Colombia: Ripe for Private Equity

Until late 2016, PE activity was dominated by Brazil, but recent political events, instability in Brazil, and the FARC-Colombia peace deal makes Colombia a lucrative opportunity for PE investment.


by Srini Chandrasekharan, AMBA '17 (7/3/17)

Latin America (LatAm) has seen extraordinary growth in entrepreneurship, and flow of investment in private equity (PE) since 2005. From only two funds in 2005, 2014 ended with 55 funds operating in Colombia in sectors ranging from mining to financial & business services. While 2015 saw an overall decrease in M&A activity in LatAm, PE activity across LatAm increased in 2015, with firms announcing US $7.5B in new investments which was a noticeable increase relative to 2014. It is also interesting to note that until late 2016, PE activity was dominated by Brazil, but recent political events, instability in Brazil, and the FARC-Colombia peace deal makes Colombia a lucrative opportunity for PE investment. 

Potential Growth of PE in Colombia

A report from PROCOLOMBIA in 2016 showed strong growth in capital committed to PE since 2005. Using similar growth rates and projections, 2017 and 2018 are expected to show further increases in capital committed to PE in Colombia. While the amount of capital seems low, sectors like energy, tourism, forestry, agro-industry, and ICTs among others offer investment opportunities with good rates of return. The report further shows that the constant increase in committed capital has helped Colombia move in the Latin American Private Equity & Venture Capital (LAVCA) rankings. It was ranked in 7th place in 2006 and by 2010 it had inched up to the 4th place.

Economic Conditions in Colombia

Using GDP data since 2005, Colombia has been growing at a steady pace between 3.5 – 4.0%, except for 2009 when the GDP growth was recorded as 1.6%. Though the GDP growth rate has fallen to about 1.7% since 2015, it is expected that the Colombian economy will grow at 2.5% in 2017 even when LatAm has had negative GDP growth for both 2016 and 2017. The FARC peace deal will boost economic activity in Colombia and will have a positive impact on the GDP. Reports also show that inflation in Colombia has been controlled and has remained steady at around 3.6%. There has also been a reduction in unemployment rate to 8.9% in 2015. Colombia also has a fast-growing middle class population which comprises of 37% of the 48 million citizens. All the above factors point to a dynamic long-term economic performance.

Regulatory Framework

According to reports, Colombia has generated interest among investment funds and facilitated, and boosted the PE industry by creating a regulatory framework for the creation and management of PE firms. Decree 1242 of 2013 replaced the previous regulations regarding the administration and management of investment funds by removing restrictions on local institutional investors to invest in PE. Colombia is also internationally recognized for protecting its investors and was ranked 6th in the world and 1st among LatAm countries, according to Doing Business. 

Access to Capital Markets

Since 2007, changes in regulations have also allowed pension funds and insurance companies to invest in PE funds, and they have had good returns and are considering higher ones. With the implementation of the multi-fund system in 2011, smaller pension funds are also allowed to put part of their funds into PE and high risk funds. This too has increased access to capital for the new and upcoming PE funds. The integration of the stock exchanges of Colombia, Chile and Peru in the last few years has also increased the availability of capital and exit opportunities.

Investment Opportunities

Colombia has a diversified economy with investment possibilities in various sectors. The PROCOLOMBIA report of 2016 shows the wide variety of sectors that PE funds can invest in. It is interesting to note that no sector dominates and variety allows PE funds to target sectors in which they feel they have a strong know - how. Some of the sectors are health, software and IT, tourism infrastructure, agriculture, energy, infrastructure, and innovation projects.

Opinion

With the steady economic growth of Colombia and the improved regulatory framework, and better access to capital markets and investment opportunities, I can say that Colombia is ripe for private equity investment. One of the topics not covered in this article is the effect of entrepreneurship on family businesses. Like any other developing and emerging economy, the majority of Colombia’s small businesses are family owned and operated. These businesses have excellent cash flows, and the next generations of owners want to make some changes. These small businesses are excellent targets for private equity because of their steady cash flows and willingness of the owners to sell their stake. The next big wave of large PE firms will be in Latin America and the destination is Colombia.

 

References

1. http://www.investincolombia.com.co/sectors/services/private-equity-funds.html

2. EY Report – Private Equity roundup Latin America

3. Bancoldex, IDB (Inter-American Development Bank), OMIN (Multilateral Investment Fund Member of the IDB Group) – Private Equity and Venture Capital Funds Colombia 2015 – 2016

4. Colombia’s Private Equity Evolution – Isabella Munoz, ColCapital


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