Investing in SMEs in Colombia 2009
In mature markets such as in the US and Europe, SMEs benefit from an inflow of capital from venture capitalists, private investors and banks. However, investments in SMEs in Colombia are limited by a lack of information and thus a high perception of risk. BiD Network, a Dutch Foundation supporting SMEs in emerging markets, and SEAF Colombia, a private equity fund operating in Colombia, have just published “Investing in Small and Medium- Sized Enterprises in Colombia 2009”, a guide which addresses this knowledge gap, by providing all the information necessary to plan, manage and exit from an SME in Colombia. This publication, which was sponsored by Bancóldex, Colombia’s state-owned bank for entrepreneurial development and foreign trade, is a practical manual which contains several interviews with funds, banks and philanthropists from Colombia, Europe and the U.S. as to how they approach this sector.
The guide highlights that financing to SMEs is focused on short-term financial products, with only 14% of the companies classified as SMEs having long-term debt which exceeded their short-term debt. This could limit their investment in industrial and human capital, which is a crucial factor for growth and a prerequisite for accessing the global market. Nevertheless, Colombia wishes to make a profound change in the competitiveness of its enterprises, and for this reason the guide identifies those sectors which have the highest returns on equity and the most potential to improve their debt/equity ratios.
On the other hand, the publication confirms that SMEs are already a strategic sector for Colombian financial institutions and private capital funds operating in the country. The publication also sheds light on the main financial structures used to invest in SMEs in Colombia. Tom Gibson, founder of SEAF and an expert on SMEs in emerging markets, describes in detail the “shareholder loan funds” model as a strategy to make risk capital investments in SMEs in a country such as Colombia, where it can be difficult for investors in SMEs to carry out an exit via an IPO.
Interviews with several funds operating in Colombia shed light on the most important factors investors take into account when investing in SMEs. “More than good ideas, investors are looking for a strong management team, with a clear and shared vision for their company and a clear demand for the product or service they are offering”, says Jorge Montoya Sánchez, director of Capitalia Colombia, which manages a network of angel investors and a seed capital fund. In order to promote angel investment, Montoya Sánchez says that it is important to create more spaces for investors to meet entrepreneurs that are looking for finance. Some SMEs interviewed for the guide noted that venture capital is not an option for most SMEs in the country. John Alexis Guerra Gomez, winner of two major business plan competitions sponsored by Ventures and BiD Network in 2007 says that “there are still many obstacles for start-ups with a high technological component in Colombia, since they do not yield immediate economic returns.”
The study finds that the relatively large amount of highly qualified workers in the country is an important factor attracting capital to the country and in particular to the SME sector. Various banks and private capital funds interviewed for the guide note that Colombian SMEs are highly innovative, resourceful and entrepreneurial, and highly adaptive to changing circumstances. “The skills level of social entrepreneurs in Colombia is among the highest we have found” according to Fabio Segura, who runs LGT Venture Philanthropy’s operations in Latinamerica. Segura: “Colombian entrepreneurs exposure to internationally based organizations facilitates negotiations and deal structuring”.
The study finds that the difficulties SMEs face in accessing finance have both internal as well as external roots. Banks and private equity funds say that various characteristics of SMEs hinders their access to finance, including: informal and family based structures, flaws in their companies’ structures and credit applications, insufficient information about the returns on investments made by the enterprises, and difficulties in managing working capital. At the same time, according to Doris Arévalo Ordoñez, Director of Product Development and Marketing at Bancóldex says “its worth mentioning that some financial intermediaries still focus on supply rather than demand regarding the products and services they offer to this segment. Many banks assume that all SMEs have the same standard needs, which is hardly the reality.”
The publication also touches on Colombian entrepreneurs’ perceptions of equity investment. Héctor Cateriano, General Director of SEAF Colombia points out: “in Colombia, there are generally speaking two positions with regards to equity: entrepreneurs who are expanding rapidly and are looking for capital and partners for their operations, and on the other hand entrepreneurs who own well-positioned enterprises and which are reticent to issue shares to new partners. This latter group can be skeptical about the benefits of taking on new partners, unless they offer value added such as the ability to break into new markets. Considering that equity investments in general are new in Colombia, its necessary to be clear about the objectives of both the investors and the companies receiving the investment at the very beginning of negotiations, in order to avoid misconceptions.”
Finally, the guide provides information and contact details on the chambers of commerce, business associations, duty free zones and investment promotion agencies, which will help the investor to navigate through the sometimes complex and volatile tax and legal systems that Colombian firms operate in.
