April 22, 2014
Interviewed by: David Snow
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Colombia’s Growing Appetite for PE

Francisco Jose Arboleda of HarbourVest Partners talks about private equity in Colombia, and the growth of the industry and talent in the country.

Francisco Jose Arboleda of HarbourVest Partners talks about private equity in Colombia, and the growth of the industry and talent in the country.

Colombia’s Growing Appetite for PE

With Francisco Jose Arboleda of HarbourVest Partners

David Snow, Privcap:

Today, we’re joined by Francisco Jose Arboleda from HarbourVest Partners. Francisco, welcome to Privcap. Thanks for being here.

Francisco Jose Arboleda, HarbourVest Partners:

Thank you very much, David.

Snow: There’s been a lot of excitement around the Colombian private equity opportunity, including Colombia as a destination to invest and also as a place where lots of capital can come from. What is behind that excitement?

Arboleda: There are a lot of factors. First, if you see the macro story and what has happened in Colombia for the last years, you’ll find a country with nearly 46 million people, a growing middle class, and a relatively consistent GDP growth somewhere between 4% and 5%, which clearly outperforms most of the developed markets. When you take all those macro conditions down to the private equity industry, all of them are huge and strong tailwinds for all the private equity deals.

Snow: How has the population of local GPs developed? Are you seeing a lot more private equity talent and groups with which to deploy capital?

Arboleda: Yes. The private equity industry has grown significantly compared to what it was back in 2006, 2007, when it began. Now, you’ll find some local, Colombia-based GPs, but you will also find that the large, regional managers are already established down here in Colombia. Three years ago none of them had an office.  Now, all of them have an office and they have done deals here in Colombia. 

Snow: Let’s talk about the local institutions. Many groups are seeking to partner with them and to help manage their money. Do they have an appetite for global private equity or are they more focused on Colombia?

Arboleda: They have a bigger appetite for non-local, private equity and there are a few reasons for that. The first is track record. Outside Colombia, you can find managers with 10-plus or even 20 years of experience. Here in Colombia, the most experienced manager managing institutional capital might have five years, though they have some track record from their previous jobs and positions.

Number one is track record, number two is size. The local Colombian pension plans manage roughly $50 to $60 billion. They’re making significant amounts of investments into the private equity funds, so they need large funds for them to be able to deploy as much as they want. That’s the second reason.  

The third is, basically, diversification. Most of their portfolios are here in Colombia or Latin America. It’s roughly 80% to 90%. They want to build a portfolio, diversify it through geographies, assets classes, currencies, etc.  

Snow: What would you say to a North American or European asset manager who is really excited about coming to Colombia and helping to manage the capital of the Colombian institutions? What do they need to know before they get on a plane and try to get meetings here?

Arboleda: First, they’ll face a lot of competition. If you go through the main hotels here in Colombia, you’ll probably run into other private equity managers. That’s one thing to keep in mind—that all of them will be competing for the same amounts, the same dollars. 

Second will be that they can only invest because of the law and the restrictions that apply to the pension plans. They can only invest in private equity funds that have more than five years of experience and at least $1 billion in assets under management.

Snow: Eight billion?

Arboleda: One billion. One billion in assets under management. The small, medium segment is not available for them for the local pension plans, but beside that, basically everything is available and they don’t have many legal restrictions. They go directly into the partnerships, so that’s much friendlier than Peru or Chile, where most of the international private equity managers are trying to raise capital as well. 

The other piece of advice is to come on a regular basis. Again, as there is a lot of competition, you must be at the top of their minds. There is some turnover within the private equity teams. I usually recommend people to visit Bogotá at least twice a year.

Snow: Let’s go back to the subject of doing deals in Colombia and the increasing number of purely local private equity firms, as well as the bigger, multinational private equity firms. Are there enough opportunities to sustain all these entrants to the market? What do you think?

Arboleda: I believe there is. When you see what all the private equity funds have raised here in Colombia and how they have been able to deploy that capital—none of them has had any issues. All of them have been able to deploy capital alongside or within their strategy and there’s no big change in strategy, markets, etcetera. 

That’s the best sign that there’s enough room for all of these GPs. The only sector where there have been more challenges probably would be infrastructure, because you need to bid on auctions run by the government. But it would also be competing against international and the strategic players that can pay much higher prices. 

Snow: For the local entrepreneurs or owners of these energy-facing businesses, do they need capital from outside of Colombia? Don’t they have plenty of opportunity to partner with locals or is there room for substantial outside capital?

Arboleda: It’s both. They have raised and they partnered with some of the local investors or private equity managers but, in some cases, they also need capital from outside Colombia. The reason is the size of the deals or projects they’re working on. As you know and you could imagine, especially in the oil and gas industry, you can have a small project but you can also have a very large project. In those very large projects, you not only need a lot of capital but also experienced managers and there are not many experienced managers in Colombia. For that, you will have to go abroad and try to find specific energy investors. 

Snow: Do you feel there have been enough exits in the Colombian private equity market for people to have a sense of it working or is there a bit of holding one’s breath, waiting for a wave of monetizations that will really prove the thesis for Colombian private equity?

Arboleda: It’s halfway. There have been some realizations. Fortunately, I would say most of them having successful good exits with profitable and very attractive returns for any private equity standard, but they’re quite few. When you see all the exits, they might be significant but then when you go GP by GP, they have just a couple. I don’t think there is any Colombian private equity manager with more than three or four exits, to give you an idea.

Snow: Can you talk briefly about HarbourVest operations in Latin America and maybe in Colombia in particular? How do you see that developing over the next few years?

Arboleda: We opened our Bogotá office here in Colombia in early 2011.  Peter Lipson, one of our managing directors based in Boston, came down here to open the office. We also have hired some other people. 

The purpose of this office is to cover Latin America, going from Mexico all the way south, including Brazil. We believe that as our business keeps growing, we might open other offices. It might make sense to have an office in Brazil or even Mexico. But it will depend on how these markets evolve because, as you know, there are not many fundraising opportunities in Mexico and Brazil for non-local private equity managers, as we are. Once those pension plans start to invest abroad, we might think about opening an office in those two countries. 

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