"We have a full portfolio of different investments"

Friday, April 8, 2011

US private equity firm Riverwood Capital has broken out the checkbook in a big way since December, announcing investments in Argentine IT solutions and outsourcing services provider Globant, Brazilian data center company Alog and Chilean IT solutions provider Synapsis. Those moves showed that venture capital is a force to be reckoned with in the Latin American IT industry.

BNamericas caught up with Riverwood Capital founding partner Francisco Alvarez-Demalde, who discussed his company's appetite for Latin American tech firms, its next moves in the region and also venture capital conditions in the IT industry.

BNamericas: In how many companies is Riverwood Capital currently invested?

Alvarez-Demalde: In the IT space in Latin America, we have investments in Globant, Alog, Synapsis and we also have a minority stake in a company called Allus, which is a regional company with operations in Colombia, Peru and Argentina. It has customers in those countries plus other countries in Latin America, and it has commercial offices in Spain and the US. But, today [Apr 6], we announced the sale of that company to Contax.

BNamericas: Why did Riverwood Capital decide to sell its stake in Allus?

Alvarez-Demalde: I prefer not to comment on Allus. The only thing I can say is that we co-invested together with Eton Park. After 3-4 years, Contax signed this agreement with Allus, and we think it's very beneficial for Allus because it creates a full, Latin American company. I prefer not to talk about it because Contax is in charge of communication.

BNamericas: Why has Riverwood Capital invested in the other companies?

Alvarez-Demalde: We basically focus on the technology space and a lot of different sectors within that space. Our real focus is the US, Latin America and Asia.

During the past 10-15 years, several of these economies in Latin America have gone through a significant transformation from a political and economic perspective. That economic growth, driven by the commodity cycle and the middle class, has also driven significant growth in the technology markets.

Synapsis is a company that provides IT outsourcing services, including IT infrastructure, SAP, some business applications and some commercial systems to corporate and government clients. It has a regional platform, and it has an outstanding team of professionals. In Synapsis, we saw an opportunity to invest in regional and local markets for IT outsourcing services.

In terms of Alog, we have seen significant growth in data center demand in developed markets, and we think the demand is accelerating in emerging markets, specifically Latin America and Brazil. We went to Brazil and had been looking at the market for a while. We decided that Alog was the best alternative to invest behind that market.

Finally, Globant is a different company. What Globant does is produce software products for its customers. Most of the work that Globant does - more than 90% - is offshore. Globant is a different type of investment in that we are leveraging and basing growth on local IT skills in countries like Argentina, Uruguay and Colombia. They're offering services with that base of operations to the US and the UK.

BNamericas: So Riverwood Capital is diversifying its investment strategy for Latin American IT companies?

Alvarez-Demalde: Diversification is important. What I would say is that we have a full portfolio of different investments. When we think about the region and go one step beyond and think about technology in the region, even within technology, we see many different opportunities. We can capture that opportunity with investments in different sectors.

BNamericas: For how long does Riverwood Capital expect to maintain its stake in each one of these firms?

Alvarez-Demalde: It depends on the company. For example, we have been in Globant for more than three years, and recently completed another investment. Synapsis and Alog are recent investments. We have a long-term investment horizon. It's difficult to say.

BNamericas: What factors would Riverwood Capital consider to eventually sell those firms?

Alvarez-Demalde: We aren't thinking about selling now; we are thinking about creating value in those companies.

In terms of an exit, again, it depends on opportunities that are in front of the company. Sometimes, there are good opportunities for the company to be acquired by a multinational or global company. If it is beneficial for the company, the employees, the business and the customers, and we think it's the right thing, then we go ahead.

BNamericas: When Riverwood Capital invests in companies and then creates value, what's the general time commitment on this?

Alvarez-Demalde: You can take an average of 5-6 years, but it's tough to say. Each investment is different.

BNamericas: Is Riverwood Capital looking to make additional investments in IT companies in Latin America?

Alvarez-Demalde: Yes, we are very actively looking at the space. We are very interested in continuing to invest in the region given the growth profile.

BNamericas: What types of companies is Riverwood Capital considering for a possible investment?

