after years of narco-trafficking and terrorism, the third

www.thedeal.com
vol. 9 no. 15 october 3 — october 16, 2011
Feature Investing
Colombia
emerges
After years of narco-trafficking and
terrorism, the third-largest nation in
South America is growing fast, driven
by commodities, a booming financial
economy and monetary discipline.
Now it’s looking abroad By Matt Miller
Feature Investing
C olombia’ s largest conglomerate , Grupo de Inversiones Suramericana
SA, turned heads toward the end of July when it won the auction for ING Groep
NV’s Latin American life insurance, investment management and pension fund operations. With its ¤2.615 billion ($3.73 billion) bid, Grupo Sura beat out U.S. insurance behemoths such as Prudential Financial Inc., Principal Financial Group Inc.
and Metropolitan Life Insurance Co. ¶ The purchase is the priciest ever for a Colombian company. It makes Grupo Sura a major player in global pension fund management, more than doubling assets under management, to $130 billion, and giving the
company significant financial beachheads in Mexico, Uruguay and Chile.
“We weren’t looking for such a large
acquisition,” says Andrés Bernal Correa, the group’s chief finance and investment officer, as he explains his company’s recent moves to expand regionally
through M&A. “But we were happy to
find it.”
Others in Colombia share in this
sense of exuberance and pride. The
Grupo Sura deal is another high-profile
indication that the country’s business
community is coming of age globally.
“Until recently, Colombian companies weren’t big international players
or expanding across frontiers. That has
changed a lot,” says Álvaro Hernán Mejía. An investment veteran in Colombia,
Hernán is co-founder of the Bogotábased stock brokerage Correval SA,
where he heads investment bank operations. “Strategic investments are starting to take off.”
Grupo Sura’s M&A activity is only
one sign that Colombia-related investment is in the midst of dramatic change.
In August, Colombian paper products
company Carvajal SA acquired Grupo
Convermex SA de CV, a Mexican plastic
goods maker, for $180 million, while Sam
Zell’s Equity International announced a
$75 million stake in Colombian real estate company Terranum Development.
An enviable mix of economic drive
and monetary discipline characterize
the country today. Booming exports,
inbound investment and consumer
demand all propel the economy these
days, while inflation remains low, com-
mercial banks strong and sovereign debt
manageable.
“We have a dynamic economy. We
are a commodity producer with high
commodity prices. We are attractive
to foreign investors,” says soft-spoken
Central Bank of Colombia Gov. José
Darío Uribe. “We now have the highest
terms of trade in Colombian history.”
That kind of confidence resonates
among Colombians and Colombia
watchers. “In macro terms, it’s in the
best shape I’ve seen in decades,” says
Richard Frank, the president and CEO
of Darby Overseas Investment Ltd., the
Washington-based emerging-markets
private equity firm that first invested
in Colombia 16 years ago and has made
four investments in Colombian companies. “I used to be really on the defensive for investing in Colombia,” he
continues. Now, “it’s one of the most
successful Latin American destinations
we have.”
In late June, Fitch Ratings upgraded
Colombia’s foreign debt to investment
grade. Fitch was the last of the three
ratings agencies this year to boost Colombia’s debt profile after 12 years categorized as junk.
All this may come as a surprise to
Americans who still know Colombia
for its notoriety as an illegal drug center. “Prudent and consistent macroeconomic management has resulted in
low inflation and higher growth compared with peers,” Fitch wrote in its
upgrade. “Colombia has been among
the most actively reforming sovereigns.
The [President Juan Manuel] Santos
administration has moved forward with
an impressive legislative and executive
agenda designed to increase growth
prospects, and improve fiscal credibility
and predictability.”
Brazil may hold center stage when
it comes to economic performance in
Latin America, although some are beginning to wonder whether the hype
is outpacing the reality. Colombia, by
contrast, remains underappreciated
and a bit of a sleeper. “Colombia is the
next upcoming emerging market,” argues Juan Carlos González, foreign investment vice president with Proexport
Colombia, the government’s investment
and tourism authority, which sponsored
this reporter’s trip to the country.
