The tides are changing with respect to foreign direct investment into Latin America.
Everyday, there are new funds looking to place capital into the region and a story about a newly-minted unicorn is upon us. Much of this growth is occurring in Colombia, and for good reason.
Why is Colombia becoming a desirable location for foreign investment?
Within this article, I will focus on the benefits of investing in Latin America, but more specifically the reasons why investors should hone in on Colombia. We at Legacy Group see Colombia as different than many of the other countries that make up the Latin American region. We feel that certain countries within LATAM are definitely a no-go for individual investors and some should be taken more seriously if presented with the correct opportunity. The most attractive of these investable countries is Colombia.
When readers think of Latin America, many will think of a series of individual nations that all behave in a similar manner as if a LATAM investment were the same as comparing Florida to Texas. That is a mistake. Each market in LATAM has its own idiosyncrasies and requires careful attention to analyze thoroughly. Below, we will provide you with the top ten reasons why we think Colombia is today’s #1 market in Latin America for individual investors:
- High upside with low initial investments given the current foreign exchange arbitrage vs. the U.S. Dollar: The current exchange rate for U.S.-based foreign investors is the most advantageous it’s ever been for investing directly into Colombia. On a purely US Dollar basis, investments today cost U.S. investors investing into Colombia in Dollars roughly 45% of what the same transactions would have cost in 2013. Investment amounts to enter the market are therefore naturally lower. Along with this low cost of entry, Colombian businesses are proving to have the incredibly high growth potential that we see in emerging markets with unicorns like Rappi and other businesses making foreign investors wealthy.
- Colombian human talent is more sophisticated than many of it’s LATAM peers: Colombia has many reasons to brag when it comes to showcasing its existing labor pool to foreign investors. Although the country has been historically seen as attracting investments only into the large metropolitan areas of Bogota (for large corporate multinationals) and Medellin (for technology and entrepreneurship), foreign direct investment is occurring in areas all over the country. Here are some recent quotes from international companies regarding Colombia’s human capital pool:
“Colombia is business-friendly and open to foreign investment, and its young, educated, multi-lingual and digitally-savvy population makes it a key market for recruiting leading talent.” – Scotiabank’s President and CEO, Brian Porter
“The strategic position of Colombia, the highly qualified human capital of the country and the great facilities . . . for the creation of companies, such as the digitization of processes and records, were decisive for our investment decision.” – Ximena Shelton, General Director of Shelton’s Coffee
- Colombia has favorable macroeconomic characteristics vs. its peers and is leading LATAM in Green Funding: Colombia’s post-Covid recovery in 2021 is projected to be one of the strongest GDP growths in the world at 7.7% for the fiscal year. Aside from merely growth projections, Colombia is consciously focusing on sustainable growth. At the end of September 2021, Colombia became the first Latin American nation to issue a sovereign green bond in its local currency, which observers say illustrates the growing hunger for the energy transition-focused investment class. The 10-year Colombian Peso 750 billion ($196 million USD) sovereign bond was issued on the 29th of September and demand from investors was so high that the size of the bond was increased by 50% from the Peso 500 billion originally sought. Investor requests for allocation of the bond came in at 4.6 times as much as its face amount. We expect that Colombia continues to lead the region in green investment innovation and that its sovereign debt and financial strength will continue to appeal to global investors.
- The United States is the largest trading partner with Colombia and that relationship should only grow as supply chain tensions with China continue: The opportunity for a revamp in the global supply chain has never been more positive for countries in Latin America, specifically two countries: Colombia and Mexico. Earlier this year, a delegation of diplomatic and development officials led by President Joe Biden’s Deputy National Security Adviser, Daleep Singh, travelled to Colombia, where they met with President Ivan Duque to discuss plans to counter the Chinese Belt and Road initiatives. As supply chains evolve and the United States refocuses their key priorities away from China, Colombia will stand to benefit significantly. According to MarshMcLennan, if Latin America captured just 15% of U.S. imports from its top-10 source destinations outside the Western Hemisphere, the region could increase its exports of goods by $72 billion per year. We believe that Colombia is poised to capture a tremendous amount of this opportunity and that the COVID pandemic has only increased the chance of this becoming a reality.
- Colombia has a long history of democracy and strong institutions: According to the Global Competitiveness Report prepared by the World Economic Forum, Colombia ranks as the #1 Latin American country for corporate governance and #2 for both business dynamism and financial system stability. The systems within Colombia are far superior to the Central American nations to their north or the famed disaster that is Venezuela. Colombia is the longest running democracy in South America and has repeatedly shown its support for western capitalism, which goes a long way in establishing goodwill in the foreign direct investment market.
- Colombia offers many foreign direct investment incentives: Colombia is a country that offers a favorable business environment with a stable legal framework. Furthermore, the national government has introduced several incentives to support and encourage foreign investment into Colombia. These include the free trade zone regime, customs duty reductions or exemptions for imported raw materials and machinery, VAT exclusions for imported equipment, incentives to invest in science, technology and innovation and incentives for several economic sectors, including agriculture, tourism, the creative/orange economy and the automotive industry, among others.
