Episode 62: Stephen Marks of Emmersion Capital on
How to Navigate the Rewards and Risks of Nearshoring

Episode Transcript  

 Shiv: All right, Stephen, welcome to the show. How's it going?

Stephen: Doing great Shiv, happy to be here.

Shiv: Yeah, excited to have you on. So why don't we start by you giving a background of the audience about what you do and then we'll take it from there.

Stephen: Very, yeah, I have a bit of a unique background in that I come from the family office space, Midwest, Chicago. And a lot of these investors had owned assets, both in the US, but also in the Latin American market. And I've always been drawn to, let's say, the internationalization of investments. And I think the complexity and culture has always really interested me. And so I've really honed in on that. I've been a Spanish speaker since high school. I have learned Portuguese. And really, I've appreciated the fact that sometimes other opportunities can exist in other regions. And so essentially, I've built an advisory business and a portfolio of lower middle market companies who have benefited from the cross-border aspect of Latin America nearshore.

Shiv: Got it. And in terms of working with these types of investors, like where are you exactly advising them?

Stephen: So think of it from this perspective, US lower middle market to middle market, PEs, family offices, who are looking to either reposition a supply chain in the Latin America or are looking to build nearshore delivery centers within the Latin American market. And frankly, they don't know how to approach this. There's a lot of advisors, for example, on the Mexico side of Latin America. But if you start getting into other jurisdictions, Colombia, Costa Rica, Chile, Brazil, it's very hard to find someone who understands, I guess, the complexities of working in those environments, but then also has the experience of the United States.

Shiv: Yeah, it feels like an under-tapped avenue for growth and expansion for a lot of these companies, but there's also added complexity, right? Because you're talking about taxes and legal and labor and managing a multinational, multilingual team or having assets in different places that are maybe not as stable as the United States. Talk a little bit about that. And also there's been recent news, especially with Trump taking office and tariffs in a bunch of these different regions, especially and yesterday you mentioned that Columbia is an area where there was some, some debate with. So talk about that and how this, how companies should be thinking about expanding into territories like that.

Stephen: Yeah, I think that's an excellent point. The way that I've always viewed this is, yes, there are complexities in all of these Latin American markets, but there's also complexities in Asia as well. And my viewpoint has been that the United States and middle market US has always been overexposed to the Asian market. And I think what happened was COVID really proved that theory. And then layer in the fact that you've had now Trump 1.0, Biden, and Trump 2.0, where there has been a push towards tariffs and making things more difficult for the average investor to invest or develop some of these markets. And I also know as well that you're talking about, whether it's China or India or Southeast Asia, these are also very complex regulatory environments to own and operate business. And think about intellectual property protections in a place like China, very, very challenging. Well, Latin America has some of those same challenges as well. I'm currently in Sao Paulo, Brazil, the Brazilian market is a great example of some of those challenges. But at the same time, some of the benefits outweigh those regulatory challenges and you can see this in terms of labor, cost arbitrage, also an affinity for the US market, US style of business. I think all of those things are important and they do help an outside investor to invest locally. But to your point about the challenges, we saw this just recently yesterday, in that the dynamic can change overnight, where Trump came in and through a disagreement with the Colombian president, you saw a threat of tariffs, you saw a threat of revoking visas. So yeah, the dynamic can really, really shift very quickly, even from the US perspective. But my argument and thesis all along is that we've had those same fundamental challenges in Asia as well.

Shiv: Mm-hmm. Mm-hmm. So why take on the headache? Like, what is the benefit or the pot of gold at the end of the rainbow here of expanding into markets like this?

Stephen: So the way that I see it is that this is a lot of what we focus on as a group, both as advisors and with our own portfolio is the nearshoring of services and production. And in our minds, it's a blue ocean opportunity that you look at local stress and that is challenges, strong inflation challenges, political challenges. That has actually created an opportunity for talent in particular, where you see side level talent that is now available saying to themselves, I'd rather work for a US company remotely and take the work experience I've had locally and apply that to a US business than work for a local company where I don't have flexibility in my job. I'm only going to plateau in my career. So from our perspective, where we see tremendous opportunity in the region to cultivate that talent and also from a production standpoint, you're seeing the pivot away from Asia into Latin America. And we've seen it through private equity. We've seen it through the middle market investors in the United States. They are already there and they are increasing their presence. So now is a real interesting time to be here.

