LAVCA spoke with Francisco Alvarez-Demalde, new LAVCA board member and Partner at Riverwood Capital, about attractive opportunities in the middle market and his optimism about the tech sector in Latin America.
LAVCA: Please give us some background about your firm. How many funds do you operate, and what is your geographic and sector focus? What are your assets under management?
Alvarez-Demalde: Riverwood Capital is a private equity firm targeting middle market technology firms to achieve growth and profitability on a global scale. We believe mid-size technology companies represent the best investment opportunities to achieve outsized risk-adjusted returns. The most attractive of these opportunities have a disruptive product or service that can satisfy a large market need, and where the entrepreneurs do not have the skill set to successfully grow and operate a large and global business.
We invest in middle market technology companies on a global basis, with particular focus in North America, Latin America, China and India. We manage approximately $1 billion in assets, and our current fund has $780 million of committed capital. Our normal investment size ranges from $25-$75 million.
LAVCA: How did you become involved with your firm? What factors led you to join/start the firm?
Alvarez-Demalde: In my career before Riverwood, I worked with Goldman Sachs, KKR and Eton Park. I had worked with the other founders of Riverwood during my time at KKR, and we teamed up because we believed that we could create a unique and better private equity firm.
Given my partners’ operational and financial experience, and our common values, we saw the opportunity to develop a quality team and network together.
LAVCA: Who are your top 3 LPs? How was the experience of attracting investors to back Riverwood as a first-time manager?
Alvarez-Demalde: We are fortunate to have a broad base of Limited Partners that include pension funds and fund of funds from around the world, recognized family offices, and dozens of successful technology executives along with some strategic investors. Our top 3 LPs are CalPERS, OPERS and Foxconn (largest manufacturer of electronics in the world).
Being a first-time manager, our experience attracting investors was quite interesting, as we did our fundraising during one of the worst economic crisis in the past century. We had a lot of meetings and were able to explain our value proposition as a unique firm with an attractive investment approach, strategy and focus.
LAVCA: Can you elaborate on your partnership with Foxconn and how that may have affected your strategy?
Alvarez-Demalde: Foxconn is one of the largest technology companies globally with more than $100 billion in revenues, and a crucial component of the global technology supply chain. Our partnership has allowed us to take advantage of a broad network and base of experience. We are interested in developing relationships like this with other technology companies than can become our strategic partners in some of our investments.
LAVCA: Your average investment size ranges from $25-75 million, what are the challenges and opportunities you see at working in the mid-market?
Alvarez-Demalde: We believe that the mid-market offers the best investment opportunities, given that we can invest in high growth companies that already have a relevant size (but are not yet too big), proven business model and management team, and strong market potential. We also find that there is a large universe of investment opportunities of this size, which allows us to develop a strong proprietary pipeline.
We think that the major challenge in the mid-market relates to the ability of companies of this size to scale the business and become a global player or long-lasting market leader.
LAVCA: Riverwood has a global presence, what synergies do you see between portfolio companies across your markets globally?
Alvarez-Demalde: We believe that technology is a global industry. Every company in our portfolio should aim to become the best on a global basis, and understand the global trends on their respective sectors. As a consequence, the main synergies we see relate to sharing the experience and network that our firm and portfolio companies have around the world.
LAVCA: Which geographies are most interesting to you in Latin America right now? Why?
Alvarez-Demalde: We have seen the best opportunities over the past few years in Brazil and the economic region of Colombia-Peru-Chile. We are excited with the growth potential of each of those countries. We think that Brazil presents a very attractive technology market, although valuations are sometimes challenging. We sometimes see more attractive risk-adjusted valuations in the smaller countries.
LAVCA: We have also seen a rapid increase in early stage e.commerce investment over the past year. How has Riverwood capitalized on this trend? Do you see a bubble forming?
Alvarez-Demalde: We agree that most of the recent growth in venture capital and early stage investment has been focused on Internet, in particular in Brazil. We share the excitement about the region’s e-commerce potential. However, we have maintained our focus on middle market investments (avoiding earlier stage risks and challenges) and our disciplined approach to valuation, in particular when looking at consumer-driven companies.
Our current portfolio includes: ALOG, a leading datacenter company in Brazil that provides a big part of the infrastructure required for the growth in e-commerce and internet; Mandic, a cloud computing provider that focuses on providing services to the SMBs and corporates in Brazil as Internet and connectivity expands and allows companies to buy IaaS and SaaS products to lower costs and increase productivity; and Synapsis, an IT outsourcing company that help corporates and governments in Latin America with their mission critical IT requirements, being a big driver of e-commerce and internet related applications and systems growth.
LAVCA: What is your long term strategy for investing in Latin America, say over the next 5 years?
Alvarez-Demalde: Our strategy is the same to what we have done up to now: we focus on sectors within the technology industry in certain countries and regions, that we believe have strong growth potential, and look for companies and management teams with the proper platform, experience and market positioning in order to succeed in those sectors. We have a long term approach to value creation and are optimistic about the macroeconomic future of the region over the next 10 years.
LAVCA: When do you expect to realize your first exit from the portfolio? What exit strategies do you see as most viable for your investments? Do you see any specific challenges with tech exits on public markets in the current environment?
Alvarez-Demalde: As a group, we have already exited some investments in the past in Latin America. However, we still have not exited any investments in the region from our current fund. We expect our exits to be mainly through sales to strategic buyers, either from the region or a global player in the sector. We believe that there will be a limited number of technology companies from Latin America that would be able to do a public offering in the US markets, and even in Brazil, Chile and/or Colombia, in the medium term. One or two companies in our portfolio might be in this group at some point in the future.