When Luc Gerard arrived in Colombia in 2003, the founder of what would be the country’s first local private equity fund was pleasantly surprised to find a picture that deviated from common public perception. “He found a completely different story,” says Felipe Iragori, who founded Tribeca Asset Management with Gerard in 2006.

“A boosting economy, full of very good people with great companies. … Despite all of its history, which we understand has generated problems, the economy has been extremely well-managed.”

The private equity industry began in Colombia between 2005 and 2007 when lawmakers allowed the country’s pension funds to invest in such instruments. While the legislation opened the door to private equity, it took time for domestic institutional investors to make their way over the threshold. 

“The initial challenge for the local private equity funds was convincing the local pension funds to invest in private equity. It was a learning process on both sides because the local pension funds had little experience or track record investing in private equity. It was a mutual learning process and it just took time for them to get comfortable to do that,” says Mauricio Salgar, managing director of Advent International in Bogotá.

The coaxing has paid off. Today, local pension funds Protección, Porvenir, Colfondos and Old Mutual constitute 41% of the capital invested across the 55 private equity funds that were active in Colombia last year. Of these, 42 funds have achieved financial close, while 13 funds are still raising a combined $930 million in capital.

“The ability of pension funds to invest in private equity is what spurred the generation of this first group of funds in the last 10 years. Then the ball got rolling and that’s how things started to grow,” Salgar says.

Family offices are the second largest set of investors, constituting 19% of capital investments, followed by financial institutions at 16% and corporate investors, which includes groups such as Antioquia Business Group, at 8%. 

On the up

Among the handful of conditions that have fostered private equity fund development in Colombia, the government’s support has reinforced the sector’s growth along the way. Colombia has passed several additional pieces of legislation to strengthen regulations on fund transparency, governance, international best practices and to develop the market for initial public offerings, the natural exit for private equity funds.

“Colombia from 2002 to 2003, and in particular the years of 2006, 2007 and 2008, the government made substantial advances and progress in catalyzing all types of investment into the country,” says Luis Fernando Castro Vergara, chief executive of Bancóldex.

State-backed Bancóldex, which is tasked with facilitating commercial development of small- and medium-sized enterprise (SMEs) in Colombia and foreign trade, launched its Bancóldex Capital Program in 2009 to cultivate private equity funds. The program’s approach includes $100 million of capital that Bancóldex invests directly into private equity funds. It also promotes the industry by gathering and disseminating information to prospective investors, fund managers and others.

The program had the unintended, though welcome effect, of foreign investors approaching Bancóldex as a guide, and of prospective funds using the bank as a quasi-clearing house that signaled the Colombian government’s support to the wider market.

“Bancóldex has a very rigorous due diligence process. We are very serious in analyzing who the fund manager is, their track record, their thesis of investment, what industries they focus on and everything that’s related to the fund,” Castro tells LatinFinance.

“Once the bank decides to invest in a particular fund, it’s like a seal that we put on a fund when it’s approved and goes through this process. Those funds can go through the rest of the market, to pension funds, to family offices, to other providers of capital. Once they have Bancóldex on board, they’re able to mobilize resources from other players in the market.”

Bancóldex Capital has invested roughly $50 million across seven private equity funds and analyzed 33 funds since its inception. These seven funds have deployed their capital into 27 companies in a range of sectors, including information technology, tourism, renewable energy, logistics and outsourcing services.

Measures to address security and the macroeconomic health of Colombia over the past decade have also attracted private equity to the country. The government’s negotiations with the FARC have hit delays and roadblocks since they began in 2012. However, the fact that the process is in motion and that violence has declined during the negotiations, gives investors some comfort. The FARC announced a unilateral month-long ceasefire in July, the second one this year.

“The government was able to instill security and reclaim parts of the country that were totally taken over by the guerillas, and slowly, but consistently, security was enhanced dramatically. We started to have a lot of visitors to the country across the board,” Salgar says. 

Colombia has been hit hard by the low commodity prices and devaluating currencies that have wreaked havoc on economies across the region. The country continues to outpace its neighbors for growth, though, with a target of nearly 3.5% GDP growth this year, compared to growth of 0.4% for Latin America and the Caribbean, according to the World Bank. Colombia’s greater trade relationship with the US, as opposed to China, its healthy commodities exports in the last decade and a responsible fiscal and monetary policy are among the bright spots, fund managers say.

“People have realized that Colombia now, with the increase in security, with the longest standing democracy in LatAm, has shown the world what it really is,” says Tribeca’s Iragori. “Plus, it’s the third largest economy, a business friendly economy that has a history of being well-managed. It’s a good recipe for private equity. That’s what’s happening now.”

The next generation

After a decade of opening up the market and courting Colombia’s premier private equity investors, many players are looking to cement their operations by exiting assets ahead of launching their next funds.

“The challenges for the local private equity funds are trying to wrap up those first generation funds successfully and see if they can raise a second fund… We have seen one or two funds that have already done so, that have had some successful exits and have been able to raise a second, bigger fund with investors,” Salgar says. We have seen one to two funds that have already done so, that have had some successful exits and they have been able to convince investors to raise a second, bigger fund.”

Tribeca, which raised $131 million in its first fund in 2007 and $250 million in its second fund in 2010, is considering its third. More than 16 funds, including MGM Innova Capital, Nazca Ventures, Nexus Capital Partners, Austral Partners and Axon Partners Group were in the process of fundraising at the end of last year, according to Bancóldex.

The growing competition makes it increasingly important for funds to attract foreign investors, which make up 19% of investment in the industry in Colombia today. Bancóldex wrapped a roadshow with institutional investors in the US and Canada in May for a $500 million fund of funds that it’s looking to structure over the coming months. This vehicle would give investors access to Colombian private equity funds, vetted by Bancóldex, and focused primarily on SMEs.

“We’re putting skin in the game,” says Vergara. “Something that I think is even more attractive than the money, though, is that we connect them to local opportunities that may be difficult for a manager in Toronto or Washington or New York, to have access to — middle-market companies in Colombia that have possibilities to grow.”

Finding the door

Successful exits are the unequivocal key to luring investors, domestic or international, fund managers say. With many funds approaching the end of their investment cycle at the same time, and an underdeveloped IPO market, the balance between supply and demand for assets may not be favorable. Strategic investors are emerging as crucial buyers for private equity assets.

“What we’ve seen is that there is so much interest in Colombia from strategics, and normally they pay much better than the IPO market,” Iragori says, adding that strategic investors have accounted for all six of Tribeca’s exits. “But the IPO market is there for larger transactions, north of $150 million or so. It will be possible.”

Strategic investors have been an important avenue for selling, Salgar says, but he also adds that successful exits are more a matter of timing. “Private-equity-owned companies are just starting to be put on the block and some of these are being sold. It’s just a matter of time for the market to mature.”

The steep devaluation of the Colombian peso is also asserting itself. For funds that need to realize returns in dollars, the prospect of selling peso-producing assets that have lost up to 40% of their value is less than appealing. “There’s going to be a valuation gap and people may want to stay and see if they can recover that valuation in time. Many of those people do think in dollars, although their businesses are in domestic currency, there is a gap that will delay the sale of some businesses,” Iragori says. LF