- The venture capital market is growing rapidly in Colombia: While historically overlooked by the venture capital investment market, over the last several years venture capital investment into Colombia has skyrocketed. Investors like Softbank are entering the market and are looking to place billions of dollars into venture capital opportunities. Venture capital investment grew from just $20 million in 2017 to over $1 billion in 2019 as Colombia attracted more and more large capital allocators. There has never been a time in the history of Colombia when more investors have been looking at early-stage company investments at such a large scale. We are excited to participate in this drastic upswing.
- Colombia has a large domestic consumer market: The population of Colombia is currently 51.6 million people and is forecasted to continue to grow. Domestic wealth creation is increasing, and the middle class is steadily strengthening. This consumer class is a large benefit to a number of industries. Colombia’s increasing move to digitalization with a young population screates many opportunities in e-commerce and the connectivity economy. While Colombia has typically been viewed as an investment market driven by value creation through export, the ability of domestic Colombian producers to sell to a growing and increasingly wealthy populace at home grows every year and only adds value to foreign direct investments into the country.
- Colombia acts as a strong diversification play: Much of our readership is heavily allocated in U.S.-based assets and enterprises. We would advise anyone that given the current structural, political and monetary issues the U.S. is facing and the corresponding lack of investable asset classes, it is an excellent time to begin looking outside of the United States for investment opportunities. Within the Latin America bucket, there’s no better choice than Colombia in terms of stability and upside for all the reasons covered here.
- Colombia is a member of the OECD: The Organisation for Economic Co-operation and Development (OECD) is an international organisation that works to build better policies for better lives. The OECD’s goal is to shape policies that foster prosperity, equality, opportunity and well-being for all. Together with governments, policy makers and citizens, the OECD works to establish evidence-based international standards and find solutions to a range of social, economic and environmental challenges. From improving economic performance and creating jobs to fostering strong education and fighting international tax evasion, they provide a unique forum and knowledge hub for data and analysis, exchange of experiences, best-practice sharing and advice on public policies and international standard-setting. Within Latin America, the only other countries besides Colombia within this unique club are Mexico and Chile.
Author’s Final Words:
We encourage readers to think of Latin America as a series of unique countries with differing strengths and weaknesses with respect to investment. Within our own review of the LATAM region, we believe that the countries are so macro-economically, socially and politically different that investors need to review opportunities on an individualized basis. While we would not recommend to spread bets across all the markets, we would recommend concentrated strategies on targeted, promising nations.
- Colombia stands out in LATAM: There are a number of changes that are happening globally that suggest that there are potentially beneficial waves coming to the Latin American market in the near future. From an individual investor’s point of view, we would encourage investors to solely select a few markets for capital placement. Not all markets are equally as rosy and not all markets will behave in a similar manner. From our own analysis of markets in Latin America, we are most excited about Colombia, with Mexico as a runner-up. For accredited investors looking for arbitrage valuations and investing before the “next big thing” label is placed on a country and prices surge, we think Colombia has more upside potential than Mexico, largely given the fact that Mexico is much more developed from a venture capital perspective and much of that development is already priced-in, unlike Colombia. We do see general stability and potentially positive macro-economic movements in countries like Costa Rica, Uruguay and Chile, but feel those markets are too small to concentrate any significant efforts. If we had the option on the roulette table of Latin America and only had one chip, we’d put it on Colombia.
- We encourage investments into only selected industries within Colombia since not all industries are equally promising and some are unavailable for individual investment: At Legacy Group, we have operated on-the-ground within Colombia for the last seven years. We have reviewed and placed capital into a number of industries, in a number of projects. We have also passed on the vast majority of opportunities that were presented to us. For a passive foreign investment strategy directly into a portfolio company, which is the investment style most accredited foreign investors prefer, businesses with the ability to gain scale are best and they need to be managed by a sophisticated, international team. To counter that point, once a business gets too big and remains private, it will be very difficult for individual investors to gain access to invest. Within Colombia, we see the most individual investor capital flowing into the areas of agriculture, real estate and technology and see these markets as the most viable for high-net-worth-individual capital placements. We see areas such as energy and infrastructure, which are also both promising and potentially very lucrative, as largely priced-out of the individual investor market due to the extremely high entry prices that are typically only picked up by larger financial institutions.
Colombia is the market that U.S.-based accredited investors and those looking for new investment opportunities with the potential for outsized yields should be focusing on. Investors would be wise to take note and participate in this growth in Colombia before pricing becomes too lofty. In the past 20 years, $32 billion of foreign direct investment has come into Colombia from multinational businesses and investors who are bullish on Colombia. 47% of that $32 billion has arrived in just the past three years. We suggest catching this rising tide before it gets too expensive to do so in Colombia, a market full of opportunity.
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*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.