April 15, 2014
Interviewed by: David Snow
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Colombia’s “Incredible Transformation”

Experts from Advent International, Tribeca Asset Management, and EY describe a blossoming private equity landscape in Colombia in which entrepreneurs and family businesses are seeking capital as well as guidance on corporate governance.

Experts from Advent International, Tribeca Asset Management, and EY describe a blossoming private equity landscape in Colombia in which entrepreneurs and family businesses are seeking capital as well as guidance on corporate governance.

Colombia’s “Incredible Transformation”
Private Equity in Colombia

David Snow, Privcap:

Today, we are joined by Eva Garcia de la Fuente of EY, Felipe Iragorri of Tribeca Asset Management, and Mauricio Salgar of Advent International. Welcome to Privcap. Thank you for being here.

All: Thank you.

Snow: We are in Bogotá, Colombia. All of you are deeply involved in the Colombian private equity market, so I’m fascinated to hear about how this market has grown and how you think it will continue to grow. You can’t really understand the private equity opportunity in Colombia unless you understand the changes in the Colombian economy and the Colombian society.

Let’s start with a question from Mauricio from Advent: talk about the general contrast between seven or 10 years ago in the Colombian economy versus today.

Mauricio Salgar, Advent International:

I would start by saying that the private equity market in Colombia 10 years ago was nonexistent. Colombia has faced an incredible transformation. First, security-wise, nobody used to want to come to Colombia because we had problems with the guerillas and the drug dealers, but that’s no longer the case. Not to say that the problem is resolved fully, but it’s no longer the number-one topic on the agenda.

At the same time, investor confidence started to grow. Then, our consistent governments have good policies that have attracted foreign investment consistently for the last 10 years and growing. That has opened the space for private investment.

Snow: Do you agree, Felipe? Do you see a huge contrast in business opportunity between seven years ago and today?

Felipe Iragorri, Tribeca Asset Management:

Definitely. As Mauricio mentioned, Colombia has always been but recently much more of a business-friendly government and that has been seen with a new regulation in private equity, relatively new, seven years ago. That’s why a lot of investors came in. GPs tapping at the LP market due to this regulation. That has also opened the space for private equity, local and foreign.

Snow: Eva, I’m told you speak Spanish with an accent, so were working in the European private equity market and now you’re here in Colombia working with local GPs. Can you talk about the contrast in how things are in Europe in conducting private equity and the stage at which the Colombian private equity market now finds itself?

Eva Garcia de la Fuente, EY:

Sure. Of course, the European private equity industry is very mature. We should be talking about the third and fourth-generation private equities. Exits examples are hundreds. For example, we are in the region of 300 exit experiences last year whereas, in Colombia or in Latin America, it’s in the region of 70. The Latin American private equity industry is still emerging, first generation.

Snow: It’s one thing for there to be a growing economy and a growing middle class. It’s another thing to actually, as a private equity investor, find those opportunities and convince the management of some of these companies, many of which are family owned, that they should partner with you. Mauricio, can you talk about an evolution the attitude of sellers in Colombia toward the private equity opportunity?

Salgar: It’s just beginning. Advent International has been in the region for 17 years. We’ve seen how this market has evolved in Mexico and in Brazil, but we just opened an office in Colombia three years ago. We’re seeing in Colombia what happened in Brazil probably 10 years ago, which is that people understand the private equity language and are developing trust with managers like us to generate those conversations. But it’s very tough to have the entrepreneur who grew his family business and now a young group of people come and say they are going to fix his life and give him a big, fat check and continue growing the company. That’s a tough conversation to have, but it’s starting. The few deals the industry has started to do locally show that it is possible. But that’s one of the big challenges we have.

Snow: Is that your experience as well?

Iragorri: Yes. And, let’s say, back in 2007, when we closed our first fund and did our first investments, the investments were done with cash out. Entrepreneurs or family businesses weren’t prepared to partner with us. It was more of “let’s cash out” because of different reasons. And now what we are seeing and having knocking on our doors are people who do want to partner with private equity, see private equity as a funding option for their growth and, of course, not only financially but strategically, through corporate governance and so on. So, as Mauricio said, it’s starting in smaller companies. At least we’re seeing that it’s opening up very fast.

Garcia de la Fuente: The private equity in Colombia is also helping the entrepreneur and the small, medium-sized companies to guarantee this ongoing concern are around companies that are growing very fast and they don’t know how to handle it because they don’t have the professionalized team. Private equity is contributing to improve that significantly to the medium-sized Colombian companies. Of course, it’s another option rather than going to the bank and asking for funds. The private equity is offering them an alternative professionalizing, the management.