Whether Colombia will blossom into
Latin America’s newest star is far from
certain. Impediments remain, and even
the country’s most avid boosters agree
its infrastructure is woeful. At the very
least, however, Colombia is becoming a
country that has outgrown the caricature.
“I don’t see many clouds on the horizon,” says Juan Muñoz, Bogotá-based
executive director for J.P. Morgan Chase
& Co. There aren’t many places where
that’s the case these days.
In a sign of Colombia’s growing financial confidence, the Santos government is laying the groundwork for fiscal
sustainability through both mandated
Feature Investing
photographs by Matt Miller
Feature Investing
limits to spending and reforms in the use
of oil and mining royalties. The government proposed four separate development funds in July, which are now subject to mandated review by the courts to
ensure they are constitutional.
Germán Arce Zapata, the Ministry
of Finance’s director general of public
credit and the national treasury, says
the funds would be independently supervised and administered; he likened
the board to that of the central bank.
The system has been designed to ensure
that the government won’t expropriate
funds earmarked for local projects. Arce
describes a pool of some $20 billion
over the next decade for a development
fund targeted at the country’s various
regions—a sizable amount for a country
of Colombia’s size.
According to Arce, the central government will first focus its royaltiesrelated dividends on reducing budget
deficits and levels of debt.
Optimism isn’t limited to the government; it pervades boardrooms, banks
and balance sheets; it’s carried slowly
along the traffic-snarled streets of Colombia’s largest city and capital, Bogotá,
a city of 8 million, some 8,612 feet above
sea level in the Andes. New construction punctuates Bogotá’s urban expanse,
which spills down from the Eastern
Cordillera of the Andes and onto a high
plateau, known locally as the Sabana de
Bogotá. Well-dressed workers rush to
their offices while residents stroll parks
and sidewalks, pack giant shopping
malls and crowd restaurants and bars.
In August Colombia hosted the FIFA
U-20 World Cup, the international soccer tournament for players under 20.
That kind of an event would have been
unimaginable just a few years back, says
Santiago Gutiérrez-Borda, a partner
with the Bogotá-based law firm José
Lloreda Camacho & Co.
All this represents a kind of societal exhale after long years of anxiety
and uncertainty from all the violence.
“There’s a real sense of national pride in
the culture and the current economy,”
says Frank. Colombia’s global image is
slowly improving, though it continues
to lag behind what’s happening on the
ground. Quick. Hear the words Cali and
Medellín, and what comes to mind?
Economically vibrant cities or drug cartels?
With American aid, the Colombian
military shut down the country’s major drug cartels; violent drug wars by
and large then moved north to Mexico.
Colombia’s government also successfully disarmed paramilitary gangs, and
the army effectively beat back left-wing
guerrillas. Gone are the days when
narco-trafficking, rightist death squads
and kidnappings distinguished the
country—though those forces continue
to haunt this nation of 47 million, Latin
America’s third-largest country.
When it comes to righting a perception, “Colombia has a long way to go,”
says Muñoz. “It’s always easier to remember the bad news rather than the
good news.”
Colombia has not magically erased
all traces of its past. Cocaine still courses through the country. Some 8,000 rebels remain holed up in the mountains
and lord over isolated communities.
The Santos government is only now
moving to return farms to thousands
of displaced peasants, victims of paramilitary land grabs; that task could take
several years. Unemployment tops 11%,
high compared with the rest of booming
Latin America.
And even now, wealthy Colombians
tend to keep low profiles as fears linger
of once-widespread extortion and kidnapping. “People are very humble. They
don’t show off,” says Muñoz.
Security isn’t the only hangover. Bogotá suffers monumental traffic jams,
while transportation links between
major cites and the rest of the country
remain sketchy. Millions lack adequate
housing; the Santos government is targeting construction of 1 million new
housing units over the next three years.
And corruption, by all reports, remains endemic. In its latest annual corruption perception index, Transparency
International ranks Colombia 78th out
of 178 countries, the same as China. In
a sign of both an independent judiciary
and a crooked polity, some 50 politicians, including governors, mayors and
members of the Congress of Colombia
have been jailed for links to right-wing
paramilitary groups, according to Ricardo Ávila Pinto, the publisher of the daily
business newspaper Portafolio.