Shiv: Yeah, I guess I understand that. Help me understand this part. We have a ton of clients backed by private equity that are multinational corporations. Many of them are north of 500 million in revenue. And a lot of them have a Latin American presence. And when we analyze the data and look at the revenue that comes in from these regions, it's very inefficient to acquire revenue in these regions. And often we're kind of rebalancing their budgets and investing in other regions that might be more profitable. Maybe they're overextended in Mexico and they should be spending more in let's say the United Kingdom or Australia. So how do you reconcile that part? Because the companies themselves need to expand and focus on their core business, but also still need to capture these opportunities. As a counter example, we had one PE customer that expanded into Latin America as a way to get distribution. So they used M&A to get distribution in that market versus building their own local presence and sales team and all that stuff. But kind of giving you both sides of what would love your take.

Stephen: Well, the thesis that I believe is sort of the winning formula here is really the exporting of talent and services and production from the Latin American market into the United States, Canada, Europe, and Australia. I agree. I think it's very rare to see businesses, and some have, some brands have dipped down into Latin America, where technology companies have dipped into Latin America and have developed successful businesses. You just look at how Uber has flourished in the Latin American market, financial technology companies as well. But where I truly think the bigger opportunity lies is a US facing or a European facing operation that is delivering services or goods to those markets. you're not, unless you really see a true market opportunity in a place like Brazil to develop that local market, the real opportunity exists in taking the resources of a place like Brazil and exporting that to help your own business. And then the benefits being cost arbitrage, more efficiencies, and then also the ability to hire labor, which has been a tremendous issue in the middle market, especially for technical positions in the United States.

Shiv: So you're suggesting that instead of looking at these markets as like expansion for the core product that you're selling to find a new market, use it as more shoring up your team and bringing down your cost of labor.

Stephen: Exactly. So middle market company that I advised, me and my team at Apertura had worked with $500 million in revenue. So true middle market. They were having trouble hiring the resources and the talent that they needed in the U.S. It was not only hiring, it was also they had trouble retaining technical resources in the U.S. And so we helped them dip down into the Latin American market, where we were able to find cybersecurity analysts, cybersecurity engineers, financial analysts, controllers, bookkeepers, engineers, civil commercial, there's a larger talent pool that exists. So in my opinion, unless you really know the market, the bigger opportunity exists in taking the talent or the production of those countries and exporting it to the US.

Shiv: Interesting. Are there any particular domains where you think this is better suited for? Like, is it more on the technology side or is it more on the go-to-market side? As an example, when we were building Wild Apricot, we had a developer office in Moscow. And I know a ton of software companies offshore their development services to places like the Ukraine or Latin America. So are you thinking more on the technology side or do you see application even for go-to-market services?

Stephen: So what you've seen is that you've actually seen a diversification of services. Which i think is really interesting it started with started with contact centers so there is a big push about five or six years ago where you saw I think it was United Healthcare, AT&T started moving some of their resources from Asia into places like Columbia and Peru and in Costa Rica. But now, and then it moved from contact centers to IT. And you also saw acquisitions being done by US companies, European companies into the lower middle market in Latin America, acquiring those IT development companies and then exporting to their headquarters abroad. But now what I'm seeing is actually a total diversification of services. So now it's not just IT or contact centers. US civil engineering firms, US accounting firms. It;s a lot more about just taking, finding specific roles within the Latin American market that can be used to help meet a need in the United States. So yeah, I'm seeing it really across the board.

Shiv: And what is your advice on how to enter those markets? Is it through M&A or building like an office in Bogota or something like that? Like, how do you see that?

