In the wake of the COVID-19 crisis, companies have been re-evaluating all aspects of their global operations: supply chains, marketing strategies, partnerships, and more. Meanwhile, investors such as private equity funds, venture funds, and family offices (particularly those pooling their resources) are finding themselves in an advantageous position for expanding their portfolios.
For example, Bain reports that “PE funds have a record $2.5 trillion in uncalled capital—more than $800 billion for buyouts alone—and are on the clock to spend it.” And EY notes that “venture capitalists are sitting on an enormous stockpile of dry powder. Investors have raised more than $100b over the past two years and when the timing is right, this capital will be invested.”
Where have internationally-focused investors and organizations been looking?
Traditionally, many have done business in China, Singapore, France, India, Canada, and Germany—leading recipients of foreign direct investment in 2018-2019. For US companies, these nations, plus Japan, the UK, South Korea, and the Netherlands have been top trading partners. For EU firms, Switzerland, Russia, and Turkey join the list.
Latin America, home to roughly a billion of the world’s population, has risen on organizational radars. One example is in Spain, where companies have invested in the region for decades. Among the Spanish companies who responded to a recent survey, 65% planned to increase their investment in South America, and 72% of SMEs noted increased investment plans. TechCrunch cited the rise of Mexico and Colombia to join “economic powerhouse” Brazil, noting that “even countries like Argentina and Chile are showing signs of increasingly vibrant startup ecosystems.”
Yet challenges have arisen in Latin America as well. Uncertainty about economic policy and reforms in Brazil and Mexico as well as social unrest in Colombia and Chile threaten to dampen the economic outlook of these nations. Across the region, as worldwide, the impacts of the COVID-19 pandemic are just beginning to unfold. Brazil, with its looser approach to restrictions and shutdowns, soon joined the United States and Russia for highest number of cases worldwide. Mexico also has been criticized for its lax response.
In this confluence of circumstances, we think another Latin American market merit investors’ consideration: Argentina.
This may seem counterintuitive given the country’s double-digit inflation, income inequality, and long history of political and economic turbulence—including today’s evolving story of debt renegotiation and default. Furthermore, how Argentina will handle the economic repercussions of COVID-19—like business closures, losses in tax revenue, and the possibility of even higher inflation from measures like lower borrowing rates—remains uncertain.
The answers to these questions are still unfolding. Despite the uncertainties, however, we believe Argentina has much to recommend it, particularly for investors with an appetite for risk: a tech-savvy population, broad-based resources, potentially favorable conditions for M&A activities and recovery, and extraordinary savvy and resilience among the companies that have prospered.
Customers and talent for a virtual world
Argentina has a population of roughly 44 million people, the third-largest population of Spanish speakers in Latin America, and its consumers and workers tend to have a high level of tech savviness. This bodes well in two key areas for today’s climate: ecommerce and remote work.
For Spanish-language businesses, Argentina offers customers who speak their language, ready to buy products and services via their phone, tablet, and computer. To illustrate: even in mid-March, during the early stage of the COVID-19 shutdowns, 87 percent of Argentina’s internet users reported buying or planned to buy items like household cleaning and personal hygiene products online. Argentinians are working online as well. A survey by the nation’s International Network for Education and Work reported 80 percent of the workforce engaging in telework.
For companies expanding operations like software engineering, agile development, or customer service, such tech-savvy demographics bode favorably as well. In Coursera’s 2019 Global Skills Index, software engineering skills in Argentina ranked first worldwide, and CESSI estimates that 134,000 people are working in the country’s IT industry. Moreover, this tech talent is working in a time zone complementary to North American and European operations.
And current conditions appear to be strengthening digital transformation.
“The Covid-19 quarantine accelerated the integration of new information communication technologies (ICT) into work in Argentina,” the Center for Strategic and International Studies reported. “ICT tools like Skype, Zoom, Meet, or Hangouts previously thought of merely as entertainment tools in the past have in fact increased productivity and visibly contributed to keeping the economy moving forward.”
A strong presence in key sectors
While Argentina’s popular travel and hospitality sectors have taken a hit, tango and malbec represent only one aspect of the nation’s economy. Argentina also has strong foothold in evergreen resources and emerging areas of innovation. Highlights include:
Agriculture: Argentina provides a significant portion of the resources that feed us, fuel us, and keep us healthy. This includes nearly 40 percent of the world’s soybean oil and soy meal, as well as a fishing sector that serves 85 international markets, and a wide variety of produce: grapes, apples, limes, lemons, pears, onions, garlic, potatoes, and tomatoes.
What does this mean for supply chains, competitive advantage, and opportunity? As restrictions on migrant worker travel threaten to hinder agricultural production in areas like Europe, Argentina is well-positioned to fill the gaps and accommodate spikes in demand. Furthermore, the country has a rich ecosystem of agtech entrepreneurship and investment in areas such as farm management software, sensing and IoT, and novel farming systems.