Alvarez-Demalde: On one hand, we look for growth; we are very keen on finding opportunities in companies that have potential of growing significantly. A second criterion relates to size and maturity. We don't really do startups, and we also avoid investing in very large companies from which the return comes more from leverage or financial factors, rather than operations.

BNamericas: Can you provide some details on total headcount or total annual revenues of these potential buys?

Alvarez-Demalde: Annual revenues have to be higher than US$50mn.

BNamericas: Is there any technology type of particular interest in Latin America?

Alvarez-Demalde: We are looking actively at different sectors…

BNamericas: Can you provide some examples?

Alvarez-Demalde: We are interested in services, outsourcing, software-based companies and business services companies. It's very broadly defined.

BNamericas: Geographically, in what countries is Riverwood Capital interested for a possible acquisition?

Alvarez-Demalde: We look at the Latin American region by sector first and second by geography. In terms of geography, we like regional companies. We like companies with a regional platform that can leverage their products and services across different countries even though each market is very different. We also like strong IT markets. Brazil is very attractive, but we also like the Andean region. We look at things in Argentina, and we have been working also in Mexico.

BNamericas: Does Riverwood Capital have a target number of companies for investments in Latin America?

Alvarez-Demalde: No, not really.

BNamericas: When could another announcement come in terms of another investment in a Latin American IT company?

Alvarez-Demalde: We cannot comment on that, but we aren't really close to another announcement.

BNamericas: How do you see overall conditions in Latin America for venture capital?

Alvarez-Demalde: The market has improved significantly in the last few years. The improvement was driven by two things. The first is macroeconomic growth, and the second is the increasing availability of capital. There are more investors in the region, and companies are bigger and doing better.

There is still a lot to do in terms of developing more mature companies for investors like ours. That has to do with promoting smaller investors at the country level that can support and help - not just with funds, but also with advice in order to help startups to become more professional.

As I look towards the future, I see that some countries are developing an important local venture capital market. Brazil and Chile are good examples. That will generate more interest in companies and more interest from investors like ours to spend more time in those countries.

BNamericas: Is that drive coming from the private sector or the government?

Alvarez-Demalde: It's a combination. There is government support. There is private sector interest as a consequence of the economic development and growth. There are private associations that are doing a good job, and also universities. I see a lot of different actors promoting venture capital.

BNamericas: What are the factors that can help startups become more mature and receive investments from companies like Riverwood Capital?

Alvarez-Demalde: I think it's a combination of funds together with advice on areas such as how to manage and grow a company, to leverage a business and make it bigger and to develop processes. That requires time from experienced people.

BNamericas: Are economic factors such as inflation and currency fluctuations posing any challenges for venture capital investments in Latin America?

Alvarez-Demalde: The macroeconomic variables are very relevant, especially more in regions that have a volatile history. If you take Brazil, the tax system is very complicated and also the volatility of the exchange rate -which has now appreciated significantly versus the US dollar - really calls a lot of attention from any investor. Volatility is a key driver, and we have to take these factors into account. Inflation is also a problem in Brazil today.

BNamericas: How relevant are political variables such as changes in governments?

Alvarez-Demalde: It's very relevant as well. It gives you an indication of in what type of market will the company play and also what is the potential growth of those markets. Politics has a significant effect on economics.

BNamericas: What will be Riverwood Capital's top priorities for Latin America during the remainder of this year?

Alvarez-Demalde: The first will be to work with the investments that we have in the region. The second objective is to continue to look for other opportunities in the region. Potentially this year or next year we are going to make another investment.

About Francisco Alvarez-Demalde

Prior to joining Riverwood, Francisco Alvarez-Demalde worked at Eton Park Capital Management, where he focused on private equity investments in emerging markets. The executive's experience also includes stints in KKR and Goldman Sachs.

Alvarez-Demalde holds a degree in economics and finance from Argentina's Universidad de San Andrés.

About the company

Riverwood Capital is a private equity firm that invests in technology and service businesses across a variety of geographies. The company has expertise in electronics systems and components, software, IT services and outsourcing.

Riverwood Capital is headquartered in Menlo Park, California, and has additional offices in New York City.