April 28, 2014
Interviewed by: David Snow
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Energy, Healthcare and the Colombian Opportunity

Important trends in the Colombian energy and healthcare markets are spelling opportunity for private equity firms, according to experts from Advent International and Tribeca Asset Management. The panel also discusses the Colombian exit market and IPO outlook.

Important trends in the Colombian energy and healthcare markets are spelling opportunity for private equity firms, according to experts from Advent International and Tribeca Asset Management. The panel also discusses the Colombian exit market and IPO outlook.

Energy, Healthcare and the Colombian Opportunity

Private Equity in Colombia

David Snow, Privcap:

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

All: Thank you.

Snow: We are in Bogotá, Colombia, and we’re going to learn about the Colombian private equity opportunity directly from all three of you who are so deeply involved in investing and growing the value of companies here.  

Let’s talk about the most important sectors in the Colombian economy that present an opportunity for private equity investors.  There are many, but we’re going to focus on a couple. Then, we’ll talk about the exit markets.  

I’d like to start with healthcare. I’m told that there have been big changes in the Colombian healthcare market that might present opportunities for private equity. Let’s start with a question for Felipe. What are you seeing in the healthcare market and why might that spell opportunity for your firm?

Felipe Iragorri, Tribeca Asset Management:

What we’ve seen is that the healthcare industry in Colombia is almost in a crisis because of regulation and malpractice in some of the players in the industry. Although the government has reached universal coverage, there are still some rules to be fixed. The government has been keen to a health reform. Today, it’s under discussion in the congress. Hopefully, it will come out sometime this year.

Eva Garcia de la Fuente, EY:

Hopefully soon.

Iragorri: Hopefully soon, yes. Still, at Tribeca, we think healthcare is a constitutional right in Colombia and in almost all countries in Latin America. Anything that happens in the health reform still will be a constitutional right. That’s why we’re focused on looking at more than the insurance companies on healthcare providers. We’re not still in pharma; we’re more in healthcare providers. We’ve done some deals in that sense and today, we’re looking at some deals in others.  

A lot of the public sector has gone to private. Public healthcare providers, public hospitals and clinics are going to be privatized, either to a public/private association or just privatized. There are some big opportunities in that area now. 

Mauricio Salgar, Advent International:

We look at healthcare across the value chain. Service providers and insurance companies will be the most affected with this new reform. Pharma companies won’t be, because at the end of the day, the demand is there.

You need to understand that GP per capita has been growing very fast. There’s a lot of unmet demand that needs to be fulfilled.  Actually, we have invested in a pharma company locally where we’re taking advantage of that consumption and it is growing strongly. In time, we’re looking and waiting to see how this reform evolves to see if we invest in the healthcare provider space.

Across the region, the same topic is happening. GP per capita grows and then, the standard of living generates. The governments have been good at providing universal healthcare coverage, so we see the same thesis here, in Peru, in Mexico and in Brazil, and we are looking at opportunities across the chain.

Snow: Advent has invested in a pharma company in Colombia, right?

Salgar: Yes.

Snow: How did that opportunity come about and why do you think that that’s the way to win a changing healthcare market?

Salgar: That’s only one of the many ways to win and the jury’s out there.  We’re investors in this company and we’re busy trying to grow it.  This is a platform at which we commercialize and distribute niche healthcare products for unique diseases. We partner with global laboratories that do not have a local presence in the region and we provide the marketing facility and the knowledge of the local regulatory framework so that we can market those products locally. There are operations in Colombia, Nicaragua, Peru, Chile and Argentina and we just announced acquisition of a similar company in Brazil that we’re going to merge with this company.  We’re looking at it as a regional platform.

Snow: Colombia has a very diverse economy, but oil and gas is a very important part of it.  Can you talk about where the capital and expertise from private equity is needed in that sector in this country?

Salgar: Let me step back to give you the dimension of the industry in Colombia. Oil products in Colombia used to be 500,000 barrels a day in 2003. Today, it’s a million barrels a day. The production doubled and the local consumption is under 300,000 barrels a day.  So, it’s a self-sufficient energy economy and exports have grown dramatically.  

