Latin American development companies have successfully faced the challenges of economic liberalization, market globalization and the internationalization of operations. However, not all of them have taken advantage of their potential to create value for investors, nor of the wave of investments in emerging markets and developing countries, which have intensified during the last two decades.
Investors have been encouraged by the potential for growth in demand and the better risk-return combination offered by companies and projects in these markets. During the 1990s, top-down approaches dominated, where country risk and currency exposure considerations were the determining factors in investment selection.
As a result, companies in politically and economically stable countries and companies that are well established in their market were selected. In the last decade, and particularly in the post-financial and economic crisis era, more and more investors seem to follow Bottom-Up approaches, which focus on company and industry potential rather than country risk considerations.
Improved macroeconomic fundamentals and better tools for managing currency risk have given way to considerations of companies' competitive potential.
Competitive potential is directly related to opportunities to improve operating efficiency and capital structure optimization. Many of the Latin American companies have stood out for their high levels of operating efficiency, following the typical recommendations of the Dupont Analysis, achieving better profit margins and higher intensity of use of their installed capacity. However, a comparative analysis with companies in other markets reveals that relatively fewer companies have taken full advantage of financial leverage.
In fact, a large number of Latin American companies are characterized by high levels of liquidity and low levels of indebtedness, largely due to limited access to capital markets in their respective countries. Access to capital markets has enabled companies in other emerging and developing markets not only to improve financing conditions and optimize liquidity management, but also to reduce their exposure to business and financial risks.
Traditionally, it has been assumed that the limited access to the capital market seems to be the result of the restrictions associated with the level of income of the economy and the low liquidity of the market, as well as the preference of local investors for government securities and instruments from international financial markets.
However, recent studies reveal that in many markets it is rather the absence of financial instruments that limits investor interest and explains the low depth and liquidity of the market. It seems then that the strategy to create value in the company and to position itself competitively in the face of investments in emerging markets should focus on optimizing the financial structure through access to the capital market.
However, access to these markets requires as preconditions the strengthening of the operation and the improvement in liquidity management, in order to proceed first with the issuance of financial obligations, and secondly, to opt for the public offering of shares.