Despite all this, Colombia’s change
has been dramatic. That is reflected in
investment, individual and institutional, domestic and international. “There’s
been a huge transformation in market
sentiment, in investment perception,”
says Juan Pablo Córdoba Garcés, who
heads the Bolsa de Valores de Colombia SA, or BVC, the country’s stock exchange. “It’s very exciting.”
Colombia’s recent history has been
exciting as well, just not in a good way.
The ’90s was pretty much a lost decade.
Heavily armed narcotics traffickers,
paramilitary gangs and two left-wing
organizations—the Fuerzas Armadas
Revolucionarias de Colombia, or FARC,
and the Ejército de Liberación Nacional, or ELN—battled each other and the
government, terrorized large swaths of
Colombia and tore apart the country.
The economic results were predictably
bad. Investment dried up and inflation
soared. The best and the brightest fled
for the United States and elsewhere.
A banking and credit crisis hit Colombia in 1999. It marked an economic
nadir, the only time since the Great
Depression that Colombia’s economy
contracted. This mortgage-related
meltdown was eerily similar to that in
the United States almost a decade later.
Most Colombian banks—80% by some
estimates—either failed or were bailed
out by the government. “We spent quite
a significant amount of money paying
off the debt from the banking crisis,”
Arce says.
That time weighs heavily on Colombians. “We learned our lessons in the
’90s,” says Uribe.
Colombia slowly pulled itself out of
its economic tailspin in the first half
of the past decade, then accelerated.
While the rest of the world battled the
global financial free fall in 2008, Co-
Feature Investing
lombia remained above the fray. Uribe
describes a meeting with other regional
central bank governors and how their
tales of woe contrasted with Colombia’s
still-humming economy. “From the beginning [of the 2008 crisis] we did very
well,” he says.
Commercial banks weathered the
storm. Monetary authorities refused to
intervene in the market and allowed the
peso to float freely as it had since September 1999. (The Colombian peso has
appreciated about 14% over the past
three years against the dollar, even as
the central bank regularly buys dollars.)
Uribe says one critical decision the
Finance Ministry made in 2004 was to
tackle the currency mismatch of the
public debt. That year, 70% of public
debt was dollar-denominated, with only
30% denominated in Colombian pesos.
By the time the international financial
crisis hit four years later, that ratio was
reversed. “That was very useful during
the financial crisis,” he says. “During
the crisis, our FX intervention was negligible.”
Part of this focus was a policy that
prohibited foreign exchange borrowing
to hedge peso debt. “A fixed exchange
rate provides an incentive to get external debt. It encourages people and firms
to think that the exchange rate will always be stable and that they can get foreign financing at a lower interest rate
and with a fixed exchange rate,” Uribe
says.
In Colombia, he continues, “We don’t
allow the financial sector to have currency mismatches, and term mismatches in foreign currency. A bank goes out
and gets a $1 million loan. It has to lend
internally in dollars. If it’s a three-year
loan, the bank can lend in dollars, but
with a maturity of three years or less.”
Colombia’s commercial banking sector has been transformed from liability to asset. Frank, for one, commends
banking capital adequacy requirements
in which Tier 1 capital reaches 15% of
total assets, the highest in Latin America and far higher than Europe and the
United States.
“Banks are very well managed,” adds
Ávila, who says the country’s major financial institutions are beginning to
flex muscles regionally. He cites Grupo
Aval, Colombia’s largest bank, which
last year paid $1.9 billion to General
Electric Co.’s GE Capital Corp. for BAC
Credomatic GECF Inc., which has operations in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama
and Mexico.
Uribe and others cite 2004 as a kind
of base year for the economic turnaround. The government finally turned
the corner in its fight against the drug
cartels and leftist guerrillas. Higher
commodity prices and the beginning of
renewed investment also marked that
time.
After 4.3% growth in 2010, forecasters expect Colombia’s economy to grow
some 5% this year, with inflation of 3%
to 4%. The research arm of Spanish
bank Banco Bilbao Vizcaya Argentaria
SA projects gross domestic product
growth next year of 5.4%. (What effect
the recent global market volatility will
have on growth remains a question.)