Stephen: There's pros and cons to either of those strategies. I think the first is that if it were a greenfield strategy, it can be really hard to develop without the right partner. Like you really need to understand and have the right management team in place to grow and develop that nearshore delivery center. And that could, unless you know the market and know the regulatory framework of that market, it's tough to do. Now on the flip side, M&A adds its own level of risk. And sometimes it can be hard to leverage those transactions if you're not used to doing that or structuring those opportunities. Also knowing your counterparty is another thing. So we advise on the buy side from US investors. And one of the challenges we always have is just understanding counterparty risk in a place like Latin America and know your customer implications, KYC. I mean, those are things that could crush a deal. So there's pros and there's cons to both of them. On the pro side for a greenfield operation, you can do it in a very cost effective manner if you have the right partner to do it. On the acquisition side on M&A, valuations are so low in the region that actually you can find assets fairly cheap.

Shiv: What about partnering with like a local presence? Is that frequently used as an option, like as an option C?

Stephen: We do a lot of joint ventures. Where let's say a US company or US PE is looking to develop nearshore production or services and they come to us and we say, okay, we have the infrastructure and everything that you need. We will partner with you to develop that center or that operation together. And from there, we can figure out the best way to scale it. That is by far the best strategy for a US company.

Shiv: There's less risk as well because you kind of get the best of both worlds there. 

Stephen: Yeah, that's right.

Shiv: Yeah. How do you look at this in the world of like AI? Because AI is bringing down the cost of labor in many domains. And so you could theoretically enable your current workforce that's onshore versus necessarily going offshore. So how do you think about that?

Stephen: All right, I'll just use another example. A lower middle market company came to us a couple of months ago in the construction services space, and they are developing an AI application to automate what is ultimately going to be, in their opinion, about 80% of their work. Their theory is that there's still going to be 10% of that automation that's still going to need to be run by someone offshore. And they would rather have someone and build a team to do the nearshore delivery of that automated, all those automated workflows and processes versus doing that domestically because they're running into those issues of number one, recruiting, number two, retaining the talent that they need in order to scale and grow. And then the other 10% of that breakdown would still be done by US onshore personnel higher level who are essentially providing the last check on the work that's being done. the way I see it, and I've seen this family office investor who invested into a $75 million nearshore production facility in Mexico who is going to automate it, they still thought to themselves, we would rather do it in a place like Mexico, take advantage of the trade agreement with the United States because we know we can build a team there versus the place like Iowa or Ohio where they thought it's much more challenging.

Shiv: Right. Are there particular ways in which, you know, we should be looking at or thinking about expanding into these countries? Because I often think about from a strategic perspective, or let's say PE investors putting capital into a company and they're thinking about the core business, the value creation levers that are available to them. And oftentimes expanding into a country for labor purposes is not at the top of that list. So like, how do you trade that off and how do you look at that for business that has like seven other priorities, some of that could be revenue efficiency or sales and marketing efficiency. Some of it could be product development. Like how do you weigh these priorities against each other versus expanding into a market like this?

Stephen: I think that's a great question. And something that I have been seeing from limited partner investors, family offices, institutional investors as well, is that you're starting to see more of a push on labor and due diligence, specifically labor due diligence, and analyzing that from a risk perspective. actually view this in some ways very similar to cybersecurity due diligence in that nobody was paying attention to it. And then you had CrowdStrike last summer and all of a sudden everybody's paying attention to it. And so now it's starting to filter down because it's, I've seen labor kill deals. I've seen cybersecurity kill deals during due diligence where all of a sudden there's a layered in risk where if you're hiring, for example, I'll use the engineering thesis, if you're hiring engineers in the United States, a civil or commercial engineer is getting a job offer in their third year of university. We're not graduating enough engineers to take all of these positions. So if you're, if you're a PE and maybe if you're one of the big boys, like an HIG capital, Sun capital, it might, it might not matter to you as much because you have the resources to solve some of these problems. But if you're go downstream, if you're lower middle market, PE, that should be top of your mind is, how are you gonna hire people in that manufacturing facility that you just acquired in Janesville, Wisconsin? How are you gonna solve something like that? And I'm starting to see LP pressure on labor due diligence. And I think that's only happened in the past three years.

