Colombia: Regulations cramp equity market hopes
Auction system hampers ECM deals; Private pension funds growing fast
Colombia’s strong, stable economic growth and low stock market capitalization-to-GDP ratio theoretically make the country a perfect opportunity for equity capital markets.
However, while that promise might well pay off, investment bankers operating in the country warn that ECM deals will take some time to come to market and will be hampered by the country’s equities regulations.
The initial public offering pipeline data compiled by LatinFinance, a sister magazine of Euromoney, lists 47 Latin American IPOs. Of these, only one, Cemex Latam – the unit holding Cemex’s regional ex-Mexico assets – plans a listing in Bogotá, which is expected to include an international portion.
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International bankers blame equities regulations for creating an IPO process that does not incentivize best practices seen in other jurisdictions. The regulations were designed for IPOs targeted at retail investors. There is a fixed-price mechanism, as well as a bookbuilding mechanism. However, the process of bookbuilding is not the same as it is in the US, and banks have no discretion about how to allocate shares – they must be allocated according to pre-established criteria, where demand equals supply.
"Think Google rather than Facebook," says Juan de Bedout Vargas, managing director of investment banking and capital markets at Corredores Asociados, whose example illustrates his point that one system is not necessarily better than the other. "But the problem is that when you use an auction system, you are mathematically matching all the supply at the sale price. There is only one likely way for the stock to go after going public – and that’s down."
De Bedout, whose firm has led eight of the country’s last 11 IPOs since 2009, says that in practice Corredores Asociados uses a greenshoe but it is really an over-allocation mechanism. "Buckets can also be used, as long as the proportion of shares sold to each type of investor [for example, domestic retail and foreign international investor] are determined before the sales process begins," says de Bedout.
Under the fixed-price sales mechanism, the company decides on the sales price and then offers shares in the market. However, this structure requires the sale to be in the market for 15 working days – but in markets with any kind of volatility, such as now, companies are not prepared to take this duration risk.
The inability of underwriters to allocate large orders to international investors poses a problem. For example, in Davivienda’s IPO, 62,000 investors were all awarded the minimum $5,000 bid. It is a situation that makes the research process uneconomic for large institutional investors and will limit the appeal of future Colombian issuances to international investors.
One local banker admits to dealing with "very frustrated" international investors. As Colombian companies grow and need to access larger pools of liquidity, this might present a problem. "Colombian companies are facing challenges when it comes to raising capital from international equity investors due to the existing divergence between local rules and global practices," says Juan Manuel Muñoz Leclercq, executive director of investment banking for JPMorgan in Bogotá.
"This dichotomy has built up to what is now an issue for local offerings when considering follow-on transactions – exposing issuers to large execution risk due to fixed-pricing terms – and secondary deals, as no offering can have a secondary sale of more than 25%."
Alejandro Sánchez Vaca, executive vice-president of investment banking at Corficolombiana, Grupo Aval’s investment banking and asset management division, also believes the intention of the regulation – to promote widespread retail ownership – is flawed.
"It is not reasonable for every person in the country to own stock – it is a difficult security and you need a taste for risk," he says. "Anyway, the development of the pension funds has led to a second wave of democratization – thousands of people now own shares through the pension, and so the retail-based IPO has to be questioned. We are, as a regulatory framework, pushing stock on to people who don’t necessarily want or need it."
Colombia’s private pension funds are growing fast – with a young customer base and few retirees they are taking in about $300 million of funds that need investing. While Colombian companies are not ready to tap this liquidity, there has been an increase in foreign companies seeking Colombian investors for its IPOs. Chilean companies Sonda and La Polar are marketing fresh equity sales in Bogotá, and Echeverría Izquierdo visited the country as part of its IPO marketing efforts.
Sánchez also cites the substantial investor-relation logistical challenge – and cost – of hosting AGMs. Ecopetrol has to hire fairgrounds to hold its annual shareholder meetings, and its president, Javier Gutiérrez Pemberthy, one of the busiest men in Colombia, often gets bogged down answering questions about customer-service issues at particular garages.
However, de Bedout says a change to the rules would need congressional reform, and that is not even proposed. "The market moves faster than the regulation," he says. "The challenge is to try to find a way to use what we have to make the process more harmonious with international standards."