The Interview: Jeff Schmidt/Jacopo Giuso talk about opportunities for cross-border M&A in Costa Rica

Recently Jeff Schmidt, CDI Global Executive Managing Director and Chief Executive Officer, had the pleasure of talking with Jacopo Giuso, the Managing Partner in Costa Rica.

Jeff Schmidt
I'm pleased to introduce Jacopo Giuso, the Managing Partner for ProInve, which is CDI Global's newest member firm representing our network in Central America and specifically in Costa Rica. Welcome, Jacopo.

Our clients and blog followers are eager to learn about your firm and the opportunities for cross-border M&A in Central America and Costa Rica.

Jacopo Giuso
Thanks for this interview, Jeff. I founded ProInve Capital in 2015. We are based in San Jose, Costa Rica. Currently, we are a team of seven experienced professionals fully dedicated to investment banking focused on middle-market transactions.

We are “industry agnostic” but have significant experience with medical device companies, manufacturing businesses, and financial services firms. and offer advisory services as well as financial and tax due diligence and corporate structuring. About 70% to 80% of our time is dedicated to deals (M&A transactions).

We are based here in Costa Rica but serve the Central American region.

Jeff
For our followers, there is interest in understanding the opportunities for investment in Central America. Could you comment on Cost Rica and Central America broadly as a destination for investment by companies looking to diversify their business into the Western Hemisphere?

Jacopo
Costa Rica is an attractive country for investment. We are a very eco-friendly country. Moreover, the Costa Rican government devotes a very high percentage of its budget to education and health. Additionally, Costa Rica has many (13) free-trade agreements, including the CAFTA-DR with the U.S., Dominican Republic and Central America. .

Costa Rica has a population of 5 million and is at the center of seven countries in Central America with the combined of 50 million. Central America is the geographic bridge between North America and South America.

Roughly 50 to 60% of the total investments in Central America are coming from North America, mostly from the United States.

Jeff
Of the countries in Central America, which receive the most direct investment?

Jacopo
Costa Rica along with Guatemala and Panama.

Jeff
What about Panama and Guatemala is particularly attractive to investors?

Jacopo
Guatemala is the most populous country in Central America with a population of roughly 12 million. The agricultural sector is especially strong Guatemala, which is a major producer of bananas and pineapple. Costa Rica has a very robust agricultural sector as well.

In Costa Rica and Panama, the financial industry is a leading sector. Panama has enduring ties with the United States related to the Panama Canal and has become a financial center for Latin America with more than 50 international banks operating in the country. In these three countries, manufacturing is an important industrial sector. Due to the attractive labor costs in these countries, a wide range of products are manufactured for export to the United States. Of course, tourism is an important business throughout Central America.

Jeff
CDI focuses on cross-border middle market transactions. Please comment on the trends in middle market transactions over the last few years and what do you think the outlook will be over the next three-to-five years for middle market deals?

Jacopo
M&A activity in Costa Rica was growing until 2019. Before the pandemic, Costa Rica had focused on trade “openness”. We attracted many foreign investors such as large

OEMs and medical devices companies. In fact, most of the large medical device companies own plants in Costa Rica.

The pandemic reduced M&A activity, but by 2021 dealmaking had begun to recover. For example, we closed an important transaction in April 2021 involving the sale of a large medical device company in Costa Rica to a Canadian private equity firm.

We believe M&A activity will continue to grow as interest rates drift lower. Given the fragmented nature of the financial services and other sectors in Central America, we expect industry consolidation will result in a steady flow of transactions. Buyers in fintech as well as the agricultural, food and beverage, telecommunications, and business services sectors will include strategic companies and financial investors.

Jeff
Industry sectors like telecommunications and medical devices require a very skilled, educated workforce. In Costa Rica, you mentioned the government is very supportive of education and workforce development. Can you comment on the workforce available in Central America?

Jacopo
The workforce in Costa Rica is experienced and highly skilled. Roughly 5% of GDP in Costa Rica goes to Education. For the medical devices sector we produce many engineers. Talent is key to building in this industry sector. Costa Rican engineers work with OEMs in the United States to help transfer technology and manufacturing know-how to their operations in Central America.

Jeff
If a company in Europe or North America was interested in building or acquiring a manufacturing plant in Central America, why should Costa Rica be considered?

Jacopo
Costa Rica has 68 free trade zones with income tax incentives, exemptions from certain import duties, municipality taxes, etc. Costa Rica is also relatively close to the United States and could serve as a “near-shoring” location. We also have ports with access to the Pacific and Atlantic Oceans.

Costa Rica also has access to a market with more than 60 million consumers including Central America and the Caribbean countries. We are part of the OEDC and have preferential access to more than 50 countries, including the United States and China.  Costa Rica has also emerged as a strategic partner in the U.S. CHIPS and Science Act initiative, which aims to strengthen the global semiconductor supply chain.

Jeff
Middle market deals always hinge on whether the buyer and seller can reach an agreement on a fair price. What are the deal pricing expectations for sellers of businesses in Costa Rica?

Jacopo
Costa Rican companies are a bit more expensive than companies in other parts of Central America. That is because Costa Rica has the second highest GDP per person in Central America (very close to Panama which ranks #1) and has a favorable business and stable political climate which are attractive to investors, which finally provides a lower discount rate that ultimately result in higher valuations.