Shiv: Yeah, I think the labor shortage argument is a really good one like we talk about this on the marketing side that there just aren't enough great marketers around and what a big chunk of the engagements that we end up working on is usually when a marketer’s let go or they've decided the CMO is going to be let go or or the CMO is not performing and what you end up seeing is people kind of switching seats between different companies because there isn't enough talent. But then the same problem exists because somebody who's not talented enough to lead this entity is certainly not talented enough to lead this company. But because they're one of the few people that has that requisite experience, they're able to kind of switch seats. And you kind of have to expand the labor pool to be able to find more folks. And I'm assuming this kind of a shortage exists in tons of other functions and verticals.

Stephen: Absolutely. So I've seen it. I keep using that example of engineering, civil commercial engineering, architecture. I've seen it, anything IT related. So it could be IT software development. It could be cybersecurity, analysis, engineering. Really hard to find that talent in the United States. We've seen everything back office related. So administrative, virtual assistants, bookkeeping and the finance side, bookkeeping controllers, going all the way up to even the CFO level, where we've seen companies dip into the Latin American market for fractional based services like CFO and chief of staff. And I think you're sort of touching on something that is really a good point is that it might, the issue might not even be access, even though I do think that is a big issue, it could be just retaining that talent. I'll actually, I'll ask you, I mean, I've seen this in terms of business development, corporate development, even in my own network, it seems like a lot of people go in and out of those positions every 18 to 24 months. So how are you building a new product? I mean, is that what you're seeing?

Shiv: You're not. I mean, in most marketing and sales leadership positions, the average tenure is less than 18 months and you cannot build an effective go-to-market in that much time. It's just, you may be able to do some decent work to start, but you eventually are, if you're transitioning out, you haven't done the bulk of the core value creation work that needs to be done inside that business. And then what happens is when you swap seats like that, or you swap one person out, somebody else in, there's now another like time of two to three months to first find the person, then onboard them, then they have their new plan, you're of restarting and before you know it, a whole year has passed and no progress has been made.

Stephen: Yep. How do you, so how, my question to you is how do you solve something like that? I understand from the technical services side, because we see the nearshore component providing a lot of opportunity for those types of functions, but how do you do that where you maybe need someone local for sales and marketing?

Shiv: Yeah, I think there's two different ways or two different types of issues. One is just capacity. So we're talking about something simple like bookkeeping or accountants. Like that's a skill that's kind of taught everywhere and there's a process you follow and there's almost like, like GAP compliant or whatever IFRS systems that you follow and you, you're, kind of, you're in the territory of good. But then there's in other roles where there's creativity and you need to figure out what the solution is, especially in go-to-market roles that won't speak for every other type of role out there, there's a quality issue. And so you may be able to find another market where there are more marketers as an example, but there just aren't enough people that have the ability to think at a certain level. And actually one of the reasons why we try to solve for that is we have our own training program. So we try to educate with that, but it's not at the scale that I would want it to be like, I think every marketer should take our course, but if you just look broadly, marketers don't have places to go get trained on these things. So you have this major quality gap in terms of what a company needs versus what the marketing labor market is able to provide. And so I think the solution is actually to train people and level them up, but that takes time and patience and CEOs need to be able to put in that time without firing their marketing leader, if you will. So I guess my question on that would be like, how do you look at training there, especially if you're offshoring or nearshoring this talent, because there are obviously, there are going to be some capabilities that they're able to do, but there are going to be talent gaps and you kind of have to bridge that and you have to onboard these folks and that takes investment as well.

Stephen: It absolutely does. So the way that we have been solving it with our portfolio company, Apertura, is that we have been layering in from, let's say, high level senior, just use financial analysts, for example, all the way up to a controller, fractional CFO, all the way down to junior level talent. And what we've been doing is that we have been building up the junior level analysts so that they have their own quote unquote career path where they can really start building their skills, their hard skills, and getting into more of a senior financial analyst role than educating them as part of the process, putting them into more of a controller type of role. So we've seen this building up the skill base and it does take, to your point, it takes a lot of effort, it takes time. But one of the things that I'm actually very proud about that we have is that we have very dedicated people who work for us and work for our clients abroad because they view this as truly a transformative career move for them. They're working for a US company. They're earning in dollars. They're gathering more skills and life skills as well to help them accelerate and build their career that, to be honest, they might not have the opportunity to do in a place like Colombia or Brazil. It's much more hard, it's harder for them to get a trajectory and that's what we can provide.

