FUND TIMES

Colombia 2014 | FINANCE | VIP INTERVIEW

TBY talks to Diego Córdoba Mallarino, President and Co-Founder of Teka Capital, on asset management in Colombia and potential investment areas.

Colombia's asset management industry is the fourth largest in Latin America. How important is private equity for the asset management industry?

Private equity plays a minor role amongst the various investment alternatives in the market. Investments in private equity funds have reached around $1.5 billion, with commitments to reach approximately $3.4 billion. Colombian pension funds have approximately $70 billion under management, meaning that private equity is still a small share of the total. I believe that approximately half of the assets under management (AUM) are in fixed-income instruments, whilst the remainder are divided between assets such as real estate or equities. In fact, pension funds, which are traditionally the largest sponsors of private equity funds worldwide, do face a number of limitations in Colombia. For example, they can invest up to 10% of their AUM in pension and employee funds in private equity. In summary, pension funds have pioneered the alternative investment industry thanks to their investment in private equity funds. Teka Capital forms part of the first group of private equity funds that were born in Colombia.

How great is the potential for alternative investments and private equity in Colombia?

I'm aware that Colombian pension funds can invest abroad, and they're doing so thanks to a new regulation by which the government opened a larger space for them to be able to invest in foreign funds. However, regarding specific reforms, I believe the private equity industry hasn't been affected unduly. The perspectives for the industry are good. I believe there is important growth potential amongst pension funds, with investors awaiting the results of the pioneering private equity funds in order to judge their performance. US treasury bills have been at historically low levels, as have Colombian fixed-deposit rates, which means that investors have to design new strategies in order to compensate for the lack of return they had been obtaining from their traditional investments. Equities have been highly volatile both in emerging and developed markets, although the former have experienced a boost since the downturn they suffered in the previous year. Private equity funds, as their name implies, are illiquid funds with a long-term focus that are exposed to the lasting performance of the local economy. Their success depends to a great extent on the success of their managers, the price of entry, and on their divestments being made in the appropriate cycle. Having said that, I expect Colombia, an emerging market, to continue growing. In 2013, Colombia's growth was at approximately 3.5% and I expect it to grow by around 4.5% this year. If infrastructure developments are executed correctly in Colombia, I believe we could grow by around 6% as the country has sufficiently strong internal demand to fuel such growth. In addition, Colombia has been developing a very interesting productive sector that may underpin future growth.

“Teka Capital forms part of the first group of private equity funds that were born in Colombia."

What types of companies are you keen to invest in?

We ideally want to focus on medium-sized companies. Colombia is a country in which the middle class is experiencing dramatic growth. Between 2012 and 2013, GDP per capita grew to around $8,000, as a result of which per-capita consumption rates have grown too, meaning greater consumption of household appliances, clothes, food, automobiles, tourism, health services, and so on. Secondly, we expect important infrastructure development and are interested in those companies that offer engineering and other specialist services to related enterprises. In summary, we have carried out four investments. The first company, Color Siete, manufactures clothing and apparel in Manizales. We have an important retail operation with approximately 72 wholly-owned shops and export to Mexico, the US, Peru, Ecuador, and Central America. We own 62% of this company and it is comprised of two brands: Color Siete and Rosé & Pistol. We sell to Bloomingdale's, the upscale chain of department stores, as well as to Barneys New York, the American chain of luxury department stores headquartered in New York City. We also own an 18.7% stake in Bodytech, an investment we made to support the company's international growth. With our support, the company has grown in Peru and Chile and we are naturally looking for new markets in which to expand. It is a great company and we have generated a good amount of added value. In April 2013, we invested in a 47% stake in the Movich hotel chain with 1,100 rooms and are very satisfied with this investment. Regarding hotels, while people say that Colombia is becoming saturated, we still perceive room for development. I believe that Colombia has a lot to do to attract more interest, as this is still a very young market. Whilst Cartagena may be very well known, the rest of the country isn't, and has considerable potential, including Bogotá, Medellin, the Caribbean islands of Sand Andres and Providencia, the Coffee Triangle, and the Amazon. On the other side, the business community is also demanding high-quality rooms with competitive prices. In December 2013, we closed the acquisition of Americana de Colchones and we're looking to close another acquisition in the mass consumption sector. We believe the mattress industry has considerable barriers to entry because of the volumes managed, although we forecast strong growth as the middle class grows. In comparison with our Latin American peers, the per capita consumption rate of mattresses is quite low, pointing to considerable growth potential.

What is the nature of your investor base?

We have a series of commitments with institutional clients that help us to close the funds. In the Teka 1 Fund, 45% of the investor base is composed of local investors, the Porvenir and Protección pension funds, whilst the remaining 55% is composed of sovereign wealth funds family offices and institutions from Asia, Europe, and the Americas.

At Valorem, you managed a portfolio of 18 companies for the Santo Domingo Group, with assets totaling $2.9 billion, achieving a complete restructuring and average internal rate of return of 27.6% in your divestment process. How valuable was that experience?

First and foremost we developed a very focused team and our skill sets were very complementary, which made working in the Valorem processes invaluable. I have been working with my partner, Juan Antonio Pungiluppi, for 13 years, a relationship that has strengthened over the years. In fact, we began working together when I was Vice-President of Valorem in 2001.This experience helped us to design a methodology that allowed us to efficiently turn a large number of companies that were unproductive into profitable enterprises. Secondly, we divested a series of operations that were not part of the core business defined with a carefully designed strategy and with very good returns for the holding. We also performed acquisitions that brought important amounts of value for the holding as was the case of TV Cable, where we were able to buy the company, improve its operations, and sell it to Carlos Slim, and Cine Colombia, which is a leading operation in the entertainment industry in Colombia. We always work on having motivated teams, growing our companies, and improving returns. In addition to managing these companies, we were able to analyze over 90 companies, and this experience allows me to state that we have quite a unique knowledge of the Colombian market. I don't actually know many people who have managed 18 companies, $3 billion in assets, restructured $1 billion in debt, sold $2.4 billion worth of companies, bought $360 million worth of companies, and managed to pass from a loss to large profit in eight years.

© The Business Year - May 2014