrated from the fixed income markets to capital markets, many projects in Latin America still have a large margin to grow in valuation.
Review in saturated markets or peak valuations can make companies even more attractive. startup Latin American companies, which present themselves with powerful arguments, over and above financial uncertainty: greater interest and participation from foreign investors and funds and, on the other hand, more experienced entrepreneurs who build on a vast market, largely virgin, for their products and services .
Investors value a growing demand for services geared towards the middle class, which they expect will grow, despite political and economic problems. The case of fintech is illustrative, because it starts from a very low rate of bankarization, both of people and companies, and in the face of this, with the power of digitization to overcome a historical lag quickly and at a relatively low cost.
The example of Mexico: according to the National Survey of Financial Inclusion (ENIF) 2021, recently published, on a universe of more than 90 million adults, those who have some type of formal financial product (savings account, credit, insurance or Afore) does not reach 57 million, less than 68%.