The Rise of HR Technology in Latin America

In this week’s episode, we’re exploring the HR tech sector in Latin America with Max Gonzales, a Mergermarket correspondent based in São Paulo, Brazil. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you’ll learn about:

• Latin America’s tech landscape
• Rise of HR tech in LATAM since the pandemic
• Problems HR tech firms are addressing
• Why the sector has become a hotspot of M&A activity
• Cross-border M&A activity among large IT and private equity firms

[TRANSCRIPT]

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a journalist who's been covering M&A for a decade. In this episode, we're going to find out about the HR tech sector in Latin America. I'm joined by Max Gonzalez, emerging market correspondent who's following this topic. And he's based in Sao Paulo in Brazil. Hi, Max. Thanks for joining me today.

MAX GONZALEZ: Hi, Julie-Anna. Thank you for joining me.

JULIE-ANNA NEEDHAM: So, Max, can you begin with a brief introduction to Latin America's tech landscape?

MAX GONZALEZ: Yeah, it's an amazing landscape. Latin America had a lot of problems, bureaucratic problems. State services are very complex. And the financial life of the people demanded a lot of solutions that was solved only by the information technology. Software development in Latin America [? attributed ?] because of those kind of problems.

And we had a lot of business that attracted investors in the 1990s, especially because of the Latin American countries inflation that demanded the banks developing a lot of solutions to address all the problems and the economic plans and a lot of [? heterodoxical ?] problems. So the Latin America IT industry [INAUDIBLE] in software solutions, especially these days. We have 22 [? unicorns ?] in Brazil generating in the last few years. And we have a good environment of computer science and software developing academic and schools providing services.

But we have a demand, which is much more greater than the offer. And we are trying to create more schools to develop software and computer science. So now we have set of good companies, which provides services, not only for Brazil, for Latin American countries. We have — Stefanini IT is a company which have offices in dozens of countries in the world. So we have a really good IT industry in Latin America.

JULIE-ANNA NEEDHAM: Great. Thank you. And looking more specifically at HR tech companies, what's the picture like for that subsector in Latin America?

MAX GONZALEZ: Yeah, we have a lot of startups creating solutions that addresses the problems the labor market has to solve. Especially after the COVID-19 pandemic search, all the companies had to develop and managing solutions to address the remote working for most of workers. And because of that, a lot of professionals had to work at home. And they had to be managed.

Some companies were, before the pandemic, developed that kind of solutions. And they had a boom of demand because of that. In addition, we had, in Brazil, the LGPD, which is the GDPR--

JULIE-ANNA NEEDHAM: Data protection laws.

MAX GONZALEZ: Yes, exactly. Because in Brazil, we have a lot of digital crime and a problem with the protection of the people's data. So all the companies that try to develop solutions to managing their workers and making them have more benefits to stay at their jobs, the companies needed to retain talent. So we had a boom of developing of new solutions in HR.

JULIE-ANNA NEEDHAM: So you touched a bit on that there with data protection and also how the pandemic's expedited a lot of technology. But could you elaborate a bit on what kind of problems the Latin American HR technology companies are addressing or solving?

MAX GONZALEZ: Yeah, sure. The companies which are developing HR solutions are trying to manage all the journey of a worker in a company since the recruitment and selection and the onboarding. It's a solution called Admission Tracking Systems, ATS, which are developed by companies such as the Brazilian [? Selectee ?] and the Mexican [? LaPierre. ?] And all the parts of the selection and hiring of our employees are being addressed by those startups, especially because of the COVID-19 that made a lot of people stay at home.

So that kind of problem, especially generated by COVID-19, created other kind of HR tech like the Brazilian [? Momentu, ?] which developed mental health services benefits for employees, which are provided by the startup, but hired by the company, which employs the worker. Other kind of solutions are trying to-- managing benefits to keep the talents at the company like the Brazilian Matchbox. And for more [? precise, ?] more typical tasks like the payroll management and digital clock time solutions developed by the Chilean company Workit.

And a new buzzword for the workers which are KPI and OKRs. This kind of indicators are managed by a company called [? RankMe, ?] which is a Chilean startup, which is looking for comp for capital right now.