The 5% growth rate trails that of Peru
and Chile this year. However, Banco Bilbao Vizcaya warns that, if anything, an
overheated economy in Colombia remains the main concern. Colombian officials say they’re satisfied with “6+% by
end of 2014,” Arce says.
“Critics say, ‘Why not grow 9%?’ ”
Arce continues. “We say because we
have to grow 6% for the next 100 years,
not 9% for the next couple [years], and
then get hit by the next crisis and spend
“A fixed exchange rate provides an incentive to get
external debt. It encourages people and firms to
think that the exchange rate will always be stable
and that they can get foreign financing at a lower interest rate and with a fixed exchange rate.” —Uribe
Feature Investing
the next decade solving the crisis so we
can get back to 6. We’re trying to get the
economy to cruise speed.”
To a major degree, Colombia is flourishing because it produces some of the
world’s most strategic commodities. Oil,
gold and coffee alone compose half the
country’s exports. Coal-related revenue
is also surging.
The government forecasts oil production will double over the next decade. In an interview, Javier Gutiérrez
Pemberthy, the CEO of Colombia’s oil
giant Ecopetrol SA, agrees with this
goal, but says that will require the discovery of new fields and enhanced production, primarily in Colombia, as well
as “opportunistic” acquisitions. (Last
year, Ecopetrol teamed up with Talisman Energy Inc. to buy BP Exploration
Co. Colombia. Ecopetrol holds a 51%
stake in the joint venture that paid $1.9
billion for BP’s Colombian subsidiary.)
Ecopetrol projects capex for the decade ending 2020 will be a staggering
$80 billion, 25% of which is
earmarked for exploration.
The ability to explore
and enhance production is
in part because security is
no longer as big an issue.
Gone are the days when
Bloomberg terminals offered a running tally of oil
pipeline attacks (and kidnappings, for that matter).
Increased production, says
Ávila, should get a filip as
well because of the diminished activity of its oil-producing neighbor, Venezuela, under the
unpredictably autocratic Hugo Chávez.
“Thanks to Chávez, 1,000 [petroleum]
engineers have moved to Colombia,” he
says.
(Uribe, the central bank governor,
says the downside of Venezuela’s deteriorating economy is that it buys fewer
Colombian-made goods, including motor vehicles and other manufactured
products. “We exported to Venezuela
more than $6 billion in 2007. Now we’re
exporting about $1.5 billion,” he says,
adding that many of those Colombian
exporters have been waiting to get paid
“a long time.”)
Oil and mining have traditionally
accounted for the bulk of private investment, some 70% of foreign direct
investment in the years 2009, 2010 and
the first quarter of 2011, according to
government figures. But investment is
diversifying.
According to government officials,
FDI this year should top $10 billion,
which could match the 2008 record of
$10.58 billion. In the late ’90s and early
2000s, FDI averaged only $1.5 billion to
$2 billion a year.
Domestic and foreign investors alike
are signing checks as never before.
“There’s confidence of investors here
in Colombia and confidence of investors abroad,” says Lloreda Camacho’s
Gutiérrez, whose clients include CocaCola Co., Unilever NV/plc and Spirit
Airlines Inc.
Gutiérrez, for example, advised the
Colombian supermarket chain Grupo
Éxito SA on the ¤700 million purchase
in June of two Uruguay supermarket
chains, Grupo Disco del Uruguay and
Devoto SA. France’s Groupe Casino
owns a 54% stake in Éxito. Éxito says it
will issue up to $1.4 billion worth of new
shares on Colombia’s stock exchange to
underwrite this expansion.
Colombia’s capital markets are undergoing notable change. “Equity markets were stagnant two, three years ago,
[but] they will progress very rapidly,”
says Dario Duran, a director of Altra
Investments, a Bogotá-based private
equity shop.
Perceptions of the country’s capital markets vary, and the discussion is
sometimes half-empty versus half-full.
The Bolsa de Valores de Colombia has
only 90 listed companies. This year,
three initial public offerings have taken
place, with four or five more issues in the
pipeline.
