BiD Country Guide Series

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Investing in Small and Medium Sized
Enterprises
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in Colombia

2009
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www.bidnetwork.org www.seafcolombia.com
Partners to this guide

BiD Network Prepares

emerging market
entrepreneurs for investors.
ww.bidnetwork.org Its mission is to stimulate
sustainable economic
development through
entrepreneurship. It
operates in 11 countries
and is a Foundation in the
Netherlands.
www.bidnetwork.org

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Small Enterprise Assistance
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Funds (SEAF) is a global
investment firm focused on
providing growth capital and
operational support to
businesses in emerging
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markets and those

underserved by traditional
sources of capital. SEAF
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selectively makes structured

debt and equity investments in
locally owned enterprises with
high growth potential.
www.seafcolombia.com

Bancoldex is Colombia’s
state-owned development
bank for entrepreneurial
development and foreign
trade. Bancoldex plays a
central economic policy role in
promoting and supporting the
activities of Colombia’s SMEs.
www.Bancoldex.com
 Investing in SMEs in Colombia

The BiD Network Country Guide Series

Investing in Small and Medium Sized Enterprises in Colombia

2009 is the second in a series of country-specific investor guides
focusing on small and medium sized enterprise (SME) finance in
new emerging markets. Investments in new emerging market
SMEs are limited by a lack of information and a high perception
of risk. This series aims to provide investors with practical
information to make informed decisions, thereby stimulating
investments in the best SMEs in these markets.

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Countries to be covered in this series:
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Argentina Kenya

Bolivia Peru
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Colombia Philippines
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Ecuador South Africa

Ghana Tanzania

India Uganda (available)

If you want more information on this series, please contact

Susan Randall at: susan.randall@bidnetwork.org

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 Investing in SMEs in Colombia

About the authors

Michel Casas is Investment Officer at SEAF Colombia. Mr.

Casas previously worked as a research assistant at Universidad
de Los Andes for working papers on capital markets, in the
following subjects: corporate bond markets and valuation;
transparency on securities trading; government on private
equity and venture capital industry; valuation on mortgage
securities sponsored by the World Bank and supported by
Titularizadora Colombiana.

Hector Cateriano has 10 years of Venture Capital/Private

Equity investment experience in emerging markets (ASIA, CEE,
LATAM) with SEAF. Mr. Cateriano, is SEAF’s General Director for

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its Colombian Fund, a private equity funds investing in
Colombian medium size business. During his first two years in
Colombia Mr. Cateriano structured three investments in the
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financial, health and hospitality sectors. Mr. Cateriano also
served as the Director for SEAF’s India Growth Fund and SEAF’s
India International Growth Fund. He represented SEAF’s team
in its relationship with Kotak Mahindra´s Bank (Kotak) Private
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Equity Area, a leading private bank in India, where he served a

role in structuring and closing the partnership with the Bank in
order to launch a common private equity fund. After successfully
establishing the partnership, he teamed with the Private Equity
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Head of Investment for Kotak and with Mr. van der Vaart,
together raising a US$ 160 million Investment Fund. He was
part of the team that closed the fund’s first transactions,
committing in the process approximately 30% of the total
amount raised. Such investments encompassed industries such
as Agro-biotech, Software (PIPE deal), Computational
Biotechnology, Machining Centers, Textile Manufacturers,
amongst others.

Mr. Cateriano also served as the Estonian Director of SEAF’s

Baltics Small Equity Fund (BSEF). BSEF specializes in growth-
oriented investments in the three Baltic Countries. Before
joining BSEF, Mr. Cateriano served as Fund Director to FAPE, a
SEAF managed fund in Peru. He has hands-on experience in
hiring and training new investment officers, generating an
attractive pipeline of projects, and analyzing market trends,

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 Investing in SMEs in Colombia

while developing creative investment structures to make equity

investments. Mr. Cateriano has invested in a wide variety of
industries such as agro-industry, textile, wood processing,
software, telecommunications, life sciences, metal mechanics,
wholesale and retail, food processing industries and fast food
franchise chains.

Maria Pontes recently joined BiD Network and is assisting the

Country Research Coordinator with the Country Guides Series.
Prior to this Ms. Pontes worked in Mexico for more than two
years in development programs. She also conducted several
research projects on poverty reduction and sustainable
development related issues.