In the same period, the average price of oil grew from $20 or so per barrel to $100 a barrel. The exports of Colombia are widely dependent on oil and gas. To be able to double production in such a short period, there has been a huge amount of investment across the value chain in exploration, production, field development, midstream assets, pipelines, ports and refineries. This generates, on the back-end, investment requirements in the oil field services companies, in engineering firms and in all the equipment required for this development. That’s been a “boom” in Colombia. 

Now, we are seeing private equity coming and investing in small and medium-sized exploration and production firms. Also, we have seen money from private equity coming into oil field service companies and, recently, big money coming into the pipelines and the midstream assets. 

I don’t see private equity investing as aggressively in pure-play exploration, which is very risky and that risk is borne more effectively by the global exploration players. But, across the value chain, there are going to be opportunities.  

Garcia de la Fuente:

What do you think about the oil reserves in Colombia?

Salgar: Back in 2003, people in Colombia said, “We’re going to run out of oil in 2009.” It didn’t happen. That means that the companies have been good at replacing reserves and having a good blend of exploration successes and fuel development, so that there’s enough reserve development. I’m optimistic. I’m optimistic that the production of one million barrels of oil can be sustained for the long-term.

Snow: Felipe, what are the opportunities in oil and gas for the smaller and mid-sized players that your firm might be interested in?

Iragorri: My firm has a junior E&P company; we invested in that company back in 2008, when Colombia was opening more in the oil industry, and it has been a great success.  

Today, we are in the middle of exiting the company. It’s very interesting for a bigger player. We don’t think, at least in Tribeca, there’s more space in the E&P sector because the big chunk of the Colombian future in oil will be big exploration, unconventional for example, in the middle Magdalena Basin. All this offshore exploration is for big players.  

We will exit this company, hopefully very successfully and, for us, that’s that in the E&P. But, in the midstream and downstream, something could work in the future.

Snow: Let’s talk about the exit market. These are two important sectors of the economy: healthcare and oil and gas. But, of course, private equity’s job is to invest and to exit at a higher value than you invested.

Can you talk about the success, so far, that GPs here have had in exiting and tell us what you think the future of exits is going to look like?

Salgar: For three investments in the country—the most recent was this year, then the other one that has been with us a longer time was done two and a half years ago and we’re still there. We’re not looking for an exit right now. 

Snow: You’re in the value creation part of that.

Salgar: Correct. Most of the fund managers are in that stage. I wouldn’t judge that the economy doesn’t have the ability to exit, because we haven’t proven ourselves yet. If the same question is going to be asked three years from now and no companies have exited, then we have a problem. I’ll let the talking go to Felipe, because he has a portfolio that started back in 2007.

Iragorri: Out of ten companies, we’ve had two full exits. But, we’ve had many partial exits through refinancing or big dividend payments to the shareholders and to our fund. That’s happened in three other investments. We’re working on two or three exits this year and probably even four for the following year. It’s time to exit in two of our funds. There are a lot of opportunities and what we’re seeing is a lot of strategics coming in—international strategic players who are knocking on our doors with some assets we have.

Salgar: So people understand, the typical exit route will not be through the public markets. The public stock exchange in Colombia is very small. Only the “blue chips”—big airlines, the oil companies, the two major banks—are the type of companies listed. But, aside from those, for a mid-sized private equity-owned company to think their primary exit route is through an IPO, it’s simply not there yet and I don’t think it’s going to be there for at least three or four more years.

We have quite a bit of experience in listing companies in Brazil, for example. We went through this same process in nearby countries like Brazil and Mexico where, 10 years ago, that was not existent. But, in the last 10 years, that developed and it has been an exit route for many of the investments.

Snow: Felipe, you said you’ve done 10 deals so far. Do you think any of those will be IPO candidates?

Iragorri: No. One of our companies would have been in the size of an IPO but we think the strategic appetite, it’s very good to go into an IPO.  

I agree with Mauricio. There are companies below $100 million, a possible market cap. I don’t see it. It’s more than that—$200 or $300 million and that will happen in the future. Probably smaller companies will happen with Chile, Mexico and Peru coming in. It will probably open up and Mexico will bring some of that experience to these markets as well.

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