Biotech: Notable during a global health crisis, Argentina has 14 percent of the world’s biotech crops—a sector that’s thriving as the world races towards COVID-19 vaccines and treatments and that’s concurrently readjusting as COVID-19 disrupts global trade, supply, and distribution. About the global biopharma industry as a whole, Oxford Business Group noted. “Short-term disruptions in the pharmaceutical industry could potentially result in a significant realignment of supply chains away from China and India, and could lead to long-term benefits for local industries in other emerging markets.”
Fintech: Leading investors are recognizing—and investing in—Argentine companies like payment processor Prisma Medios de Pago SA, of which Advent recently acquired 51 percent, and online marketplace Mercado Libre Inc., in which PayPal-associated Dragoneer recently invested $850 million.
More promising fintech opportunities may be on the horizon, thanks to regulations issued during to foster fintech activities: Decree 182/2019, which gives digital signatures the same legal value as a certified signature and Communications A 6578 and A 6697, for electronic check regulation and the regulation of uniform virtual code, which makes it mandatory for banks to process transfers through mobile devices.
Potentially favorable conditions for recovery and M&A activities
After years of pro-business policies under President Mauricio Macri, some feared an era of retrograde economic policies when the current president, Alberto Fernandez, took office in 2019. Yet Fernandez so far has received positive marks for his leadership during the COVID-19 crisis and with debt renegotiations. One example involves efforts to recruit HSBC, Lazard, and Bank of America to help with the restructuring.
Fernandez and his team also may be leveraging the current confluence of conditions into a potentially precedent-setting restructuring. According to analysts like Nearshore Americas Research, the global financial crisis spurred by COVID-19 may have created a fortuitous moment for Argentina. The opportunity: delay the maturity of some of its loans and ultimately reduce the amount owed to creditors.
“Argentina’s creditors have been asked to accept a proposal whereby debt repayments are being restructured, to make them more sustainable,” the World Economic Forum reported. “Many hope that this could set a precedent for the international financial system, as the world continues to face the economic fallout from the pandemic.”
What about current conditions for business operations? As in many nations worldwide, the Argentine government has provided businesses with some measures of COVID-19 relief. This includes postponing the payment of employer contributions to the Argentine Integrated Social Security System (SIPA), reducing SIPA payments, and having part of employee wages covered by the National Social Security Administration.
While some pro-business policies have unfortunately been suspended, like the Promotion Regime of the Knowledge Economy, those that remain may be particularly fortuitous for investors in the current environment. DLA Piper’s LATAM Law Blog examined potential exemptions to Argentina’s 2018 Merger Control Guidelines for distressed enterprises. The enforcement authority “may authorize [an] acquisition even though it generates anticompetitive effects[,] […] if the exit of the failing firm [would cause] a greater harm to competition than the acquisition itself.”
More M&A opportunities may be emerging in the months ahead. Experts in the market, such as the law firm Marval O’Farrell Mairal, anticipate the COVID-19 pandemic will cause companies to revisit decisions on their strategic investments, particularly those based on short- and medium-term expectations for the global economy.
On the buyer side, one cannot ignore the reality of advantageous pricing, both for distressed investments in advantageous markets and for promising enterprises hungry to grow.
Remarkably resilient entrepreneurs
In 2017, a Reuters report dubbed Argentina “South America’s new hotspot for venture capital, with a growth in investment inflows that outpaced Chile and Brazil, following a 214 percent leap in venture capital transactions in the three years prior. Moreover, Argentina has been home to multiple “unicorn” startups with valuations of $1 billion or more: Mercado Libre, Globant, Despegar, OLX, and the Auth0 platform for the authentication and authorization of web and mobile applications.
What makes Argentina such a hotbed of entrepreneurship? A strong university system with international ties and a healthy ecosystem of start-ups in Buenos Aires, certainly. But perhaps most importantly, Argentina’s companies have succeeded in what Inc. magazine calls “one of the toughest business climates on earth.” To paraphrase the classic Frank Sinatra song: If you can make it here, you can make it anywhere.
Gustavo Markier is one example. He is chief executive of travel website Plataforma 10. Even with COVID-19 and even while operating in one of the hardest-hit sectors, he remains optimistic. What could he do with the help of financing? (It’s important to note that small business loans and lines of credit are much harder to obtain in Argentina than in places like the United States.) His company could still expand “several times over,” Markier told Financial Times.
“We have grown in Argentina, with the Argentina that we have — and we could grow much more. While most of the world contemplates with dread the economic destruction wreaked by the coronavirus, for many Argentine entrepreneurs it is just one more challenge to overcome.”
“We’re comfortable working with risk,” Alejandro Mashad with entrepreneurship nonprofit Endeavor Argentina told Inc. magazine. “It’s something we get used to from the day we are born.”
In conclusion, what should investors and other globally focused businesses expect in Argentina? Law firm Estudio Beccar Valera cites:
- Smaller transactions
- An expectation of cash for M&A transactions. “Shareholders might be willing to accept shares issued by a foreign acquirer but they are not used to doing so.”
- Familiarity with international business transactions and partners. “Foreign buyers are very common in Argentina….Investors are mainly from North America, Europe and Latin America.”
Ready to get started? Specialized consultants and advisors can help you evaluate the Argentine market for expansion, partnership, investment, and more. For more information, contact us.