Shiv: What is the labor arbitrage opportunity there? So like, let's say a role is $100,000 all in here. In Latin America, is it like 60,000, 70,000? And then when you factor in the total cost of building this team, like including onboarding and training and management and legal fees and all of this stuff, like how much further ahead are you really?

Stephen: So if you were to go, I'll answer the first question. So the first is the arbitrage could be anywhere between 20 to, let's say, 40% around there. All in, you can add in another 10% to 15%. So you're still coming out ahead. And I would also factor in as well that things become more expensive when you start getting into higher level profiles. And a lot of, if we're recruiting someone who is ex-Deloitte or ex-Microsoft, who was running business units, yeah, that talent is going to be much more expensive. But at the same time, it's someone who's going to be more dedicated and your junior level positions are going to offset that higher level position as well. you can still take advantage of a 15% or 20% discount that allows you to become more efficient if you're a private equity investor or a middle market company.

Shiv: Do you think this is something that larger companies should think about or all companies should think about? Because let's say it's 15% all in, like you're going to save. It has really a meaningful impact if you have a ton of roles that you're doing this for versus if you're doing it for a handful of roles, like the return doesn't feel like it's heavy enough. But I'm curious what you think about that.

Stephen: So the smarter, larger companies are already doing it. So if you look at, I was in Montevideo, Uruguay, two months ago for a project and investment we're looking at there. And it was really interesting because I was talking to financial analysts who all came from a European bank, Santander, because Santander had their offshore or their offshore servicing was being done in Montevideo. And they were using that as a hub to do a lot of their back office loan servicing and credit servicing in particular. And so what we've seen Procter & Gamble companies like that, Unilever, they're already deploying those teams abroad. Where I think it's real interesting is when you get into the middle market or the higher end of the lower middle market and what's possible with those types of companies. Because if you can look at volume and developing a 50 person team in a place like Bogota, there's really a lot of cost savings that can come with that. it's everything from the talent itself to offices, to the whole spectrum of what it costs to hire and deliver these services. So, to your point, volume matters. If you're doing a one-off, yeah, you're going to get a bit of an arbitrage, but really where this becomes impactful is if you're setting up whole teams nearshore.

Shiv: Yeah, we to be get to a certain get to a certain site. What do you think about? This is a separate question, but especially as you have larger teams that are not attached to the core teams like culture because that's a huge part of building companies and having teams integrated and thinking about the business in the same way. And in this way, you're almost like creating a separate company and that would almost have this like its own culture. So how is that the right way to think about it? Or is it about unifying these two entities and making sure that they're as integrated as possible?

Stephen: The answer is really kind of all of the above, that you have to look at developing a really strong local culture first. And that means getting them to buy in as a team that is working with the, let's say the offshore team being in the United States, the headquarters, but then also making sure that you're getting buy-in from the headquarters to put the time and effort into developing those relationships offshore. And really, and we've done this where we've scheduled lunches or dinners or events or group travel and things like that, because all of that really matters when you're connecting virtually and getting to know each other. I always encourage people to come from the United States. In fact, we're actually organizing a few delegations this year to bring them into these countries to actually meet with the people that are working for them, to get them to interact. But you're right. It sometimes can really be a challenge if you don't get by.

Shiv: Mm-hmm. Mm-hmm. I guess associated with this is like, are some of the risks involved here? Like on the cultural level, for example, I can see companies not being integrated, like the CEO is kind of spending too much time merging these offices together on a cultural level. But what are some of the other risks that can make this kind of go sideways and not make it worth the investment?