Susan Randall is Country Research Coordinator at BiD

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Network, where she researches issues related to capital market
access for SMEs. Prior to BiD Network, Ms. Randall worked for
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10 years at ING Bank in the Netherlands as Senior Country Risk
Analyst, specializing in Eastern Europe and Latin America. She is
the initiator of the BiD country guide series and author of the
first guide in this series, “Investing in Small and Medium sized
Enterprises in Uganda”.
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DISCLAIMER: While we have made every reasonable effort to

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ensure that the information provided in this guide is accurate,

no investment or other business decision should be made by the
reader on the basis of this information alone, without a further
independent check. Neither BiD Network, nor SEAF nor
Bancóldex accepts any responsibility for any such decision or its
consequences.

Copyright © 2009 BiD Network, SEAF Colombia

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 Investing in SMEs in Colombia

Table of contents

Foreword ......................................................................... 9

Chapter 1. Why invest in SMEs in Colombia? .................. 12

Chapter 2. Risks to investing in SMEs in Colombia ......... 15

2.1 Challenging operating environment ............................ 15
2.2 Risks to investing in emerging markets SMEs .............. 16
Chapter 3. Planning your investment in Colombia .......... 18

Chapter 4. Snapshot of Colombia ................................... 27

4.1 Political Environment ................................................ 29

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4.2 Business Environment .............................................. 34
4.3 Trade and Investment Trends.................................... 37
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Chapter 5. The SME market in Colombia......................... 40
5.1 Size of the market ................................................... 40
5.2 Main Sectors where SMEs operate.............................. 41
5.3 Challenges in operating environment.......................... 44
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5.4 Practical initiatives in the SME sector.......................... 46

5.5 Linkage opportunities with Multinationals .................... 55
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Chapter 6. Financial Markets in Colombia ...................... 58

Chapter 7. SMEs access to Financial Markets ................. 62

7.1 Challenges to accessing financial markets ................... 62
7.2 SMEs and the market for credit ................................. 66
7.3 SMEs and the market for risk capital .......................... 77
Chapter 8. Regulatory Framework for Foreign Investors91
8.1 Legal entities recognized in Colombia ......................... 91
8.2 Land ...................................................................... 92
8.3 Foreign exchange and remitting funds ........................ 93
8.4 Paying taxes ........................................................... 95
8.5 Ownership in companies ........................................... 95
8.6 Intellectual property................................................. 95
8.7 Performance requirements ........................................ 97
8.8 Investment protection .............................................. 97

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8.9 Fiscal incentives for investment: Duty Free Zones ....... 98

8.10 Investment restrictions ........................................... 99
Chapter 9. Managing your investment ......................... 100
9.1 Basics of entry and exit .......................................... 100
9.2 Procedures to register an SME ................................. 101
9.3 Money matters ...................................................... 103
9.4 Labor issues .......................................................... 105
9.5 Business support ................................................... 108
9.6 Getting goods in and out ........................................ 109
9.7 Managing risks of your investment .......................... 112
9.8 Resolving disputes ................................................. 118
Chapter 10. Exiting from your investment ................... 120

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Chapter 11. Measuring the Impact of your Investment 122
11.1 E&CO’s Triple bottom line...................................... 122
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11.2 SEAF’s methodology ............................................. 125
11.3 Acumen Fund’s methodology ................................. 127
Chapter 12. Interviews ................................................ 134
12.1 Focus on Funds .................................................... 134
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Focus on Seed Capital Funds: Actuar Famiempresas ... 134

Focus on Private Equity Funds: Promotora de Proyectos 139
Focus on Social Investment Funds: Root Capital ......... 147
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Focus on Fund of Funds: SIFEM ................................ 153

12.2 Focus on Credit.................................................... 158
Focus on Credit: Bancóldex ....................................... 158
12.3 Focus on Financial Structures ................................ 168
Focus on Financial structures: Shareholder Loan Funds 168
12.4 Focus on SMEs .................................................... 175
Focus on SMEs: Frutipac ........................................... 175
Focus on SMEs: Creaciones Mazzeos .......................... 179
Focus on SMEs: DUTO .............................................. 184
12.5 Focus on Business Angels...................................... 190
Focus on Business Angel Networks: Capitalia Colombia 190
12.6 Focus on Philantrophy .......................................... 198
Focus on Philanthropy : LGT Venture Philanthropy ...... 198
Focus on Philanthropy: the experience of Samuel Azout 204
Chapter 13. Frequently Asked Questions ..................... 207

