Interview: HBI’s Lorenzo Garavito Says Colombia’s Traditional Business Structures Becoming More Sophisticated, Engaging Investment Banks

Colombia is in an age of transition in more ways than one. President Juan Manuel Santos will seek to end more than a half-century of conflict today in Cartagena by signing a peace deal with the Revolutionary Armed Forces of Colombia (FARC).

This historic moment will also serve as a symbol of the economic evolution the nation is undergoing. After decades of security challenges, Colombia is now fully open for business.

Photo: Lorenzo Garavito of HBI discusses the best investment sectors and economic transformation taking place in Colombia. (Credit: Loren Moss)

Lorenzo Garavito, president of HBI (Banca de Inversión Helm Group Company), says that the investment community’s interest in the country is rising, with the peace process being a key factor. While the opportunities are vast, he believes the best move is to bet on the consumer. Retail, restaurants, and grocery stores are all low-risk plays that will bring good returns. Agriculture, while less certain, is another big growth area in Garavito’s eyes. At the same time, Colombia’s traditional family-owned business structures, more suited to an agricultural and industrial age, are modernizing and internationalizing, and to do this, they are more and more seeking the help of modern investment banks, entities that were practically nonexistent in Colombia a couple of decades ago.

To learn about the most-promising sectors, rising interest from institutional investors, and how Colombia’s evolving economy is affecting traditional family-owned businesses, Executive Editor Loren Moss of Finance Colombia recently sat down with Lorenzo Garavito.

Finance Colombia: Here in Colombia, as in a lot of countries in Latin America, many businesses tend to be family-owned and family-run, sometimes over multiple generations. Even when we look at the tycoons in Colombia, we’re usually talking about families. With the recent changes in the laws and changes in the landscape here in Colombia, how do we see the modernization, if you will, of the economy affecting family businesses and the traditional structure?

Lorenzo Garavito: Colombia has always been a country where entrepreneurs have created companies, and the public markets are very small. It’s very difficult to get money out of the public market, so families tend to stick together and grow their businesses.

There have always been concerns with succession from generation to generation. Is the new generation ready? How can you protect the company from these changes?

We’ve seen companies saying, “We just want to have a professional manager and we´ll run the company at the board level.” We’ve seen companies saying, “We need an external investor to mediate among cousins and the third and fourth generations.” We’re involved right now in a transaction where the owner basically said, “Look, I want to leave some something to my kids, but I also want to enjoy my money and my retirement.” So he split the business in two. He left a part to his kids and he’s selling that other part of the business.

“I would bet on the consumer. I would definitely bet on retail stores. Not only supermarkets, but glasses or wine or restaurants — or anything that has to do with consumers.” – Lorenzo Garavito, president of HBI

What we’ve seen in the last 18 months is that the recent volatility in the market has brought up some more fears among the second and third generations. Some companies are think they need to make acquisitions outside Colombia and try to become a non-Colombian company. So we’ve seen family businesses making acquisitions in Central America — incorporating a holding company in Panama, for example.

The investment bank is always a neutral third party, and I think our role, besides doing a transaction and raising money selling a company, our paramount role is to make sure that the family relationship doesn’t suffer because of a discussion about money, right?

Finance Colombia: So, people might traditionally think that the time to call an investment bank is when they’re going to do a transaction. But you’re saying that the investment bank can also actually work as an advisor and help structure things — help mediate, help negotiate — even if there’s not necessarily an acquisition or a deal to make?

Lorenzo Garavito: Yeah. I think that our role is as mediators in those situations. Things can be taken in a different way or misinterpreted. So bringing in a third party to mediate in those money issues is always a good idea. We can make an evaluation and have plans to separate the business or give liquidity to some of the members or bring in a third party. We can analyze the situation and provide ideas to the companies.

Finance Colombia: Are there a lot of other cases like that happening in Colombia, with Colombian businesses that are looking to maybe sell out even to a foreign investor?

Lorenzo Garavito: Yeah. We’ve seen that. I think that selling today, it’s still tricky because, two years ago, one dollar was equal to 1,700 pesos. Now the peso has devalued to around 2,900 to one dollar. So, in dollar terms, your business was previously worth a lot more than what it is worth today. So the decision to sell is not there yet. I think people are very conservative and they want to know what’s going to happen the dollar, inflation, exchange rate, tax reform, etc.

But I think, as I mentioned, we have seen a lot of inquiries about helping solve family discussions where people, in these volatile times, have different ideas. Some want to grow, some want to sell, some want to make other decisions. So we’ve been getting involved in situations where people are making transactions just to solve the different views of their members, their shareholders.

Finance Colombia: At what size — whether that’s in revenues or whether that’s in capitalization — is it even worth the exploration of talking to an investment bank?

Lorenzo Garavito: Well, I think there are also tiers in investment banking here, so there are a lot of firms that cover small-size companies. We cover kind of medium- to medium-high-sized businesses, so our transactions usually start around $30 million USD to $300 million USD. But I know there are a lot of firms that do $5 million USD deals or $2 million USD deals.

