Cimarron Capital Opens Shop in Colombia
December 15, 2009 | Volume VII, Number 20
By Dan Weil
Venture Equity Latin America
Many experts have pointed out that Latin America’s private equity industry weathered the global financial crisis quite well.
U.S. private equity firm Cimarron Capital Partners is living proof of that. The Oklahoma City, Okla. firm, which manages $320 million in the U.S., opened a Latin America office in Colombia during June. Cimarron, which sets up funds of funds for its clients, plans to serve as an advisor to institutional investors in the region.
The Bogota office is headed by Christina Kappaz, former executive director of the Latin American Venture Capital Association. Cimarron chose Colombia because Kappaz has personal ties there.
Years before opening its new office, Cimarron provided advisory services in the region and supported efforts to develop the industry. Through an affiliate firm, Cimarron sponsored the launch of the Latin American Venture Capital Association.
The firm advised a Mexican development bank, Nacional Financiera de Mexico, on the structuring of the Mexico Fund of Funds and on strategies for building a vibrant private equity and venture capital industry.
Cimarron is currently conducting due diligence for the Colombian Fund for Modernization and Technological Development of Micro, Small and Medium Enterprises (FOMIPYME). The fund seeks to invest in seed and early stage venture capital funds.
Private equity funds are emerging in Colombia, but few are involved in venture capital, particularly seed and early stage, Kappaz told VELA in a recent interview.
“We’ve been active in Latin America in different ways, watching the market carefully,” she says. “Now we’ve determined the time is right to become more actively engaged as an investment advisor and manager of capital for the region. That’s why they brought me on board.”
Cimarron managing director Robert Heard says the firm can benefit from the fact that institutional investors in Latin America have decided it’s important to include private equity in their portfolios.
“Our thought going forward is to be of service to those institutions looking for seasoned advisors on investing in private equity funds. We see a need in the market that is not yet being filled for due diligence services, which investors in other countries outsource to ensure a professional process and relieve the work load of their staff.”
Heard expects pension funds to account for the biggest portion of Cimarron’s client base in Latin America, followed by family offices and government development institutions. Pension funds in the region are getting more involved with private equity, creating opportunities for Cimarron.
“We have been in touch with pension funds and have learned about their challenges and the role advisors can play in helping to increase their sophistication,” Kappaz says.
“In Colombia pension funds were authorized only a few years ago to invest in private equity. It was about the same time in Peru. In the case of Brazil, five or so large pension funds have begun to invest actively, but many others are just beginning to express interest. There are a lot of opportunities there to help them become engaged.”
Heard says Latin America has emerged from the global credit crisis as an attractive area for private equity investment. “Its institutions are adopting international standards in terms of governance and accounting. We are looking at an evolution of investment philosophies.
That often includes a component for private equity,” he says.
“When these institutions think seriously of private equity beyond local interests, they are thinking about how to optimize return and minimize risks, how to pick good funds and diversify.”
As for the funds Cimarron might choose to put in its customers’ portfolios, Heard declined to name names.
But he did note that U.S. fund managers, including venture capital firms, are showing an increased interest in Latin America.
“The market for fund investors is fairly large and growing. There aren’t a lot of attractive funds, but there are some, and there will be a lot more in the future.
There will be a robust private equity industry that includes venture capital, mezzanine and buyouts. We believe the trajectory is positive.”
And what are the biggest barriers Cimarron faces as it builds its presence in Latin America? “Part of it has been that legal standards vary from country to country,” Kappaz says.
“Mexico, for example, is finally in the process of allowing its pension funds to invest in private equity, but the legal framework for their investment is different from international standards. They still have to understand the role of institutional investors.”
Heard points out that the different legal systems “can dramatically increase your transaction costs.”
In its U.S. operations, Cimarron looks more at venture capital than private equity, and when it comes to private equity, the firm gravitates to small buyout funds.
“It’s open whether we will focus more on venture capital than private equity in Latin America,” Heard says. “Some countries are more appropriate for venture capital, such as Brazil. Mexico has some opportunities as well. In other countries, the opportunities are more for later stage private equity.”
An ecosystem for venture capital doesn’t sprout up overnight, he says. “It takes not just money but knowledge concerning how to see and capitalize on opportunities, and how to launch super growth companies. The knowledge for how you do that is embedded in the culture of specific parts of the world. It’s hard to do venture capital where only parts of that culture exist.”
In the U.S., Cimarron focuses its investments on funds involved with a variety of industries, including biotechnology and information technology. “We like funds that are good at advanced manufacturing and ones that are involved in the whole effort on renewable energy and clean technology,” Heard says.
Cimarron isn’t concentrating on specific industries in Latin America. “We’re more focused on investment talent,” he says.
Countries of Interest
As for countries that interest Cimarron, “Absolutely Brazil, which has outpaced other countries in the development of its private equity/venture capital industry and the experience of fund managers,” Kappaz says.
“Mexico has interesting opportunities and strong fund managers. Colombia is a new country, and interesting things are happening. In Peru, the industry is small, but strong fund managers are emerging. Chile has a great private equity investment environment.”
Heard says the firm finds Mexico particularly interesting because of its close ties to the U.S. and its large population of professionals who understand how to work effectively in both countries. “That fact that we have so much experience in the U.S. makes that attractive,” he says.