Research

By Luis Gabriel Morcillo,Brigard & Urrutia Abogados and Lyana De Luca, Brigard & Urrutia Abogados

Colombia’s PE industry has reached its first decade (2006-2016). Incorporation of local funds has been successful for an emerging economy, placing Colombia in the spotlight of foreign and domestic GPs willing to incorporate local PE vehicles or to raise capital from local investors, specifically in the real estate and infrastructure sectors. Simultaneously, local investors such as pension funds and insurance companies are increasingly seeking attractive PE opportunities offered by international managers abroad.

Colombia’s PE industry has reached its first decade (2006-2016). Incorporation of local funds has been successful for an emerging economy, placing Colombia in the spotlight of foreign and domestic GPs willing to incorporate local PE vehicles or to raise capital from local investors, specifically in the real estate and infrastructure sectors. Simultaneously, local investors such as pension funds and insurance companies are increasingly seeking attractive PE opportunities offered by international managers abroad.

Development Per Sector: Infrastructure and Real Estate

Colombia currently has 11 domestic infrastructure funds with total committed capital of US$5.2 million. This represents a 100% increase on the existing infrastructure initiatives with respect to 2015, that obeys to the significant demand for private financing of infrastructure projects derived from the US$15 billion 4G toll-road program sponsored by the Colombian government.

In fact, the Colombian government has put in place a robust infrastructure program, focused not only on roads but also on other sectors such as airports, rail, ports, mass transportation systems, hydrocarbons, gas and energy. Pursuant to the Financiera de Desarrollo Nacional, the infrastructure sector needs approximately US$25 billion to finance infrastructure projects in the following years. The Colombian government has only US$4 billion, which represents a huge opportunity to other investors such a local and foreign PE funds.

With these figures and because the Government hosted a series of clear regulations such as the PPP Act and the creation of the National Agency of Infrastructure – ANI, world-class infrastructure developers are now encouraged to invest in 4G projects. This kind of action also boosted the participation of key investors, such as multilateral agencies, sovereign funds and offshore pension plans, who had previously been absent from Colombia’s infrastructure landscape.

More particularly, this constant necessity available capital to finance the different infrastructure programs triggered two regulatory modifications in the local pension funds investment regime. In 2015, the Ministry of Finance issued Decree 1385 that created a specific allocation for local pension funds to invest in local PE infrastructure funds. Subsequently, in 2016 the Ministry issued Decree 765, which created a new asset class defined as alternative investments with its own mandate to invest in infrastructure assets. PE funds were
included within this new bucket in an attempt to stimulate investments in local private equity funds.

On the other hand, since a few years ago, good and steady prices and a rising middle class accessing the real estate sector has confirmed the interest of local investors such as pension funds, insurance companies and family offices, as well as the awareness of local and foreign GPs. Currently, in Colombia there are 22 local real estate Funds, with total commitments of US$2.042 million, representing an increase of 56% with respect to 2015. Local real estate funds are managed by important local developers and large economic groups, such as Santo Domingo’s family through Terranum, Inverlink, Amarilo, Jaguar Capital and important financial groups such as Bancolombia, Credicorp and BTG Pactual, and the recent alliance of Argos and Conconcreto through Pactia. In addition, foreign groups such as Paladin and Jamestown are willing to raise capital in the country and are also thinking about the possibility of incorporating a local vehicle.

Other kinds of vehicles such as buyout funds or venture capital initiatives also have a positive but much steadier perspective. Local pension funds are skeptical of committing additional capital, since exits from existing first vintage funds are only until now, occurring and have not been as frequent as desirable. In fact, the Colombian PE industry is still waiting for an outbreak of numerous and successful
exits. In addition, the venture capital industry is still taking off and faces some concerns with respect to typical PE. Local fund structures are expensive for entrepreneurs and investors are not increasingly willing to sponsor early stage projects. With this in mind, local
incubators such as Ruta N, Innpulsa, Fundación Bavaria and the Colombian branch of NXTP Labs have made enormous efforts to foster venture capital and risk investments. Therefore, there has been an increase of 53% local venture vehicles with respect to 2014, with 9 venture funds representing US$89.5 million.

There are some examples of GPs raising second or third generation funds (for example, Altra, MAS Equity Partners, Tribeca, Terranum Capital), which demonstrates the confidence of local investors, especially pension funds, insurance companies and family offices in the PE industry. However, this trend will be stronger once the exits wave is ratified with good results and GPs demonstrate their ability to successfully disinvest a PE fund.

Finally, the Colombian PE industry is reaching an initial level of maturity that permits some entities such as Bancoldex3 to explore the possibility of incorporating the first Colombian fund of funds with a Latam regional scope. This proves that governmental authorities like Bancoldex are willing to become general partners and assume the fiduciary responsibility derived of such a role to cooperate with the development of an industry like PE that is in constant growth.