“If I wanted to take a lot more risk, I think agriculture is the place to be.” – Lorenzo Garavito, president of HBI

We were actually recently involved in a transaction where a foreign company hired us to find companies in a specific target, and we found one that was very small — but it was exactly what our client needed. So it’s a $1 million USD transaction with a family-owned business where the owner is preparing to retire. The business is managed by one of the siblings, and the owner basically thinks that the person might need the help of somebody once he is missing. This person needs help from somebody to manage the company, so it’s a good idea to bring a partner at this stage.

Finance Colombia: Succession is always complicated. One of the things that I’ve seen is that a father has done very well in business and — either out of blind tradition or not knowing what else to do — is ready to retire, and he says “Well, I’ll just leave it to my kid.” And either the children have no interest in running the business or they have no capacity. So it doesn’t work and the business implodes. The business could have been saved, and I think to myself that it’s sad for the employees. They have worked so hard and given their life to the business — just to see it evaporate.

One of the things I’ve never really seen in Colombia is an employee stock-ownership program. When the founder is ready to retire, he begins to invest the stock in the employees. “You’ve been at the company for 30 years, you get so much.” Eventually, the employees are just like shareholders, and they appoint a board of directors. Is there anything like the employee-owned business or a way to transfer ownership to employees?

Lorenzo Garavito: It’s not very common, but it has happened. We, actually Grupo Helm, had an IT company that was sold to the employees, for example. I know Grupo Sanford, for example, has a stock-option plan for employees, and they distribute stocks. They actually encourage them every year and people might sell or buy at the end of the year, They even have an internal market for shares.

But that’s rare, I think. Private equity has helped in bringing those ideas to companies here as a way to align interest. Some venture capital. I think we’re seeing a change — there are interesting examples out there — but it’s still very limited.

Finance Colombia: In Colombia, as the economy changes, there has been a huge push towards the services sector. At the mid-market, what kind of interest are you seeing from the institutional investors, particularly the more sophisticated and international players? Is that rising? What kind of effects are the economic conditions having on the interest of institutional investors?

Lorenzo Garavito: I think it’s rising. Colombia has had different cycles where sometimes the internal market is more optimistic than the external market, like in the 1990s when things were difficult in Colombia and no foreign market companies wanted to come.

Today I think it’s the opposite. Foreign investors are far more optimistic about the country than local investors. I think it’s because they see the peace process with very optimistic eyes in terms of this being a country that has not been on the radar for a lot of companies and would now be on the radar — even though, in my sense, internally, this process doesn’t mean huge changes initially. I think, over time, it will bring a lot of good changes. But initially I don’t think we’ll see a big difference. But in international eyes, they see this as a boom.

I also think that what the last 18 months have proved in Colombia is that it was not an oil-based economy. Oil was very important — a very important part of our exports and of government financing. But the real ending of the economy was the consumer.

You see results for supermarkets, restaurants, and even shopping malls. They’re doing well. They’re doing very well.

Ten years ago, we had three big cities. Then we increased that to five or six additional cities. Today, if you’re a restaurant, there are 30 cities where you want to be.

Finance Colombia: If you were a fund manager, if you were going to raise a mutual fund, what sectors in Colombia are you bullish on? What is the sector that is under-appreciated and doesn’t get the attention that it deserves from the rest of the world t as far as for an investment destination?

Lorenzo Garavito: Well, I would answer two things: One, in terms of lower-risk areas, I would bet on the consumer. I would definitely bet on retail stores. Not only supermarkets, but glasses or wine or restaurants — or anything that has to do with consumers. I think the consumer will continue to grow, especially in the low- and middle-income. That’s the large bulk of the population.

“Foreign investors are far more optimistic about the country than local investors. I think it’s because they see the peace process with very optimistic eyes. They see this as a boom.” – Lorenzo Garavito, president of HBI

If I wanted to take a lot more risk, I would say agriculture. Colombia is a country that has very good land — a lot of undeveloped land — and very good economics for agriculture in terms of weather, rain, growth, and sunlight. But it has been a sector that has been very difficult to develop.

Of course coffee is one of the best examples of the transformation. But I think that because of all the investments in 4G, the peace process, and a lot of knowledge that is easier to acquire today, if I wanted to take a lot more risk, I think agriculture is the place to be.

Finance Colombia: What does the government need to get right? We all talk about education and we talk about security. What area does the government really need to focus on strategically to improve? What do they need to support over the next decade?

Lorenzo Garavito: In agriculture specifically I would say it is rules. It’s to make sure the rules are there and that you have the same rules for the long term.

Los Llanos is a good example. A lot of people wanted to invest in that region, but then the government wasn’t clear about the rules and nobody knew what was going on. And everything stopped. So today nobody is investing in Los Llanos because there is no security in terms of ownership of the land

And second is infrastructure. Of course, Los Llanos is in the middle of the country and you have to take that product to the ports. Infrastructure is key. I think the government is fixing infrastructure. I hope that once the peace process is done, they will work on security — on legal security — in the long-term for investors.