Argentina’s Private Market Potential: Interview with ConoSur Capital’s Gonzalo Ortiz Masllorens

“Have you been to Argentina yet?” Since we started Trekking for Alpha, this has been one of our most asked questions. We finally have, and it easily is the most compelling destination for generating alpha thus far. 

The macro economic circumstances in Argentina hit you in the face on arrival.  As soon as we crossed the border from Chile, we noticed that the prices on restaurant menus were crossed out many times and handwritten, if they were listed at all, and most stores lacked price tags. Once we heard prices, they often made no sense. Fellow hikers on the trails in Patagonia shared tales of $10 coffees and $200 short kayak outings. When we flew to Buenos Aires, almost every flight was canceled due to labor strikes.

Hiking to Fitz Roy in Patagonia where pricing was impacted by inflation and currency swings, flight cancelations in Buenos Aires

The current story of change in Argentina is simple to tell, but the execution is not without risks. For decades, Argentina’s economy has been volatile and has suffered from structural hurdles that cause high inflation among other challenges. The election of President Javier Milei in 2023 demonstrated the population’s desire for a liberalized economy. Liberalization comes with short term pain for the average citizen which historically has led to policy reversing course. Hopefully, reform efforts will stick this time. Recent elections this month in Buenos Aires, which Milei branded as a referendum on his policies, indicate his efforts remain popular.

Thus far, Milei’s government has passed important reforms that have driven positive results for the economy and public markets have taken notice. The implementation of the Incentive Regime for Large Investments (RIGI), removal of currency controls, IMF deal, among other key changes have already altered the economy. Argentina’s resilient businesses may finally be getting the chance to shift from survival to growth mode. 

Outside the Pink House, Argentina's Presidential Palace, in Buenos Aires

On our recent visit to Buenos Aires, we spoke with investors at various funds including ConoSur Capital - a leading investment and financial services firm based in the capital. Our interview with Gonzalo Ortiz Masllorens, Director of Alternative Investments and Corporate Finance is below.

Gonzalo Ortiz Masllorens, Director of Alternative Investments and Corporate Finance at ConoSur Capital

Public markets in Argentina have shown incredibly strong growth recently. Various investors, notably Discovery Capital Management led by Rob Citrone, have generated outsized returns from their bets on Argentina.  Why do you think now is the right time for private equity investment, too?

There’s a contrast between public market and private market valuations right now. This is evident when looking at recent transactions. For example, in banks - look to HSBC’s sale of its Argentina business to Grupo Financiero Galicia in April 2024. It sold at a price to book value of c.0.4x while trading at a value of 1.3x. [Note that Discovery Capital Management owns a significant stake in Grupo Financiero Galicia which was up 216% in 2024]. In telecom, look to Telefonica Argentina’s sale to Telecom Argentina. It was acquired at a 4x EBITDA multiple, but was trading at 7.3x. 

There is opportunity for first movers in private markets here given this difference between how public markets are behaving vs. private transaction valuations. There will be some time before private valuations increase, perhaps after the midterm elections in October or once the macro environment becomes and remains stable for some time. At that point there probably will be valuation equivalence.

Additionally, there are limited private investors in Argentina now given the nature of the economy historically. We anticipate this changing over time. In the 1990s, for example, global investors entered the market later in the decade once the economy stabilized. International capital drives up valuations and for now, its still limited. 

Explain the impacts that Milei’s new policies are already having and the potential for continued success? 

For the last 13 years – Argentina has had a fiscal deficit. The result of the deficit was inflation – the country had to issue money to sustain itself. This current government has been able to generate a fiscal surplus for the first time in a decade and maintain that surplus. They are planting the roots for the new Argentina. The result of this surplus has been a decrease in inflation. While there was a jump in inflation in March of this year, it decreased again in April.  Also in April, Milei lifted currency controls that had restricted the purchase of foreign currency. This change could have increased inflation (given it led to a depreciation in the peso), but it didn’t. 

This government is more agile and it has already created a much more dynamic economy. For example, they are focusing on unlocking key industries like energy and mining. The country has huge untapped potential in these sectors. Argentina had its largest energy surplus in 18 years in 2024. It has almost half  of copper reserves compared to neighboring Chile, but exports less than 1%. With different regulations and policy dynamics, these resources can be better monetized. This sort of activity is creating a more diversified, stronger, and versatile economy. 

There will be challenges ahead and the government will need to pass laws through congress to continue to execute on their strategy. True reform will require changes to tax, pension and labor laws too. If these also pass, that will really change the landscape. Currently, SMEs are being punished through labor and tax laws – in many cases, domestic companies struggle to compete with foreign companies. It is cheaper to import various goods than produce them domestically. With reforms to tax and labor policy - the SME market will change and the stronger companies will prosper here.

There are things Milei has not yet achieved, but again it’s evident that the government is working on many outstanding initiatives. 

Why is this liberalization effort different? Why do you think it will stick?

In 1989, President Carlos Menem also worked to liberalize the economy and it lasted for some years. Ultimately, the reforms were painful for Argentines and led to an eventual swing away from free market, pro-business policies. President Milei has been very clear with Argentina about the potentially challenging transition period that may come from reforms. We think this transparency paired with relief from inflation already being felt will make the difference. The government has a plan - it’s very clearly communicated. And they are sticking to it. It’s clear that the administration is making progress and the effects are already being felt. The recent elections in Buenos Aires further prove this point.