Snow: It’s great to be successful and grow so fast that you can’t handle that growth. Are many of these entrepreneurs aware that they may have weaknesses on the corporate governance side that can be addressed by the best private equity firms?

Salgar: They may know, but they don’t want to accept any help.

Garcia de la Fuente: Exactly.

Salgar: You would ask them in public and they would never acknowledge that they require that help because they’ve been successful and very successful. That’s generating the trust so that the counterparty accepts that you can help can only be developed in time and that’s why growing this industry will take time. When we talk to some families, they want us to let them get in contact with the families we’ve done business with in Mexico and Brazil so that they know how this works and that has proven very effective. 

Snow: Mauricio and Felipe, you’re in two slightly different segments of the market. Can you categorize the kinds of sellers you are in touch with, whether it’s corporations with under-loved divisions or entrepreneurs, family groups?

Iragorri: In our case, it’s been more entrepreneurs because of the deal size. And as I mentioned, the first ones were more entrepreneurs that wanted to exit. A couple of them were senior age and they just wanted to cash out and retire.

Others have been younger entrepreneurs or even second-generation families who want to solve some corporate governance issues and be helped with growth financially and with strategic, because sometimes they’re fond of and knowledgeable of their business but they don’t have the right skills for strategic expansion by itself, so they need some help. It’s been successful in that sense.

Salgar: In our case, we look at bigger deals. There, you are dealing with families that are more sophisticated, so you no longer need to explain the basics. They’ve been exposed to deals internationally. They’ve already grown companies that are local blue chips, mid cap. So the conversation is a bit easier.

Still, when you introduce the whole governance picture and the rights and controls and protection one needs as an investor there, it is more challenging. Also, in the size of deals we look at, there are some corporate “orphans” or divisions of big corporations that now they want to spin off; that has been an opportunity for us as well.

Snow: Eva, on the subject of control in the transactions you advise on between private equity firms and sellers, does control often come up as an issue?

Garcia de la Fuente: It’s an issue. Yes. I’m not used to seeing big, international private equity funds investing in a minority stake. That’s one of the biggest transactions we recently were involved in, in the market. I’m more used to minorities in the stake holding. Of course, this is leading afterward to discussions and the agreements between the shareholders. This leads to difficult conversations between both parties—buyer and seller. It is starting to be a typical transaction here in Colombia, which is minority with control, which is very awkward. It’s not that usual internationally.

Snow: Is that the case, minority with control? I guess you would use certain deal terms like puts—

Iragorri: Yes. And political rights and veto rights and so on in the corporate governance.

Snow: It just comes down to trust. If they trust you, they will consent to—

Salgar: You’re dealing with a family. Even if you are able to write the most comprehensive shareholder’s agreement that covers you inside out, if you don’t develop the trust with the family and a working relationship that works, that’s a recipe for disaster.

Garcia de la Fuente: That takes time.

Salgar: Building the relationship takes time. The due-diligence process also takes time. That’s why we like more proprietary deals. Most of our teams are local because we need to talk with these guys day in, day out. It’s hard to broker a deal with a local family flying in Monday and flying out Thursday. That simply doesn’t work. You need to be local, work the relationship and be with them for the long run.

Garcia de la Fuente: That is one thing I’ve been seeing recently: that the industry is more concerned about these longer terms of due diligence. They are starting to forget about fast due diligence of one week. I put a tick-mark in the checklist saying that I’ve done the work and that’s it. They are much more demanding on the type of analysis. They are much more sophisticated. If it’s capital intensive, then ask for operational due diligence. If it’s human resources intensive, then labor due diligence. This is also a change here in Colombia.


Expert Q&A
With Eva Garcia de la Fuente of EY 

How does EY help private equity firms perform better due diligence when doing deals in Colombia? 

Eva Garcia de la Fuente, EY:

A GP calls us and the first thing I ask them is, “Is it a family owned business? Is it audited? What type of different jurisdictions do they work with? Do we have different management teams geographically or what type of control are the stakeholders performing in the company?” These questions give me some feeling about the quality of the information I’m going to find. As it usually happens here in Colombia, the quality of information is not good, so you have to dig in and perform a very detailed analysis for understanding exactly what the business is and isolate and carve out all the non-operating assets on all the expenses that are not normal in the business. That obliges you to dedicate a lot of time understanding the numbers.

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