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Annex 1. Business entities and legal implications ............ 216

Annex 2. Rules for Foreign Investment in Colombia ......... 221
Annex 3. Taxation in Colombia ...................................... 226
Annex 4 Duty free and tax incentives............................. 230
Annex 5. Investment Guarantee Programs ..................... 233
Annex 6 International commerce and trade agreements ... 238
Annex 7. Providers of financial services to SMEs.............. 245
Annex 8. Providers of business services to SMEs ............. 247
References: ................................................................ 258

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 Investing in SMEs in Colombia

Foreword

For whom is this guide?

This guide is written for foreign and local investors who are
interested in investing anywhere from US$50,000-US$2 million
in a small or medium sized enterprise (SME) in Colombia, either
directly, or via a fund or other organizations. The guide aims to
provide all the necessary information to facilitate investments in
this range. It contains specific information on the operating

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environment relevant for SMEs and for investors in these types
of companies. The content has been developed with foreign and
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local public and private sector players operating in the
Colombian market.

The information in this guide is relevant for a broad range of

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investors including but not limited to informal investors, private

equity funds, institutional investors and development
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organizations.

Note for microfinance investors: While the aim of this guide is to

assist investors in investing in SMEs in Colombia, many of the
issues discussed as well as the services detailed in this guide are
also relevant for micro-enterprises in Colombia. It is important
to note however, that there are some fundamental differences in
the market for microfinance, which are well beyond the scope of
this guide.

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 Investing in SMEs in Colombia

How to use this guide

Chapters 1-7 are designed to help you through the planning

stages, by giving you an overview of the SME market in
Colombia, the challenges faced by SMEs, and recent initiatives
to support this sector. This section will give you a good view of
the trends in foreign investments in Colombia, the development
of capital markets, and how SMEs access these markets.

Chapters 8-12 are aimed at helping you implement and manage

your investment. In this section, you will find regulations

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pertaining to foreign investors and information on implementing,
managing and exiting from an investment in a Colombian SME.
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Important Tip for reader
Before you start reading this guide, we suggest you take a
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look at Chapter 13 (List of frequently asked questions by

topic). This will give you an overview of the main issues you
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can expect to find answers to within this guide.

We also suggest that you take a look at the various in-depth

interviews contained in this guide with US, European and
Colombian-based funds, angel investors, and SMEs
themselves. These interviews are located in Chapter 12. If
you skim through these interviews early on, it will give you a
good feeling of the operational environment for SMEs in
Colombia, and help you to put the information in the rest of
the guide into context.

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 Investing in SMEs in Colombia

Definitions

The legal definition of SMEs in Colombia is based on a firm’s

number of assets and number of employees. However, it is
important to take into account that banking market practice
definition of SME does not correspond to the legal one, which
has various implications in terms of SME access to credit.

Legal Definition of SME

According to the Ley Mipyme (Law 590/2000):

Small Enterprises are those with assets of between 501 and

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5,000 legal minimum monthly salaries (around US$1 – 1.1
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million) and 11 to 50 employees.

Medium-Sized Enterprises are those with assets between

5,001 and 30,000 legal minimum monthly salaries (around
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US$1.1 – 6.7 million) and 51 to 200 employees.

The SME definition used by credit institutions is generally based

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on annual sales. This indicator often represents a better proxy of

an SME's level of business activity and prospects than its assets
or employees. Domestic Colombian banks define SMEs within an
annual sales range of around US$0.1-5 m, with differences
largely determined by their corresponding target market1.

The exchange rate used in this guide is US$ 1: COP 2,387.

1
Stephanou C. and C. Rodriguez, ‘Bank Financing to Small and Medium Sized Enterprises in
Colombia’

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 Investing in SMEs in Colombia

Chapter 1. Why invest in SMEs in Colombia?