Transactions in Costa Rica usually trade at EBITDA multiples in the range from 5.5 to 7.5 times. Strategic investors working on very important deals, especially in the branded food and industrial sectors, may be willing to pay even higher premiums. 

From a risk perspective, Costa Rica is a very stable country where investors can feel confident that they can grow their investments. We benefit from significant support from the Costa Rican government, which is critical for attracting new investments.

That said, transaction premiums would be perhaps 30% greater for comparable middle market transactions in the United States or Europe than would be the case in Costa Rica. This makes acquisitions in Costa Rica very attractive to foreign investors.

Jeff
The agricultural sector is very important throughout the Western Hemisphere. How would you characterize the M&A opportunities in the agricultural sector in Central America?

Jacopo
Costa Rica and in General Central America are countries that historically have been major agricultural producers. For example, Costa Rica produces 90% of the best and sweetest pineapples found anywhere in the world (MD2 variey). The large pineapple suppliers own plantations here in Costa Rica but there are also many Costa Rican growers. Costa Rica and other Central American countries are also the major sources of bananas supplied to world markets. The growers are quite efficient and there has been significant innovation in sustainable farming and the application of agricultural technology.

Costa Rican and Central American countries grow cassava and plantains used to make chips and other snack foods. Interestingly, there are many companies in Central America developing and producing snack foods for export to world markets. For global snack food producers, investments in Costa Rica and other countries get them to the source of their products and can also be a way of accelerating product development.

Jeff
Are there opportunities for investors in sectors that support agriculture, such as fertilizers or soil enhancement products or crop protection products? Are there actionable targets for investors?

Jacopo
The agri-tech sector, for example, has opportunity because growing can still be improved. In Central America, organic fertilizers are an attractive market. The Costa Rican government is committed to producing “green” agricultural products. Currently, there are not many organic fertilizer producers in Central America.

Looking at the opportunity more broadly, innovative and sustainable agricultural technologies and products will be very important for the long-term in the region.

Jeff
What are the most important considerations for an investor completing a transaction in Costa Rica?

Jacopo
Doing a successful transaction in Central America is different from the United States or Europe.  We close between 10 and 20 middle market transactions per year in Central America. Most are intra-regional transactions. For example, a Costa Rican company that has operation operations in Guatemala and Salvador. Regulations differ in each country, especially regarding applicable laws and taxation schemes.

So it's very important for an investor to hire CDI Global to navigate the complexities created by legal and regulatory differences but also cultural differences and differences in business practices. For example, sellers tend to be more transparent in Costa Rica than in Guatemala. For deals we are the advisor, we conduct in depth financial and tax due diligence where the risks and opportunities may be for the buyer. Again, as an example, most middle-market companies in Costa Rica are family owned. So valuations and pro forma forecasts of future results require normalization adjustments.

Jeff
How long does it take on average to complete a transaction in Costa Rica?

Jacopo
Obviously, each situation is unique. There are multiple factors involved. But from the point a letter of intent is presented to when you can close the deal will typically take between 6 and 9 months. If we consider the timeframe from the beginning of the project, the average time to closing would be between 9 and 12 months.

Jeff
Are there any acquisitive companies in Costa Rica or other parts of Central America such as Guatemala in Panama that are investing outside the region such as in South America or North America?

Jacopo
Central America is primarily an inbound market from an M&A perspective. But in the past few years, we have seen an increase in Central American companies investing outside the region. For example, some Guatemalan companies are investing in the United States. They are for the most part food and beverage companies looking to capture the “nostalgic market”.

By that I mean immigrants from Latin American countries living in the US who purchase well-known brands and products from the countries they came from. Another example is a Salvadorian company that invested in solar energy in Europe. A Salvadorian family in 2023 has invested in a supermarket retail chain called Grupo Exito, which is a South American (Colombian) company. We have also seen investments made by Costa Rican or Central American companies in the U.S. and Europe to access technology.

Jeff
Would that include, for example, Ag-tech that you talked about before?

Jacopo
Yes, Ag-tech would be attractive but technology in general is important for Central American companies to remain competitive.

Jeff
Thank you, Jacopo, for this comprehensive introduction to the M&A market in Costa Rica. What would be the most important points for our blog followers to remember from this interview?

Jacopo
For investors to understand Costa Rica, Panama, and Guatemala are countries where they can make safe investments at high returns - comparable to the U.S. and Europe. While the risk profile is a little bit higher in Central America, the returns can also be higher than in the developed country markets. As investors evaluate opportunities for geographic expansion, internationalization, they should consider Central America.

We are an important regional market and a “Natural Bridge” between the country markets in North America and the South America. The countries in Central America have large and growing demand for investment in business services, technology, health care, and infrastructure. Regarding infrastructure, Costa Rica and the region has a huge need for more and better roads and for expanding and upgrading ports. Cost Rica, for example, is planning to invest $650 million to modernize our major port on the Pacific Ocean.

There are tax incentives for any investors in Costa Rica as well. However, more important is human talent. We have a well-educated and productive work force for investors to leverage with both acquisitions and Greenfield projects.

Jeff
ProInve has joined the growing family of CDI companies. You've made a very compelling case why to invest in Costa Rica and more broadly in Central America. We look forward to our clients and prospects reaching out to you for expert advice and support to grow and diversify their business throughout Central America.

Jacopo
I'm proud to be a member firm within CDI Global and look forward to contributing to CDI’s international banking and acquisition search business.

                                                                 ###