Large, old-guard institutions dominate the exchange. With 2010 revenue
of $21 billion and net income of $4 billion, Ecopetrol alone composes more
than 39% of the exchange’s total market
cap, even though the float represents
only about 12% of the company’s total
shares. Ecopetrol was owned 89.9% by
the state, after the government divested
shares in a $3.3 billion IPO in 2007.
This August, Ecopetrol executed a
follow-on offering, which was a victim
of bad timing and fell slightly short of
expectations. Investors subscribed to
2.4 trillion Colombian pesos [$1.34 billion] of the Col$2.5 trillion shares being sold, an offer that
represented 1.67% of total
shares. The company’s
Gutiérrez says that under
the circumstances, with
global markets tumbling
and twisting, “for us, it was
a success.”
Hernán, the investment
banker, bemoans a lack of
choice in the stock market.
“Colombia doesn’t have
a lot of players,” he says.
“There’s one listed company in foods, three in oil,
one in cement.”
Gutiérrez says that limited marketplace affects his company as well. He
points to the daily float, which is pretty
much split down the middle between
Colombian investors and ADRs, even
though by numbers of shareholders,
Colombia represents 99% of the total.
“The real test for us is being part of a
market like this,” he says, on the floor
of the New York Stock Exchange, where
he journeyed in September to celebrate
Ecopetrol’s 60th anniversary of incorporation and ring the closing bell. He
Feature Investing
talks of the need in both the bond and
equity markets to be recognized internationally by investors as a global energy player. That is beginning to happen, Gutiérrez believes. “I expect in the
future, the number of shares traded in
this market will increase, the number of
ADRs will increase.”
The Colombia exchange’s Córdoba,
by contrast, emphasizes not the limited
issues, but the dramatic growth: $2 billion in trading and a $25 billion market
cap in 2004 versus $28 billion in trading and $217 billion market cap last year.
Five years ago, five companies were
trading more than $1 million a day, he
says. Today, there are 23. The percentage of foreign exposure is increasing
even more rapidly, having doubled from
4% last year to 8% today. “If you look at
Colombia today versus five years ago,
the transformation has been tremendous,” he says.
In late May, the Colombian stock exchange inked a marketing and trading
agreement with exchanges
in Peru and Chile. Termed
MILA, the Mercado Integrado Latinoamericano—
not a full merger, Córdoba
stresses—allows investors
in one exchange to trade in
the equities of the other two.
An IPO on one becomes, in
practical terms, an IPO in all
three.
“There will be more investments, more trades being done, more alternatives
to issuers,” Córdoba insists.
The integration expands not
only the markets in these
three countries, but, potentially, Central
America as well, he says.
Others believe it’s just a matter of
time until the public equities market
expands. J.P. Morgan Chase’s Muñoz,
for one, sees smaller and midcap issues
as “probably the next stage” in markets
development.
Duran agrees. “Sooner or later, we’ll
experience smaller IPOs being successful,” he says.
Colombia’s pension funds provide
the potential for a huge driver in both
private and public equities. “Colombian
pension funds have huge portfolios.
They want to diversify, and are eager for
diversification opportunities,” Duran
says, since “most have high concentrations in fixed income, both in the equivalent of treasuries and private debt.”
Pension funds account for only 25%
of equities trading on the Colombian
bourse, according to Córdoba. That
could well rise as changes in legislation aid a shift from fixed income. For
example, Colombian pension funds can
now co-invest directly in private equity
through special-purpose vehicles.
The composition of investments in
pension funds is shifting too. According
to Santiago Montenegro Trujillo, the
president of the private pension fund association Asofondos, the degree of pension fund risk allowed by law is linked
to age. A younger contributor can opt
for up to 70% equities. Investments in
alternative assets such as private equity,
normally limited to 5% of total portfolio,
can reach 7% in riskier funds.
At the same time, individual investors are flexing their muscles. “Colombia is going through a process where
individuals are getting richer,” says
Hernán, citing per capita income that
has doubled in six years. “That has
caused people here to look for alternative investments.”
The composition of those investors is
changing as well. “For a bunch of years,
the equities market was thought to be
only for rich people, an exclusive club,”
says Muñoz. “Now, ordinary people are
starting to feel they are part of it.”
