TBY talks to Rafael Alcázar, Chairman of the Board of Directors at Procapitales, on helping to develop the capital markets in Peru.

Can you outline the history and objectives of Procapitales?

Procapitales was founded almost 14 years ago by a group of professionals from different institutions involved to some extent with capital market issues. The underlying idea was to establish a sort of trade association for this type of institution so as to jointly develop a stronger capital market practice. Back then, banks were by far the prevalent source of financing, while capital market alternatives were almost non-existent. Moreover, financing predominantly consisted of short-run and dollar-denominated alternatives. We identified that a major drive was necessary to foster capital development based on a consistent effort from the private sector, but interacting with governmental authorities. Thus, the aim was to have the organization work closely with our regulator so as to develop the Peruvian capital markets. The initial stages were not easy, but nowadays, Procapitales comprises 70 institutions. But more important than that figure is the fact that it comprises a wide range of institutions by its nature, from security issuers to institutional investors, including brokers, investment banks, law firms, and others. In this sense, to the best of our knowledge, there is no other similar trade association in Latin America, or perhaps in the world, comprising these diverse institutions under one roof. Their common interest is a well developed capital market, and Procapitales constitutes a permanent institutional platform to boost initiatives regarding the legal, institutional, and operational settings to achieve that objective. In this framework, and referring to Procapitales' track record, I should emphasize the role that our association has been playing in order to promote good corporate governance practices within the Peruvian business sector. From our inception, we have been committed to disseminating the importance of transparency and accountability as a key foundation of more developed capital markets. We are proud to assert that Procapitales has played a major role in this area. Firstly, we actively participated in shaping the corporate governance code issued in 2002 and also in its updating in 2012-2013, along with the sector regulator—formerly Conasev, and today SMV—and other trade associations and market institutions. Secondly, we have been participating within a World Bank-supported Latin American network of peer institutions that promote good corporate governance throughout the region and Procapitales is now playing the role of chairing this network. And, more recently, we are stepping into the establishment of the Peruvian Institute of Corporate Governance, which is a joint venture with Confiep. Some time ago we approached Confiep in order to support this common project, and finally, it seems to be underway. We expect to receive funding from multilateral organizations.

What can be done to increase the efficacy of the securities market as a source capital for companies operating in Peru?

Despite the securities market having grown over the past 15 years or so, the number of instruments available remains quite limited and is unable to accommodate the consistent expansion of funds administered by major institutional investors. Thus, an imbalance with respect to demand is remarkable. Moreover, the market is heavily concentrated around a few issuers. As far as the secondary markets are concerned, over the past few years daily traded volumes have decreased sharply to the current level of about $10 million. This lower level of trade heavily reflects domestic structural conditions, particularly the lack of liquidity and deepening of the domestic securities market. Within this framework, in recent years some efforts have been made to face these constraints by means of a reform process. Thus, some legal and regulatory initiatives have been approved in order to promote the issue of securities on the basis of more flexible requirements. In this regard, it is worthwhile mentioning the creation of a new segment, the Mercado Alternativo de Valores, to facilitate access to the capital markets for medium-sized firms as well as the creation of a special regime for IPOs focused exclusively on institutional investors. Seeking to promote liquidity in the market, some administrative decisions have been implemented to lower transaction costs. Another initiative that may be helpful is the expected consolidation of the Latin American Integrated Market (MILA), because this enlarged market should lead to a surge of new investment products. Finally, something should be done in the tax arena, so as to homogenize tax regimes applicable to capital market operations among MILA-participating countries.

“This industry has emerged and expanded both in terms of managing firms and assets under management."

There is a lot of movement in bond markets internationally right now because of the end of quantitative easing and changes in monetary policy in Europe and Japan. How does Procapitales interact with that environment and where do you see room for improvement in the Peruvian bond atmosphere?

In effect, in the last few years, a growing number of Peruvian corporations has had access to global capital markets, by issuing both debt instruments under the SEC's 144-A Rule and equity instruments (ADR) in NYSE, which have allowed the involved corporations to take advantage of historically low interest rates, thereby reducing financing costs. While the prospects of this kind of deals heavily depend on future scenarios on the international financial markets, we foresee there will still be significant opportunities in the near future provided their associated risks are managed properly, particularly exchange-rate risks. Several of these corporations are Procapitales members and their experiences have been disseminated by means of our institutional platform seeking to contribute with learned lessons for the benefit of the whole market. We strongly believe that to the extent the liquidity and tax conditions be more favourable in our domestic market, the debt market and also equity market should react in creating a supply of instruments suitable to accommodate growing demand for instruments.

How have private equity investors altered the trajectory of medium-sized businesses?

This industry has emerged and expanded both in terms of managing firms and assets under management. In addition, a wider range of economic sectors is being reached by these investment vehicles, such as health or education to name a couple. Also, the presence of foreign investment fund management firms is growing and they are seeking to invest in local firms with growth potential. But there is still much room to progress and this may constitute a key vehicle to inject not only capital, but also improved management and good corporate governance.

Where do you see the regulatory environment two to three years from now?

We basically see a regulatory environment playing a role of facilitator so as to have more issuers, more investible instruments, more liquidity, more transparency, and more investors. In sum, a more developed and an increasingly sophisticated market. Bearing this in mind, we have seen the need to shape a new vision for Procapitales in order to properly accompany these efforts. To do so, we have developed a medium-term strategic plan for Procapitales, with the support of internationally recognized consultancy firm, Deloitte. We have defined a revised mission and a number of strategic objectives with which to face the challenges that future capital market developments will pose.

© The Business Year - March 2015