Interview: Alejandro Santo Domingo
What is your perspective on the recently operational Integrated Latin American Market ( Mercado Integrado Latinoamericano, MILA)?
ALEJANDRO SANTO DOMINGO: Although the MILA has created an operational stock exchange that uniquely integrates the markets of Colombia, Chile and Peru, the institutional investors moving significant amounts of capital, such as pension fund and insurance companies, still prefer the traditional methods. To see a fully operational integrated market, the MILA needs to address issues such as the automatic listing of the shares in the three markets to reduce costs and facilitate simultaneous openings on the different exchanges. There is an argument that the three markets must account for their different sizes before MILA can become fully integrated. Chile, for example, has a more mature pension fund market and larger asset pool than the Colombian and Peruvian markets. We need to develop the MILA so that it is not limited to stock trading and gradually allows the exchange of other instruments like fund shares, debt securities and financial intermediation.
How has private equity evolved in Colombia compared with the rest of the region?
SANTO DOMINGO: Colombia has a great appetite for private equity, yet this is an area in need of development. The lack of exit opportunities has been one of the largest issues for private equity in Latin America over the past 25 years and Colombia is no exception. The country has seen few exits in private equity, although this may change within the next two to three years.
To date, initial public offerings have been ruled out as an exit strategy and the Colombian stock market has not yet achieved the size needed in terms of capital. Fortunately, the past few years have seen revaluations in Latin America and it is clear that private equity has a big role to play in our economy as well as throughout the region. While the industry needs to overcome certain challenges related to the restrictive size and liquidity of capital markets and limited exit opportunities, Colombia has made progress, with substantial improvements in such key areas as institutional investor participation, policies toward foreign portfolio investment and corporate governance.
What do you expect in terms of cross-border transactions and regional expansion?
SANTO DOMINGO: We have already seen significant cross-border transactions across numerous sectors like insurance, banking and retail. Medium-sized and large Colombian companies have the most opportunities to expand regionally. Conversely, opportunities for foreign companies to enter Colombia are only in specific markets. For example, foreign companies with experience in the region, such as those from Brazil, can take the lead in developing the financial services market. In the fast-moving consumer goods sector, Colombian companies are showing positive returns despite the arrival of strong foreign players from Chile, France and the US. Meanwhile, Colombian companies are reluctant to sell at a time of such sector growth. If any companies do sell, it will be for a steep price.
How has the appreciation of the Colombian peso impacted the activities of private equity firms?
SANTO DOMINGO: The revaluation of the Colombian peso has actually boosted the demand for private equity. Many private equity firms fear that a company will experience devaluation in the three years following its purchase. It is nearly impossible for a private equity firm to realise a profit from an investment when there is devaluation, even if the investments result in optimal operating performance and tremendous growth.
A drop in the Colombian peso’s value forces a great loss, as investments are US dollar-based. If a firm doubles its private equity in the US, it will have a 25% return in three years; if this same scenario includes a 50% peso devaluation, the firm will instead only break even in three years. Therefore, revaluation has increased the call for private equity and led many firms to feel more secure.
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