The Key to Regional Investment: Understanding Complexity

With its big investment in Latin America, Softbank will have to manage significant complexity that varies greatly from market to market within the ...
David McCannApril 23, 2019
The Key to Regional Investment: Understanding Complexity

A new regional investment fund focused on technology startups across Latin America is looking to take advantage of expectations that the region is poised for robust economic growth. At the same time, the fund is subject to weighty risks that face any initial entry to geographic markets.

With funding of $5 billion, the recently announced SoftBank Innovation Fund represents approximately the total amount of venture capital investment in Latin America in 2017 and 2018 combined. Softbank CEO Masayoshi Son anticipates significant growth, much of it driven by the so-called multilatinas — the Latin America-based multinational companies looking to reshape the region’s business landscape.

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But unlike its Vision Fund, which invests globally, Softbank has focused this fund on a particular region. Additionally, the fund is aimed at helping the conglomerate’s existing portfolio companies expand across Latin America and drive synergies among them.

Together, those two factors create a potential trap that has undermined many investment theses: underestimating the complexity of expanding into new nations — even those within a geographic region where the investing entity already has a presence.

The danger is that Softbank will underestimate, as many do, the operational, regulatory, and market challenges of expanding into countries with different complexity profiles.

A regional investment focus tends to highlight similarities among companies in the region. However, the diversity of the economies in Latin America makes it an extremely complex region for businesses to navigate. Moreover, many of its biggest markets are complex in distinctly different ways.

To add definition to this issue, our firm created the Global Markets Complexity Index. The index assesses 83 countries across 31 factors to build a profile of the level and type of complexity that exists in a given market.

From the analysis, we developed country archetypes based on different aspects of complexity — for example, high market complexity + low operational complexity + low regulatory complexity — and classified countries into eight distinct groupings.

The groupings inform potential investors of challenges to expect in each country, and which countries share similar complexity profiles. Past success in one country within a group suggests an organization has the capabilities to be successful in another country in that group.

In one sense, the multilatinas themselves are an illustration of this idea.

According to one study, by accounting association BLITA International, Latin America can be described as a highly complex regional market, in particular from regulatory and infrastructure perspectives. However, multilatinas “tend to be better at dealing with these regulatory and fiscal difficulties” and therefore generate considerably greater profits from their assets than their U.S. or Europe-based competitors, the study says.

In other words, competitors tend to falter when they enter Latin America with the same approach they have used in their home markets. It’s easy fall into this trap — and Latin American companies likewise are vulnerable when they enter countries within the region.

For Softbank, the diversity of the region and the importance of getting this right cannot be overestimated. The diversity is well illustrated in the GMCI, but the GMCI also suggests some strategies. The table below shows how the largest economies in Latin America slot into different GMCI groups; a higher group number indicates a generally higher level of complexity.

Generally speaking, expanding to another country within the same group carries lower risk. By definition, countries within a group have similar complexity profiles.

Within that context, the first observation is the confluence of countries within Group 4 — the “Walled Gardens.” Access to these markets is impeded by walls of operational and regulatory complexity, but the size of their populations and their economic potential make the investment needed to break through the walls worthwhile for many investors.

Conversely, expanding across groups carries higher risk. Consider Chile, the only Latin American country in either of the two least-complex groups and the birthplace of many of the first multilatinas, in industries from mining to retail.

Multinationals in the Chilean market have been able to navigate cross-group challenges, but it may be tougher to go the other way. Low-complexity countries usually are more competitive markets, with more players fighting for attention from sophisticated customers. That requires more careful branding, pricing, and channel strategies.

This is a very different set of challenges than an organization would face in a more complex group, where the main competitive differentiator is the ability to navigate operational and regulatory challenges. For example, the Mexican retailer Coppel, known for extending easy credit, expanded in-group to Argentina and Brazil, but hasn’t headed to Chile, where customers generally have better access to credit.

Peru is distinct in a different way from the Walled Gardens countries. Although ranked sixth by GDP in Latin America, Peru is generally less developed and thus falls into The Builders group, characterized by very high market complexity.

The country’s population ranges from culturally Hispanic in cities to traditionally Andean in the highlands. That means customers in these areas are economically, culturally, and geographically diverse, making them hard to reach and convert to sale.

To sum up, a model that works for Brazil and Colombia will likely falter in Peru. A model that works in Panama will have challenges in Chile. If a company stays within a group, its abilities to manage complexity are largely transferable. If it steps outside that group, a learning curve is required.

The GMCI is a new data source and a framework for investors as they scan the globe for new opportunities and help guide portfolio companies in their growth. Complexity is a factor that often does not explicitly get factored into investment decisions, but it can be the difference between high returns and disappointing exits.

Stephen Wilson is co-founder and managing partner of Wilson Perumal & Company, Inc. The full GMCI report and interactive dashboard are available at