Stephen: I think it really comes down to effort and making sure that you're getting all levels of your organization to buy into the capabilities and the capabilities of the talent that you have offshore. And making sure that they feel like they're a part of a team. For example, with Apertura, there was a just NFL football season playoffs. You they knew nothing about American football. I mean, it was just, they knew nothing about it. But by the time they got to week six and every week there was a different contest where people had different teams and it created this interest that even surprised me. And doing those types of things actually is really helpful to create that culture, that sense of culture. And sometimes the risk is that if you don't do it, then you're also potentially losing out on retaining even that talent. Because sometimes the money or the good job will only go so far if the person nearshore doesn't feel validated and a part of a group. That's one of the risk areas that I've seen.

Shiv: Mm-hmm. Mm-hmm. What about in terms of like capital being stuck in another country? Like have you seen that kind of going sideways? Because you are in an essence like allocating capital to a different country. There's other macroeconomic risks or systemic risks that you kind of have to think about. Even like we're talking about the tariffs, like it exposes you from a risk side in a different way.

Stephen: You're a hundred percent correct. It absolutely does. And I'll go back to that. When we were talking about what is the best structure, you really need that local partner who can help you understand the best way to, structure that relationship and also have buy-in through developing that local business unit. Because yeah, you're right. You have to overcome currency. You have to overcome the regulatory framework, politics. And all of that can change pretty quickly. But I would also counter that by saying that if you look at countries even like Brazil, where it has been historically very difficult to do business, there has been incremental change that has happened over the past 10 years that is sort of allowing things to open up a little bit more. So it's becoming easier to do business in these countries. And also it's easier to assess that risk because things are becoming more transparent as well.

Shiv: Mm-hmm. Yeah, I think that's a really important take. It's just there are, currency is something that I forgot to mention and even political climate. So that's a great one. We're coming up at the end of the episode, but before we close, just one last question is, as a company is listening to this, it can kind of feel intimidating to do all of this at once. So what would be your advice on a company thinking about expanding into countries like this? What would be a reasonable first step for them to start to explore or dip their feet in the water here?

Stephen: Yeah, it sounds overly simple. But a lot of what I recommend to companies who are looking to potentially nearshore is that whether it's me or someone else, but just talk to an advisor about this, someone who really understands these different markets or things on a broader macro level. But just have that conversation. I do a lot of consulting and I always offer my time just at least in the beginning to just say, hey, let's talk about what you want to do because you're right. It can be very intimidating if you're trying to do this on your own. However, if you're talking to a subject matter expert in Latin America, you can find ways to take what is just an idea and turn that into a few actionable next steps. And it could be, what is it that you want to do? Where do you think you want to go? And then tailoring a solution for that investor or that company. And that's, I think just educating yourself a little bit about it will really go a long way because, you know, I'll give you a quick example. Brazil, and I talked about incremental change within the Brazilian market. You know, my father was underwriting Ford when they were moving their production facility to one of their production facilities to Brazil 30 years ago. And he did, he's still to this day, he's becoming more aware that there has been change, but at first it was really hard for him to understand why, like why would you want to go into that regulatory environment? Well, 30 years ago, Brazil was just coming out of a military dictatorship. Things have actually changed a lot since that point. And sometimes the stigma, it's hard to get past that. But if you have conversations with subject matter experts who understand the local market, it can help provide some insight for you on decision-making.

Shiv: Yeah, I think that's great advice and we'll actually be sure to include your information if as people are listening to this and if they want to get in touch with you, what's the best way for them to find you?

Stephen: So they can find me on LinkedIn, Stephen Marks, Emmersion Capital or Emmersion, E-M-M-E-R-S-I-O-N capital.com or our portfolio company I referenced, Apertura, that's Apertura.co.

Shiv: Excellent. We'll be sure to include that and in the show notes. And with that said, Stephen, thanks a lot for doing this and sharing your wisdom. thought there were a lot of great takeaways, especially for companies and investors as they're thinking about expanding into Latin America. Thanks for coming on and sharing that.

Stephen: Yeah, thanks, you appreciate the time.