September 30, 2011 Coming to grips with Colombian private equity Private equity didn't exist in Colombia before 2005 and received official government sanction only through enabling regulatory legislation in 2007. Progress is striking. In 2005 the country's two funds raised a total of $79 million, according to María Cristina Albarracín, who heads the private equity division at Banco de Comercio Exterior de Colombia SA, or Bancóldex, the government's development bank. There are now 20 funds, including five with management from abroad, holding a total of $2.1 billion in assets.

Most Colombian businesses are only now beginning to come to grips with PE. "In Colombia private equity and venture capital is very, very new," says Albarracín. "When you talk to a company in Colombia, they still don't know what private equity is."

Not surprisingly, Colombia's private equity market remains a comparatively minor force globally. "Latin America has 3% of the global [PE] pie. Colombia has 5% of Latin America," says Albarracín, whose bank has invested a total of $37 million in four PE funds.

Here's a sampling of private equity activity in Colombia.

One of the country's first efforts came in late 2005 when the Washington-based global private equity firm Small Enterprise Assistance Funds, or SEAF, organized a Colombia fund called Fondo Transandino Colombia, with a modest $23 million. In 2009 Juan Manuel de Pombo and Patricio D'Apice joined original CEO Héctor Cateriano as managing partners, took equity, renamed the fund Access-SEAF and launched a follow-on fund with a target of $120 million to $150 million. Its first closing came in April, with $62 million provided by local pension funds and insurance companies. Access-SEAF is looking for foreign investors to put up $60 million to $80 million.

The first fund invested in five companies. On average, the fund made an investment of just $2.8 million per company, often a minority position in total investments that topped out at $12 million per company. The next fund will look for average investments of $10 million each in deals that could top out at $25 million including co-investors.

That kind of investment size reflects demand, they say. "Companies seeking $5 to $25 million in growth capital are the bulk of the Andean growth potential," says D'Apice. "In these markets, $100 million investment opportunities can be counted with both hands."

In the U.S. the leveraged buyout model dominates. In Latin America "the most suitable approach is the growth capital market," says D'Apice. Companies are family-owned, need capital for expansion and "are usually reluctant to cede absolute control immediately," he says, adding that Latin American capital markets "do not allow for much leveraging of the deals."

They seek companies that not only exhibit growth potential, but also can be replicated elsewhere and have profitable brand extensions.

Access-SEAF, for example, invested in Inverdesa SA, Colombia's biggest fitness chain under the Bodytech name. The firm shepherded Bodytech to Peru as well as helped develop and market a Bodytech-branded line of functional water, similar to Gatorade.

Perhaps Access-SEAF's most high-profile investment is a restaurant called Andrés Carne de Res. Two decades back, Andrés Jaramillo started a small eatery in the town of Chía, outside Bogotá. It steadily expanded and is now the country's best-known restaurant.

Access-SEAF invested an undisclosed amount in a second Andrés, an industrial-sized four-story operation that opened in 2009 and flanks two of Bogotá's most famous shopping malls. Actors, magicians and bands all wander through the sprawling, kitsch-filled expanse, entertaining diners. It's a roaring success and a must-see stop on the tourist circuit.

But according to Pombo, what makes Andrés even more attractive is the brand, which is being affixed on a food court restaurant chain called La Plaza de Andrés, which Pombo says, was devised and launched in only five months. "We can replicate this model very quickly," he says, adding there are plans to open 10 more La Plaza de Andrés, increasing annual revenue by as much as $60 million.

Access-SEAF unloaded one of its five investments, an unidentified oil services company. The private equity firm registered an internal rate of return of 43% after making a $4 million mezzanine and equity investment.

Altra Investments was also founded in 2005. Altra raised a total of $165.5 million in four separate funds, which is fully deployed, along with a further $106 million from co-investors. Altra focuses primarily on Colombia and Peru, although it invests throughout Central America.

The firm has so far invested in seven companies, four of which are Colombian. Altra says historically its stakes have been controlling, with its own investments typically in the $20 million range and company deal size averaging $40 million to $50 million.

Altra has already made a highly visible exit. In August 2007, Altra and the TRG Management LP, known as the Rohatyn Group, together acquired a controlling stake in the Peruvian generic pharmaceutical company Corporación Infarmasa SA. The two sold their stake to Teva Pharmaceutical Industries Ltd. in January. Terms weren't disclosed, although an Altra representative says his firm made 2.2 times capital invested and a gross IRR of 25.5%.

"It's very clear," says Dario Duran, a director of Altra. "International investors are looking at the region."

Ashmore Management Co. (Colombia) SA is at the other end of the spectrum. It formed a $200 million infrastructure fund in 2010, a closed-end, 15-year term fund, with both local and international investors. The Colombian government invested $37 million as a lead limited partner. Ashmore Group plc and local advisory Inverlink SA teamed up to form the general partnership.

Camilo Villaveces Atuesta heads operations. He won't identify investments by name, describing instead sectoral investments, one each in power generation, logistics and oil-related transportation. "The change in Colombia has been amazing," he says. "Some years ago, nobody came to invest."

That boost in investment dollars carries with it a buyer's premium. Bargains, say some PE professionals, are getting harder to come by. "Clearly, the last five years have been a buyer's market," says Duran. "Valuations have been good for private equity, but valuations have increased."

According to Duran, typical Ebitda multiples were "5 or less," when his fund began investing in 2005. Now, he says, they have jumped to 6 or 7 times for comparable companies, and in the case of blue chips, "they have increased to 12 times and higher."

Even as private equity gains ground and credibility, some potential new entrants are struggling to raise funds, especially from overseas investors. Bankers and private equity professionals alike believe the number of new funds won't increase much over the next couple years. "The size of deals has to evolve to the point where international money can be deployed," says Villaveces. "The industry has to be developed significantly, [and show] maybe two, three, four years of a track record."

Few expect international private equity giants to descend on Colombia anytime soon. The deals aren't large enough, and even infrastructure plays are, in global terms, small change.

For the time being, "big players such as KKR or Carlyle don't make any sense" in Colombia, says "lvaro Hernán Mejía, co-founder of the Bogotá-based stock brokerage Correval SA.

Read more: Coming to grips with Colombian private equity - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
SOURCE: The Deal Magazine
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