Private equity is rapidly gaining
ground and local acceptance (see sidebar). However, while Colombia has two
angel investor networks, it has no organized venture capital, or at least not one
that would be recognizable in the U.S. or
Europe. “Entrepreneurs are looking for
venture capital,” says Camilo Villaveces
Atuesta, who heads Ashmore Management Co. (Colombia) SA.
That’s the next step, says María
Cristina Albarracín, the director of the
private equity division at Banco de Comercio Exterior de Colombia SA, or
Bancóldex, the government’s development bank. One possible catalyst is a
$100 million fund-of-funds that will invest in technology and innovation venture funds. Terms of reference should
be out in the next few months, Albarracín says, and would be linked to the
slice of resources royalties
allocated to what the government calls science, technology and innovation. Colombia’s legislature would
decide specific allocations.
The government has
already committed to create a biotech venture fund.
Bancóldex will hire consultants shortly to help work
out details, Albarracín says.
Juan Sebastián Pardo is
president of Credifamilia
Cia. de Financiamiento
SA, and he illustrates the
need for startup capital.
Pardo completed his M.B.A. at Stanford
University in 2007. Like an increasing
number of his generation who have
been educated abroad, Pardo decided
to return to Colombia and start his own
business. He hit on mortgage finance.
Adjustable-rate mortgages disappeared
after the crisis of 1999, and banks turned
cautious.
A long, pent-up demand for housing
finance has bedeviled Colombia. “Mortgage penetration is just 3, 4%, the lowest
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in Latin America,” says Pardo.
Pardo needed just $10 million in capital for a banking license, but that took
two years, thanks in part to the financial crisis. Credifamilia finally gained
a banking license in February and now
has private equity chasing it for further
investments. It targets affordable housing, in which the government subsidizes
interest rates. “We are hoping to make
Col$150 billion in loans in the first two
years,” he says.
Pardo is critical not only of the lack
of startup capital, but also of those seeking it. “You can always get $100,000 to
start a restaurant,” but “there’s a lack
of entrepreneurial culture that thinks
big.”
As more Colombians return home,
that could change. “People are coming
back. Multinationals are coming back,
and they’re looking for local talent. I
have several friends and relatives who
are coming back,” says Muñoz.
Cross-border acquisitions are more
commonplace as Colombia develops
its equities markets and the companies
themselves bulk up and expand.
“We’re in the process of becoming
regional players,” says Duran, whose
firm is trying to follow this doctrine,
with investments primarily in Colombia
and Peru, but also in Central America,
Chile and Argentina. One example: his
firm’s acquisition, along with Dutch
development fund Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, of Colombian specialized-packaging company Proenfar
SA for an undisclosed amount. Proenfar
has an Argentine subsidiary, markets
throughout Central America and the
Caribbean and is in the final stages of a
transaction in Mexico.
“In the Andean region, there’s a lot
of convergence—geographical, political,
economic,” Duran says. “We see today
a lot of capital flow into this region. A
lot of Colombian companies are going
to Chile and Peru; a lot of Chilean and
Peruvian companies are coming to Colombia.”
Nowhere is that expanded reach
more apparent than with Grupo Sura,
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whose domestic empire extends from
cement to chocolate, life insurance to
leasing. The conglomerate accounts for
a staggering 6.5% of Colombia’s GDP.
Finance director Bernal says Sura ran
up against limits of domestic expansion
in the past decade. “We control more
than 50% of Colombia’s cement market,
more than 60% of processed foods,” he
says. “It’s almost impossible to do more
acquisitions in Colombia.”
Over the past six or seven years, Bernal says, Grupo Sura has made some
25 international acquisitions. The pace
began to quicken three years ago when
Grupo Sura “decided our next step was
internationalization,” he says.
Strategically and financially, Bernal says, “we have the capacity to grow
through acquisitions.”
The ING acquisition, which Grupo
Sura anticipates will close late this year
or early next year, ratchets up the stakes
considerably. “We are confident we
have the resources to digest this,” Bernal says. “Then, in a couple years, who
knows?” n