Volatile exchange rates and macroeconomic uncertainty paired with spiking inflation, high interest rates and political risks have kept US acquirors away from Latin America this year.

After major increases in 2021 and 2022, Latin American inbound deal volumes from US buyers slumped to pre-pandemic levels in 2023, according to Mergermarket data. Dealmakers agreed 102 transactions worth USD 5.3bn in 2023, significantly down from 116 deals worth USD 15.3bn in 2021, when deal volume reached levels last seen in 2014.

Several factors are to blame, not least rising rates. If US investors “can make a 5.5% [return] in dollars in the US in liquid investments, they’ll keep their money there versus making a large bet into an emerging market,” said Randy Bullard, a managing partner at law firm Morrison Foerster, at the recent Mergermarket M&A Forum Miami 2023.

Political uncertainty is another factor, he added. Argentina, Brazil, Columbia and Chile have all faced recent elections, while Mexico faces its presidential vote next June.

Volatility between Latin American currencies and the US dollar, with 2% to 3% fluctuations common from one day to the next, is another M&A dampener, said Stephen Marks, a managing director at Miami-based private equity firm Emmersion Capital, at the forum. “In an already-stressed macroeconomic environment, how do you plan for that?”

Worsening security in Mexico, Colombia and Brazil also means US investors face challenges gathering information about potential Latin American targets because local business owners are reluctant to disclose sensitive financial information, noted Alessio Mazzanti, managing director at Miami-based investment bank Latam IB, at the event.

Private equity

Buyouts in Latin America by US-based sponsors have virtually dried up in recent years: none happened in 2021, followed by two in 2022 and 2023, according to Mergermarket data. Meanwhile, only three exits totaling USD 326m happened in 2023, compared with five worth USD 3bn in 2021, according to Mergermarket.

The lack of activity is due to Latin America’s limited exit options, explained Bullard. First, few private equity buyers exist to take assets off another sponsor’s hands. Second, the local capital markets have not grown as expected, meaning an initial public offering is not an exit option either, he noted. 

Still, the potential for private equity to develop in Latin America exists. Miami-based HIG Capital continues to make middle-market investments in the region, noted Emmersion’s Marks. BTG Pactual is among several Brazilian investment funds that have emerged in recent years too, he added. One area that could attract US sponsors – as well as strategics – in the years ahead is ‘nearshoring’.

Nearshoring

Nearshoring describes the growing number of US companies that bring production from Asia closer to home markets to diminish the impacts of higher US tariffs on Chinese goods as well as logistics disruptions brought about by COVID-19.

Due to high demand for Latin America’s nearshore assets, “you’re starting to see valuations grow, in particular in northern Mexico,” said Marks.

But Mexico is not the only country attracting nearshoring-focused US investors. Many US-based consumer packaged goods (CPG) companies have mapped out other Latin American markets, such as Central America or Colombia, as alternative places to locate supply chains.

The push to outsource labor to nearshoring markets in Latin America also has resulted in rising valuations of business process outsourcing (BPO) companies, particularly in Colombia, Marks noted.

Service providers to the nearshoring boom are likely to draw US interest too. They include Latin American logistics and mobility companies, shipping and trucking technology firms that help with the efficient movement of goods, and even fintech firms that help facilitate payments, added Bullard.

Agribusiness, clothing and manufacturing make up some of the other sectors drawing US attention in nearshoring-driven M&A, noted Mazzanti. “Nearshoring is a trend that is here to stay.”

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