Investor Advises Founders to Hold Capital in Uncertain Times

In 2020, Advent raised $2 billion for its seventh fund dedicated to Latin America, and this year raised $25 billion for its second-largest global fund

The drying up of capital has impacted the valuation and speed of rounds.
August 26, 2022 | 03:30 PM

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Bloomberg Línea — Advent International, a global private equity firm, began investing in growth technology four years ago in Brazil, while its recent investments in Latin America include a $430 million bolt-on for Ebanx, and $225 million to Merama last year.

Advent is Nubank’s 13th largest shareholder, with 49,022,360 shares (1.38% of the outstanding shares).

CI&T, Prisma Medios de Pago, Carrefour, Enjoy, Somar Pharmaceutical Group, YDUQS, and Canvia are other Advent investments in Latin America.

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In 2020, the company raised $2 billion for its seventh private equity fund dedicated to the region, LAPEF VII, and this year raised $25 billion for its second-largest global fund.

For Rafael Larragoiti, vice president of Advent International, in recent years there has been a keenness among investors to close rounds quickly, with stretched valuation and “schizophrenic” due diligence, due to excess capital in the market.

Large global investors that started to allocate more to Latin America, such as Chase Coleman’s hedge fund Tiger Global, were also triggers for this scramble by venture capital funds for transactions.

That’s because the market offered checks quickly if the founder agreed to close the deal, something that would normally come with higher valuations than what VC investors were offering, according to the CEO of startup Zippi, André Bernardes, told at an event promoted by Trace Finance on Wednesday night (24th).

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Bernardes said that in a short time he closed a Series A investment of US$ 16 million with Tiger at the end of May this year.

The growth of assets allocated to venture capital in Latin America has been greater than in private equity, which is usually in more consolidated companies, according to Preqin data cited by The Wall Street Journal.

Assets under management in venture capital reached $9.25 billion in September last year in Latin America, a 48% growth over the previous year.

Larragoiti says in recent years investors have suffered a “fear of missing out”. But now that has changed due to both external and local macroeconomic factors specific to Brazil.

“The drying up of capital has impacted the valuation and speed of rounds, which take longer and have stable valuations or even down rounds from series C onwards. I don’t see an improvement in valuations in the short term between now and the end of the year,” he said during the same event, answering a question as to whether founders who have money for 24 months should wait for better valuation scenarios before seeking new funding.

“If I were someone who has 24 months of runway, I would start by tightening my belt to get there with the best unit economics, deliver everything that was promised to the investors. If you have a term sheet on the table, I advise you to put it in. It is a complicated environment, we will have elections, and then the election hangover. We see this in the private equity cycle, and it is important to have capital in your pocket,” he said.

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“If someone wants to give you fair money, take it,” added Zippi founder Bernardes.

Last year, with the venture capital bonanza, some founders hired more people than they should have done just to show investors that they were building the company, and to create buzz to raise the next round, according to Bernardes.

Now, the game has changed. Investors want to know what the revenue per employee is, and how much revenue entrepreneurs can add per capital invested.

“On the operating side you have to start thinking what is the minimum unit of intellectual capital resource I can get to deliver maximum value,” Bernardes said.

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How far does PE go?

Advent is one of the largest private equity investors in the world and has traditionally invested in mature companies, entering as a minority partner in a Series D startup that already has several venture capitalists on board. Last year, the firm debated how early it would enter the rounds of startups.

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But Advent has decided it won’t participate in rounds with funding below $50 million, or at least Series B or C, precisely so it doesn’t have too wide an investment spread and can keep up with companies closely.

The earliest Advent has invested in Latin America to date was in Mexican/Brazilian unicorn Merama, when it entered its Series B, along with SoftBank.

“Startups that were growing had governance challenges, of expanding beyond Brazil. We’ve been doing that for 20 years, taking companies from Brazil to IPO,” he said.

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-- A correction was made in the headline to reflect a personal position by Larragoiti, instead of Advent’s position

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