Finding value in Colombia’s volatility

The Latin American country presents entry opportunities for foreign investors including secondaries as existing LPs seek liquidity.

Colombia’s economy has been badly bruised in the past year by sunken oil prices and resulting dips in its peso, as well as the prolonged civil war, but there’s a silver lining in the country’s woes.

The government has been addressing political and economic volatility, leading Peter Cejas, managing director of Septima Capital, to believe there are increasingly attractive opportunities for private equity investors, including in distressed assets and secondaries investments, as well as those created by economic growth.

“We’ve been working in Colombia for years now and had the fortunate ability to see different cycles,” Cejas told sister publication Private Equity International. “Over the years, there was a big transition to diversify the economy. The initial reaction to capital flight is taking place, but the next eight months will see much more stability as certain people re-evaluate the region. It’s not looking great right now but that’s where the opportunity lies: where nobody else is looking,” Cejas said.

In 2012 Colombia signed the Pacific Alliance trade agreement with Chile, Mexico and Peru for economic integration and enhancing free trade, and recently entered a peace deal with the rebel group Revolutionary Armed Forces of Colombia (FARC). It has also taken austerity measures.

The currency devaluation cycle, which began about 18 months ago, could provide greater purchasing power to US investors and open an entry point for investment, according to a Septima report titled Colombia Update. The Colombian peso hit a 52-week low in February 2015 at 2,355 pesos against the dollar.

Cejas noted that this makes imports from the Colombian perspective more expensive, which would lead to many interesting opportunities for domestic growth to take place.

The Septima report said it expects Colombia’s growth to outperform the rest of Latin America, at 3.8 percent annually, which will be driven by consumer demand, private construction, and as much as $23 billion in infrastructure investment in the next decade.

Colombia’s quarterly gross domestic product growth rate peaked in 2013 at 2.6 percent before losing its momentum and finishing 2015 at 1.2 percent, partly due to a drop in oil prices. Oil and coal comprise 59 percent of the Latin American country’s exports.

Septima said that 3.8 percent is not a significant growth rate to attract foreign investors, given that developed markets are expected to grow 2.9 percent annually. But the key to investing is to understand the opportunity at the right point in the valuation cycle.

Distressed and undervalued assets in Colombia resulting from the short-term crisis provide an attractive, low-valuation entry point for investors betting values will appreciate in the future, the report said.

There is a potential increase in secondaries opportunities arising from investor fatigue or need for liquidity, the report said. Many funds with Colombian investments have dollar capital funding, which will face a currency mismatch with the peso. Investors could see returns fall, leading to capital flight and illiquidity. Cejas noted this creates an entry for other investors wanting to purchase LP stakes at a discount.

There are two types of investors that come to Colombia, Cejas said. “One where they didn’t want to go into Latin America to begin with, but because of investor pressure or other factors, they did. And you have the Latin America investor that understands the cyclical nature of the region, the correlation of commodities and the economic growth in the region, and they try to play the cycle as much as possible.”

This article was first published in Private Equity International.