SMEs are fundamental for Colombia's economic growth,

diversification of products and for ensuring the country’s
competitive advantage. They contribute to poverty reduction by
generating alternative employment and income in rural or
economically depressed areas, thereby helping to remove
regional and sectoral imbalances in the economy. The SME
sector offers a wide range of investment possibilities, covering

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all sectors from resource-based industries to manufacturing and
services. The Colombian government and private sector actively
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promote SMEs and entrepreneurial development, via a number
of initiatives which are detailed in this guide. Bank financing to
SMEs is now a strategic segment for Colombian credit
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institutions, which should improve SMEs overall growth

prospects.
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In addition to serving as a seedbed of entrepreneurship, small

enterprises occupy a highly useful niche in Colombia's industrial
structure, subcontracting with large firms and engaging in small
batch production, made–to-order work, or finishing operations
complimentary to large scale industry. Easy entry and exit of
SMEs can make the Colombian economy more flexible and
competitive, leading to higher growth rates in the long term.

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Bank financing to SMEs is now a strategic segment for

Colombian credit institutions, which should improve SMEs
overall growth prospects.

At a human level, Colombia has a strong entrepreneurial

tradition, and SMEs there are highly flexible and adaptable to
changing circumstances. Global business environment surveys
rankings suggest that Colombia entrepreneurs have been
relatively good at moving toward more sophisticated production

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and (export) baskets. In regards to business sophistication,
Colombia was ranked 48 among 125 countries in the Global
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competitiveness Report of 2006-7. As for innovation, it was
ranked 57. According to the World Competitiveness Yearbook
2008, Colombia occupies the first place in all of Latin America in
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terms of qualified labor. One European-based Venture

Philanthropy fund interviewed for this guide said that the skills
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level of entrepreneurs in Colombia is among the highest they

have found, and that Colombian entrepreneurs’ exposure to
internationally based organizations facilitates negotiations and
deal structuring.

Colombia has a strong entrepreneurial tradition and SMEs

there are highly adaptable to changing circumstances.

Colombia offers strong incentives to foreigners who are

interested in investing in this particular segment of the
economy. The climate for foreign direct and portfolio investment

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 Investing in SMEs in Colombia

is very open. Some 45 duty free zones, where many SMEs are
active, have been set up throughout the country, which offer
many tax incentives to foreigners. The country also has three
important clusters developed around software products, an
industry which includes many SMEs (ParqueSoft, SinerTic and
InterSoft). Total assets of the productive sector exceed US$185
billion and total sales reached US$143 billion in the 2007
(excluding financial and utilities sectors). The Colombian
government has implemented new legislation which benefits the
business environment and SMEs in particular. Examples of this

simplifying registration
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are a reduction in the time and cost to start a business by
formalities, the introduction of
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correspondent banking arrangements, and strengthening of
creditor’s rights via a new bankruptcy law.
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 Investing in SMEs in Colombia

Chapter 13. Frequently Asked Questions

These questions are grouped according to the planning section

(see Chapter 3 “Planning your Investment in Colombia”)

1. Familiarize yourself with the operating environment

for SMEs in Colombia

□ What kind of constraints do SMEs face in Colombia? [see

p.15, 44-46, 62-65]
□
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How does the challenging political situation affect SMEs?
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[see p. 15, 175-179]
□ How does the armed conflict affect investment
decisions? [see p. 15, 31,150,195]
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□ What is Colombia’s government policy towards FDI? [see

p. 37]
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□ Why do SMEs in Colombia face difficulties in accessing

finance? [see p. 62,158]
□ What kind of initiatives are there in place to support
SMEs? [see p. 46]
□ How do SMEs access financial markets in Colombia? [see
p. 62]
□ What are main guarantees available for lending to
SMEs? [see p.69-75, 158]
□ What are the main non-financial needs of Colombian
SMEs? [see p. 142,178,194]
□ What are my main exit options? [see p. 51,120,121]

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 Investing in SMEs in Colombia

□ Is it possible to exit via the stock market? [see

p.17,82,120,156,169,195]

2. Inform yourself about the sector you want to invest in

□ What sector receives the largest share of foreign

investment in Colombia? [see p.37-38]
□ How large is the SME sector in Colombia? [see p.40]
□ What are the main sectors where SMEs operate in
Colombia? [see p. 41]
□

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What are the sectors with the highest returns on equity?
[see p. 77-80]
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□ What are the sectors with the highest debt/equity
ratios? [see p. 77-80]
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3. Consider starting commercial relationships with a

Colombian enterprise.
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□ Where can I find information on productive sectors and

trading opportunities? [see p.112]
□ Where can I contact details of the different chambers of
commerce? [see p. Annex 8]

4. Review the regulation for foreign investors, tax

treatment and other incentives in Colombia

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