Future returns: the investment opportunity of Latin American companies
Latinos are a young and fast growing segment of the American population who are also very entrepreneurial, but the businesses that Latinos start often struggle to get the financing they need to grow and be successful.
These companies are among the “most overlooked opportunities for investors,” Boston-based Bain & Co. wrote in a report earlier this month.
According to the report, during the decade 2007 to 2017, 50% of net new businesses in the United States were started by Latinos. And many of these companies outperform their white-owned counterparts until they reach around $ 1 million in revenue.
That’s because many of them finance their growth by taking on high-cost debt or mortgaging their homes, “all of the things that are a problem when you grow” a business, says Hernan Saenz, partner at Bain and co-. author of the report.
Start-ups are better off financing their initial growth with low-cost loans from banks or community development finance institutions, or better yet, with equity investments from angel investors or venture capitalists. Equity, unlike debt, does not need to be repaid, which means cash generated by a business can be used to continue growing, says Saenz.
The financial crisis that young Latin American businesses often face reflects both a lack of demand from owners – who may not know where or how to ask for the money – and a lack of supply, in that institutional investors and high net worth individuals with money to invest do not know how to reach these companies.
The lost opportunity is enormous. “If the population of Latin-owned businesses grew at the same rate as white-owned businesses, literally today, in 2021, you would add $ 1.4 trillion to the US economy,” Saenz said.
Penta I recently spoke with Saenz about the investment opportunity that Latino-owned businesses represent and how to address the supply and demand issues they face.
A lack of funding
Although the report says survey data does not fully explain why Latino-owned businesses do not contact local banks for financing when they start up, they said their research suggests some owners companies âmay struggle to navigate current structures and processes. from the world of financing.
The result is that Latino-owned businesses with less than $ 1 million in revenue are 19% less likely to receive full funding from a local bank than a white-owned business, according to the report. As a result, they turn to more expensive forms of financing, often with high rates and more stringent conditions.
Even when Latino-owned businesses exceed the $ 1 million level, they are three times less likely than white-owned businesses to seek funding from angel investors, Bain found. Their reluctance may be because they don’t know how to seek that funding, or âthey don’t think they will be funded,â Saenz says.
The lack of outside funding becomes even more noticeable as these businesses grow, as even investors attracted to Latino-owned businesses are treading cautiously. According to Bain, when dealing with private capital, these Latino-owned companies must have twice as many investors to approach receiving the same amount of funding as their non-Latino peers.
In the past 10 years, only 1% of investments made by the top 25 venture capital and private equity firms have been in Latino-owned companies, according to the report.
Creation of a market place
For Saenz, one solution is to create more âmarketsâ where companies and investors can meet. One example that exists today is L’Attitude, an annual gathering for the Latino business community that includes a pitch session where companies that âare ready for capital and growthâ present their stories to investors. Then Attitude Ventures, a venture capital fund, will pick a few of these promising companies to fund each year, Saenz says.
The Stanford Latino Entrepreneurship Initiative, which is affiliated with the Graduate School of Business at Stanford University, is also hosting an event where business owners are trained on how to apply for money and grow their business, says -he. And they make it easier for owners to connect with potential investors.
These events represent a âmicrocosm of the solution,â says Saenz. âThis is what we need to do on a large scale. ”
There are also lenders outside of these markets that are starting to focus on this segment, including banks such as Wells Fargo,
Bank of America
and listo !, which offer loans to small businesses. There are also Latino-owned, Latino-focused social impact businesses, such as Camino Financial, a small business lender in Los Angeles, and LiftFund, a nonprofit CDFI in San Antonio, TX.
Latino-focused venture and private equity firms, such as Palladium Equity Partners in New York and Leap Global Partners in Palo Alto, Calif., Have, to date, provided up to 97% of the total investment in Latino-owned businesses, Bain said.
But these funds are a drop in the bucket towards the potential that exists.
When interviewing some of the larger companies, Bain found that those above the $ 5 million revenue mark do âsurprisingly well, even compared to white-owned businesses,â Saenz says.
âThe problem is, we’re not getting enough to evolve.