Following political uncertainty stemming from the 2022 inauguration of Colombia’s first left-wing president, coupled with the global financial crisis, the local investment landscape exhibited fragility during the first semester of 2023. Projections for economic growth in 2023 and 2024 indicate a moderate and subdued trajectory, with an expected GDP growth of 1.5% in 2023 and 1.8% in 2024, as noted by the OECD. Colombian economy has also suffered increase of inflation and more expensive financing structures arising from higher interest rates.
This intricate economic backdrop has particularly impacted M&A and venture capital activity. According to TTR, M&A deals experienced a 19% decline, with aggregate amounts dropping by 52% between January and September 2023 compared to the same period in 2022. The contraction was even more pronounced in venture capital deals, with a 33% reduction in the number of transactions and a significant 71% decrease in deal value.
However, a potential turnaround is on the horizon with the recent election of right-wing mayors in the three major cities for the next four years. This political context, together with the decline in inflation (expected to meet its target by 2025) and the growth of foreign direct investment (which in June 2023 reached the highest figure in the last nine years), provides a positive signal for stimulating inbound investment.
During Q3 2023, significant deteriorations were evidenced in the demand for credit in the corporate sector, showing a negative historical variation of up to 40%, specifically in the demand for credit by SMEs, mainly explained by high interest rates. In this context of tight credit markets, in contrast to transaction financing in previous years, strategic investors may face more challenges to secure financing (both local and offshore) to leverage their M&A transactions.
Despite an overall deal decrease, 2023 has had its fair share of big-ticket deals, including the announced acquisition by Salvadorian conglomerate Grupo Calleja of Almacenes Éxito (one of the largest retail chains) by means of a takeover bid, in both Colombia and the US. Headline transactions also included the negotiated acquisition of a majority stake in Grupo Nutresa (one of the biggest food processing and distribution conglomerates) for USD3 billion by the Gilinsky Group (led by household mogul Jaime Gilisnki) and IHC (Abu Dhabi’s royal family), which put an end to the most memorable corporate takeover battle to date. Whilst deal flow shrunk locally, Colombian strategics were especially active abroad.
Inbound international investment has been largely driven by the Colombian peso devaluation, which suits buyers funded with hard currency, and a relative stabilisation in valuations compared to past-year multiples. Cross-border activity was also fuelled by acquisitions of multinationals with significant local presence. SPAC two performed a de-SPAC transaction through its business combination with Latam Logistic Properties (a logistics real estate operating and holding platform with operations in Colombia, Central America and Peru), which stood out as being the third of its kind in Colombia (following Tecnoglass’s and Procap’s de-SPAC jumps to NASDAQ in 2013 and 2021, respectively).
Although strategic investors seem to be currently spearheading M&A efforts, institutional investors remain active, but, for the most part, have acted conservatively in cherry-picking select opportunities. Ashmore acquired a 50% stake in Concesionaria Ruta Bogotá Norte S.A.S. (concessionaire of the Accesos Norte Fase II toll road), and in turn sold 25% of the shares of Termoemcali (240 MW thermoelectric plant) to CountourGlobal. Sydney-based asset manager AMP Capital teamed up with Enel X (Enel’s innovation segment) and acquired two concessionaires for the provision of the electric bus fleet and charging infrastructure for Bogotá’s TransMilenio (bus rapid transit system).
Joint ventures seemed to be the theme in dealmaking for 2023. The market saw heavyweights across different sectors join forces, as is the case in the announced joint venture between telecommunication companies Telefónica and Tigo to share mobile phone lines, and the joint COP164,000 million financing by the country’s most prominent gas companies (including Vanti, TGI and Ecopetrol) of “GasTrack”, a project aimed to provide retail debt financing for the acquisition of gas-powered trucks.
As for venture capital, while seed funding remained resilient, valuations seem to have decreased and equity investment pullback has been more pronounced in late-stage rounds. Growth and late-stage start-ups have also turned to alternative sources of financing, such as credit facilities. Certain founders have even changed their traditional prospect of sequential investment rounds for exits in the form of early buyouts. However, start-ups have concluded successful fundraisings, such as La Haus’s (proptech) USD62 million Series C round, and Gopass’s USD15 million Series A round led by Kaszek.