JULIE-ANNA NEEDHAM: Great. Thank you. I mean, it's really interesting how the pandemic has expedited so many new types of technology, and interesting to see how it's developed in different regions around the world. Can you explain why Latin America's HR tech sector has become hotspots of M&A activity? I mean, it seems like quite a natural progression after the pandemic and new ways of working.

MAX GONZALEZ: Yeah. As the HR techs are [? trading ?] since the pandemic began, in the last two years, the company are developing and launching these solutions. And now they are looking for scale up their companies. But they need capital for that.

So in 2021, the HR techs raised about USD 460 million in Latin America. And this year, our reporters detected that [? nine ?] HR techs are planning to raise capital. And there could be many more because we have to report all of them that they are trading all the time.

There is a new company [? surging ?] in other places. So we have to be attentive to the capital raise initiatives they are looking to achieve.

JULIE-ANNA NEEDHAM: And are there any obvious buyers in the sector? Are there any big tech players in the region that are buying up some of the smaller players?

MAX GONZALEZ: Yeah, it's true. They can look at companies which address a complementary solution for the big companies. I will cite a Chilean company called Proyecto Moms. This proyecto is the project moms, of course, moms. It helps women to rejoin the workforce after the maternity leave or any kind of leave.

They developed a solution which is ready to be incorporated or embedded into an [? Azure ?] ERP solution or other HR solution. We can say that Latin American companies in HR tech niche are ready to be incorporated by the big techs.

JULIE-ANNA NEEDHAM: And you've mentioned a bit of it there. But what are the Latin American HR tech companies looking to achieve with the M&A that they're doing? What are the big drivers?

MAX GONZALEZ: The main driver is to expand, to finance the scale up of their solutions. They need IT infrastructure for that, and especially IT staff to continue developing the solutions and addressing the clients and customers demand and deploying the systems at their clients, at their enterprise clients. So they need capital for finance, that kind of scale-up, and finance marketing because branding is really key in Latin American scenario.

And they look for international expansion. Latin American countries — usually it's located in one country. But we have Brazil, which speaks Portuguese. And all the other countries, which speak Spanish. So they are always trying to get the other side of the wall to offer the services to other languages.

JULIE-ANNA NEEDHAM: Are you seeing any evidence of cross-border M&A with foreign buyers trying to acquire Latin American technology groups?

MAX GONZALEZ: Yeah. There is a lot of great players, large players in high-tech industry always looking for opportunities to acquire Latin American companies. ERP companies like SAP from Germany or Oracle from the United States are always looking for business here. And we can say that most of the bidders are financial investors, especially the Silicon Valley funds, private equity, and VC firms that are always looking for companies here.

We have River Road Capital, which invested jointly with the Japanese SoftBank invested in the HR tech [INAUDIBLE] from Brazil. They invested about $100 million a few months ago. So we have more demand from the financial investors than from the strategic investors from the IT industry.

JULIE-ANNA NEEDHAM: Great. Thank you. And one last question for you. You've been involved in Mergermarket's tech preview report. Can you tell me a bit more about that and highlight some of the key findings, please?

MAX GONZALEZ: Yeah, well, we have a small team in Latin America covering M&A activity. I am in Brazil with [? Thiago ?] [? Barroso, ?] who is the editor. And we have [INAUDIBLE] in Santiago, Chile, Carlos Martinez in Bogota, Colombia, [INAUDIBLE] in Mexico City.

So every month, we choose start up niche to focus and try to generate a lot of-- as many opportunities as we can discover for M&A activity. And we call them origination drives. So we publish about HR techs. Now we are working about Azure techs. And at the end of the month, we consolidate all of the stories in the new report, which highlights the trends and the main opportunities for the investors.

JULIE-ANNA NEEDHAM: So what are some of the key things that we should be keeping an eye on?

MAX GONZALEZ: Yeah. Latin America has a diversity of startups being developed and built right now. We are now working in [? assure ?] [? tech. ?] It's a niche that we have a lot of business blooming. And in the last reports, we wrote about health techs. We wrote about fintechs.

And it's a good work because a lot of business and startups are being developing. And they are eager for capital and M&A activity. So we have a lot of [? stories ?] to discover in those sectors, especially in startups in Latin America.

JULIE-ANNA NEEDHAM: Great. Max, thanks very much. Really nice to talk to you. That was Max Gonzalez. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks.

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