Home Brokerage Acquisition Opportunities for Strategic Investors in Latin America

Acquisition Opportunities for Strategic Investors in Latin America

by internationalbanker

By Alessio Mazzanti, Managing Director, Latam Investment Banking, LLC

 

 

 

 

Several economic sectors in Latin America benefit from the current global geopolitical and macroeconomic situations, leading to an increasing number of foreign companies investing more resources in the region. A positive macroeconomic outlook, favorable political changes and a strategic orientation towards nearshoring and sustainability drive development in the region. This environment will foster a dynamic scenario for mergers and acquisitions (M&A) in the coming years among local and foreign companies looking to strengthen their positions or enter new markets with growth potential.

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Latin America’s economic scenario in 2024 presents fertile ground for merger and acquisition operations, supported by a series of macroeconomic and political factors that positively influence market dynamics. According to the Kearney FDI Confidence Index, there is a perceived improvement in investors’ attitudes towards the region, especially in key economies such as Brazil, Chile and Mexico. This optimism is based on policies that promote favorable investment environments, creating a conducive landscape for M&A.

Moreover, political trends play a crucial role in shaping the M&A environment. Electoral cycles and changes in government policies can significantly alter investment strategies and risk appetites. Elections in major countries can trigger changes in regulations or economic approaches that directly affect M&A activity in the region. Reports from S&P Global Market Intelligence and Latinvex indicate that investors have been closely watching these political events, as they can influence stability and investment opportunities in the short and medium terms.

These macroeconomic and political contexts provide opportunities and challenges for investors and M&A advisory firms. Navigating this landscape requires a deep understanding of regional economic and political dynamics, allowing companies and strategic investors to adapt and align their investment plans to maximize the opportunities and mitigate the risks associated with mergers and acquisitions in this region.

The impacts of nearshoring on M&A strategies

Nearshoring has emerged as a transformative strategy for mergers and acquisitions in Latin America, offering companies significant advantages in operational efficiency and access to key markets, such as the United States. The development initiative of the Inter-American Development Bank (IDB) highlights that nearshoring could increase exports of goods and services from Latin America and the Caribbean by $78 billion annually in the short and medium terms—particularly from Mexico but also benefiting other countries in the region that have free-trade agreements with the US. This estimate reflects opportunities in industries such as automotive, textiles, pharmaceuticals and renewable energy, underscoring how relocating supply chains can boost key sectors within the region and exports to the US.

Note: Data from 2019 to 2022 were extracted from the World Bank’s Foreign Direct Investment Net inflows datatset, which uses information from the International Monetary Fund’s Balance of Payments database, supplemented by data from the United Nations Conference on Trade and Development and official national sources. The figures for 2023 are projections based on current trends and analyses from institutions such as the World Bank and the Organization for Economic Co-operation and Development (OECD).

In addition to the growth in foreign direct investment (FDI), the U.S. Chamber of Commerce (USCC) has pointed out that nearshoring is not only a response to the disruptions caused by the pandemic and geopolitical changes but also represents a critical opportunity that Latin America must seize promptly. The reconfiguration of global supply chains and the digitization of economies are factors that companies are considering when deciding on strategic relocations.

Mexico has become the main beneficiary of this trend. According to a recent Inter-American Development Bank (IDB) report, Mexico could experience a 5-percent increase in its exports to the United States in the coming years due to effective nearshoring strategies. World-renowned companies such as General Motors and Tesla have announced significant investments in the country to optimize their production and logistics close to their key markets. Currently, Mexico is the US’ largest trading partner, surpassing China since mid-last year.

However, this accelerated growth has caused infrastructure saturation in northern Mexico, with occupancy rates in industrial parks reaching 95 percent in 2023, according to the Mexican Association of Private Industrial Parks (AMPIP). This saturation has created a significant bottleneck, hindering the expansion of operations. Reports and market studies by AMPIP and JLL (Jones Lang LaSalle) indicate that the demand for industrial space in this region has increased by 30 percent year-over-year, driven by the relocation of supply chains from Asia to North America. This phenomenon is analyzed in depth in reports by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), highlighting the urgent need to expand and modernize industrial infrastructure to maintain the momentum of nearshoring and fully leverage this strategic opportunity.

It should be noted that other countries in Latin America with free-trade agreements with the US, such as CAFTA-DR (Dominican Republic–Central America–United States Free Trade Agreement) and bilateral agreements with Chile, Colombia, Guatemala, Panama and Peru, offer access and proximity for companies in the textile, manufacturing, agribusiness and outsourcing industries. Although industries such as the automotive sector have less flexibility due to Mexico’s integration with OEMs (original equipment manufacturers), other sectors can benefit from investing in or acquiring companies in less-saturated markets.