Concerning deal structure, a lack of local affordable debt financing has driven dealmakers to adopt alternative novel structures. A shortage of cash-on-hand, coupled with the benefit of interest alignment of such arrangements, has enabled equity stakes to increasingly be accepted as consideration (generally in the form of roll-over equity). Earn-outs are also in the toolbox when trying to bridge the valuation gap, but are less common. Other novel structures include in-kind contributions from acquirers in exchange for equity in the target company. Structuring is also shifting to accommodate foreign investment-friendly treatment (eg, BITs).
Sectors leading M&A deal activity include technology (especially SaaS and fintech), healthcare, retail, energy and consumer goods (especially in the food industry).
The technology sector has gained relevance in the Colombian market, especially in connection with start-ups. The strongest subsectors in this ecosystem are fintech, e-commerce and proptech. During the second quarter of the year, Bogotá-based private equity firm Kandeo and US-based alternative asset manager CrossRegional announced the acquisition of a 50% stake in Canada-based technology financial services company Finexus for USD30 million. Also, I Squared acquired Zetta Data Center Complex.
The healthcare and pharma sectors continue to be some of the most active industries in M&A, bolstered by the acquisition by Eurofarma (a multinational pharmaceutical company) of Genfar, previously owned by Sanofi, with operations in Colombia, Ecuador and Peru. Patria acquired majority stakes in Oncólogos de Occidente and Organisación Clínica General del Norte (healthcare services providers). These transactions occurred against the difficult backdrop of the extensively debated healthcare bill proposed by the government. Proposed reforms include the elimination of intermediation conducted by private healthcare insurers (EPSs), which are currently responsible for covering the costs associated with healthcare services. However, this has faced fierce opposition in Congress.
The energy sector continues to be prolific for M&A. Strategic and institutional investors have mandates to shift to clean energy. In furtherance thereof, Enel sold Central Termocartagena (203 MW thermoelectric plant) and Isagen sold its only remaining thermal asset, Termocentro (272 MW). Even though this seems to be aligned with the government’s energy transition policy, project development has recently faced difficulties in terms of execution and permitting, and barriers in the interconnection proceedings, as well as fears regarding the preservation of the independence of the energy regulating commission (CREG). This has steered important players Engie, Enel and EDF to abandon certain renewables projects in the country. However, the energy market continues to foster foreign investment. Colombia is set to develop additional non-conventional energy sources, such as green hydrogen and offshore wind generation. By 2030, the government expects to have an aggregate renewable installed capacity of 6 GW.
The political agenda of Colombia’s first left-wing presidency has come with a rally to present two major social reforms of the labour and pensions systems to Congress. As the pension reform may pose risks to the sustainability of key players in the sector (ie, pension funds), the government is aiming to increase contributions that are managed by the public pension fund. Likewise, the labour reform may impose burdensome employment conditions on local businesses – eg, an increase in night shift surcharges and limitations on outsourcing activities. Nevertheless, some specific sectors may benefit from the promotion of remote work under the reform.
The corporate and M&A scenery is influenced by recent regulatory developments. Notably, the issuance of Chapter XV of the Basic Circular Letter of the Superintendence of Companies (SoC) provides guidelines for ESG and sustainability corporate reporting. The government has also proposed amendments to the fiduciary duty regime, aimed at providing clarity regarding conflicts of interest and the hard regulation of business judgement rule case law.
Unfortunately, legislation has also suffered setbacks. The last tax bill sought to abolish sunset provisions embedded in bankruptcy-related presidential decrees, which, among others, enabled certain acquisition transactions amid bankruptcy processes – ie, debt-equity swaps and takeovers in the form of equity contributions that would cover key stakeholder credits. Regrettably, such extension was recently repealed by the Constitutional Court (CC). Nonetheless, a bill introduced in Congress is under consideration to permanently institutionalise such pandemic-initiated insolvency regulations.
Colombia has developed specialised corporate and M&A litigation forums. While the SoC’s specialised corporate law court has refined corporate law doctrines, arbitration tribunals remain the preferred M&A dispute resolution mechanism. However, the former’s jurisdiction has been curtailed by a recent ruling by the CC, whereby the catch-all attribution to settle “corporate disputes” was repealed. Recent relevant arbitration precedents address shareholder agreements, delving into the obligations that may be agreed thereunder, deadlocks and remedies for breach thereof (Procecal S.A. v. Promical S.A.).
Camilo Merino, Juan Diego Martínez, Alejandro Medina, Sebastián Morales, Sergio Arias y Valentina Castillo