Can you explain the implications of the recently announced IMF reforms? How could these catalyze growth?

After the government released many capital controls and restrictions, Argentina gained the support of the IMF. No longer will Argentina be burdened with debt. With IMF support, the FX reserves will be stronger which should create a stronger peso. This should ultimately have many positive implications for the economy.

Ultimately, all of these reforms will enable the economy to transition from survival mode to growth mode.

What do you think will be the single most important reform coming to Argentina in the near future that will catalyze the economy?

Labor and tax reforms, those are the most important now. There are really strong unions that hold companies hostage and stifle growth. Reforms here will unlock that growth. Taxes are crushing now too. Argentina took a big step forward with RIGI implementation which aims to provide stability and legal protections for large investments of $200mm+, including tax and labor incentives. The government wants to implement this for the rest of the economy as well. 

The RIGI reforms incentivize more FDI coming into Argentina for larger businesses and if expanded, they can have the same effect for smaller businesses too.

Historically, how have businesses navigated the challenging economic environment in Argentina? 

In the 1990s, when there was more stability and private markets were more efficient, the CEO / COO of a company were the key drivers of growth. In times of economic uncertainty, the CFO maintains and creates value. In these times, the management team must focus on determining how to increase prices without decreasing sales to manage inflation. How to react quickly. This has forced companies to be extremely disciplined and have cleaner balance sheets and less leverage. This actually creates an interesting situation where there are many healthy companies in Argentina with strong financial management skills - companies must be disciplined and agile to survive. Historically, companies were in survival mode and could not invest in capex, their labor force, and growth more broadly. As the economy changes, companies can switch to growth mode. With access to capital now - a lot of value can be unlocked.

Which industries in particular are target rich now for potential private equity investors in Argentina? 

• Oil and gas / mining - This is the biggest opportunity in Argentina right now. Larger funds could invest directly into projects. Smaller funds could invest in service providers that are connected to these industries. For example - housing, restaurants, sanitary and basic services. There’s an opportunity specifically for businesses servicing the mining industry which is one step behind the development of the O&G industry.

• Divestments from multinational companies (MNCs) - This opportunity is industry agnostic. MNCs are exiting Argentina as it has been a challenging market to navigate historically. MNCs may not want to dedicate the resources needed to maintain their presence here. There also have been issues repatriating capital. We see many interesting targets entering the market at  attractive discounts due to this dynamic.

• Agribusiness – Argentina is a powerhouse in this space due to access to technology, know-how, and land. Land is still cheap and one of the most productive in the planet. Current owners of various agriculture businesses are aging, tired, and are looking to sell too - some want to retire and see this time as an exit window.

• Tech – VC in Argentina has been doing very well in the last decade. Many startups will register in the US ultimately, but will have the operating team in Argentina because of the lower cost to operate and abundant tech talent. Argentina has the most unicorns per capita in the region (12 now) and is the largest software exporter in the region.

• Financial – There are many opportunities here given regulatory changes and the status quo of Argentina’s banking and investment stats versus other peers in Latin America. For example, Argentina’s private debt-to-GDP ratio is only 12% compared to Chile’s 110%. We foresee this changing.

• Retail – There is consolidation taking place in many subsectors of this industry. There are plenty of things to be done in this space, as consumption will increase with a better macro and access to credit

• Hospitality – Argentina has the largest number of offshore tourists in South America (above 7mn!). Hotels, infrastructure, airports, services within this space are all investment opportunities and need heavy CAPEX. This space will develop further if public safety continues to improve.

• Real estate – This market is still somewhat informal and the mortgage market is relatively underdeveloped. With a more stable economy, there will be more mortgages (in 2023, less than 1% of GDP though increasing in 2024). This market will become more formal. Regarding commercial real estate, offices, industrial real estate – the opportunity is clear. Residential is an informal market today, it has some transparency issues. Residential is a more challenging subsector presently, but could become a big opportunity in the near future. 

Can you explain the exit options in Argentina? 

Exits are always tough, no matter where you are investing. Historically in Argentina, if you wanted to exit - you could find a path, but of course the timing of the exit may impact valuation. There are active local investors right now, but it is anticipated that there will be more international investors entering in the near future which would increase options for exits. Historically, due to exit uncertainty, its been key to enter at a discount so that you can wait for the right exit window and still hit your target returns. 

Given the changing market dynamics, there should be healthy exit opportunities in the coming 5 to 7 years. As noted, we anticipate an additional wave of financial sponsors entering the market. Argentina’s public markets are experiencing growth as well. Market cap to GDP is below 10% today, but as our capital markets grow - there will be more exit opportunities from this. 

How are private market investors in Argentina planning to take advantage of these changes?

At ConoSur, we are planning to launch a small private equity fund to take advantage of the evident momentum in Argentina. We want a smaller fund so that we can be quick and agile while this part of the market still has the dynamics discussed. We anticipate change taking place quickly, but we are positioned on-the-ground today with an experienced team and deep understanding of the country to make some very opportunistic investments in the near-term.