This dynamic has created a favorable environment for the growth of M&A, as companies seek to capitalize not only on the operational efficiencies in local markets, where there is low competition, but also on the export market expansion that nearshoring offers.

Energy transition and investment opportunities in Latin America

Latin America is positioning itself as a source of attractive investment and M&A opportunities, particularly in sectors aligned with global sustainability and technology trends. Countries in the region are leveraging their natural resources and adopting technologies to attract investments that seek financial returns and environmental and social benefits in the global context.

The renewable-energy sector is witnessing exponential growth, driven by the abundance of natural resources in Central America and South American countries such as Chile, Brazil, Colombia Guatemala, and Peru. According to the World Economic Forum (WEF), these markets attract significant investments in solar- and wind-energy projects, making them prime targets for M&A operations. These investments are motivated by government policies that favor clean-energy generation and the global need to diversify energy sources and reduce carbon footprints.

The region is rich in critical minerals, such as lithium, copper, silver and nickel, which are fundamental for renewable-energy transitions and the manufacture of batteries for electric vehicles. According to a report by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Chile (one of the world’s largest copper producers), Argentina and Bolivia form a “Lithium Triangle”, which contains a significant portion of the world’s lithium reserves.

This natural endowment positions Latin America as a strategic player in the global clean-energy market, not only as a supplier of raw materials but also as a potential leader in renewable-energy production. However, the region faces the challenge of balancing the exploitation of these resources with environmental protection and social development. Government policies play a crucial role by promoting responsible exploitation that includes equitable benefits for local communities and minimizes ecological impacts, as highlighted in a report by the United Nations Industrial Development Organization (UNIDO).

Additionally, the commitment to the energy transition also involves the need to develop the appropriate infrastructure and policies to encourage investments in clean technologies. In this sense, collaboration between governments, industries and international organizations will be essential to ensuring that Latin America not only exports raw materials but also becomes a hub for innovations and clean-technology production, as suggested by a recent study by the International Energy Agency (IEA).

Improved macroeconomic stability and structural reforms in certain countries have also strengthened the investment climate. These changes have increased international investors’ confidence, especially in strategic sectors such as infrastructure, health and education, among others. Other factors, such as the post-pandemic revival and recovery of the middle class, have also driven the development of consumer-oriented sectors, such as financial services and retail, which are transforming due to digitalization and new consumption preferences.

On the other hand, digital transformation has catalyzed the technology sector’s development in the region, from fintech (financial technology) startups to e-commerce platforms and enterprise technology solutions. This sector’s rapid growth not only attracts direct investments but also presents M&A opportunities by offering established companies the chance to integrate new technologies and innovative business models that respond to the market’s changing needs.

Financial challenges and investment strategies in the current market

Navigating Latin America’s economic landscape today involves addressing critical financial challenges, such as the scarcity of capital and high interest rates, which are significant but also present opportunities for international investors engaged in mergers and acquisitions. These economic conditions, while challenging, provide competitive advantages for those who know how to maneuver within this complex financial environment and have robust capital structures and lower capital costs.

The shortage of capital, exacerbated by global economic volatility and fluctuations in emerging markets, has rendered many businesses in the region vulnerable to favorable acquisitions. Companies facing financing limitations often cannot expand or innovate independently, making them ideal targets for larger firms or investors looking for undervalued assets that can be optimized for improved performance.

Conversely, high interest rates, while posing challenges for low-cost financing, have also recalibrated the valuation expectations of local companies. Strategic investors can leverage these conditions to negotiate acquisitions at more favorable prices, especially in sectors in which profit margins can sustain the additional capital costs.

In this context, specialized financial advisors play crucial roles in providing investors with detailed analyses and investment strategies tailored to the conditions of the region and each of its countries. These firms not only help navigate these financial challenges but also identify unique acquisition opportunities that might go unnoticed without a deep understanding of local markets and regional economic dynamics.

Integrating these challenges into coherent and proactive investment strategies enables investors in Latin America to leverage M&A opportunities fully. With proper planning and thorough evaluation, investors can transform the obstacles presented by current conditions into competitive advantages, thereby maximizing the value creation of their investments in a market that, despite its challenges, continues to offer considerable potential for growth and strategic expansion.

 

 

ABOUT THE AUTHOR
Alessio Mazzanti is the Managing Director of Latam Investment Banking, LLC. With more than 30 years of experience in investment banking, corporate finance and business management, Alessio was previously a Director at Pan American Finance and a Financial Advisor and Manager at Valorem, the investment arm of the Santo Domingo family. He also worked with Violy, Byorum & Partners in New York.

 

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