Last year, while much of Latin America was feeling the impact of the eurozone recession, four of Chile’s largest financial holding companies – LarrainVial, Celfin Capital, IMTrust and Banco Falabella – launched their attacks on the promising markets of Peru and Colombia.
In their new markets, the Chilean firms have pursued a strategy of replicating the model they used in Chile in banking, brokerages, and the administration of corporate assets and finances. But now that they have established operations in both countries, what barriers must they overcome, and what should their growth strategies be?
Clearly, Chilean holding companies see valuable opportunities in the markets of Peru and Colombia, notes Jorge Gregoire, professor of economics and business at the University of Chile. “That’s largely because they are investing in emerging economies that are now growing rapidly, in contrast to the precarious prospects in Europe as well as the United States.”
During 2011, the economy of Peru registered growth of 8.3%, according to the Central Reserve Bank of Peru. Meanwhile, the International Monetary Fund (IMF) has forecast that Peru could be the fastest-growing country in Latin America in 2015, with growth of 6.5%. For its part, Colombia's economy expanded last year by 5.7%, according to ANIF, Colombia’s national association of financial institutions.
The Barriers Ahead
Nevertheless, this doesn’t mean that everything will go well in these markets for Chilean companies. Victor Valenzuela, professor of economics and finance at Andres Bello University, warns that if Chilean holding companies attempt to become leaders in the financial sectors of Peru and Colombia, the first big barrier they will face will be cultural differences.
The main cultural barrier that Chilean firms will have to overcome will be to adapt their business models to those of the Andean nations, notes Valenzuela. First, Chilean players will need to face a culturally different way of doing business – with different rates, terms and codes when it comes to talking about business. Beyond that, “they will [also] have to master an essential change, which is to convince traditional, family-managed companies, both in Peru and Colombia, to open their purses and decide to raise capital in large volumes.”
That is an obvious ingredient in the world of business, and something especially important in a market as complex as the financial sector, Gregoire notes. Achieving efficiency in that sector means developing the capacity to offer a full range of financial products and services at the lowest possible cost, “in order to strategically attract institutional investors to non-financial companies and retail investors, as well as to family owned companies.”
In that regard, Chilean managers cannot improvise by providing that same products they provide to markets in Chile. Whenever foreign companies play a role in a domestic market, notes Gregoire, they have to study the financial sector there and decide what type of contract or business is most convenient for local operations, while “considering other factors, such as regulatory risk, resistance to foreign investment, and public image, along with cultural differences.”
Opportunities Worth Leveraging
Despite all of these barriers, Chilean managers are more likely to emerge victorious than to fail in these foreign markets, argues Gregoire, because they can leverage the long experience they have developed as financial agents. “Both LarrainVial and Celfin Capital have considerable expertise in the investment banking niche in capital markets; in brokerage activities and underwriting; as well as in investment funds, advising investment projects, issuing capital and financing, among other things,” he notes.
In fact, adds Gregoire, Chile’s financial holding companies already have experience with Peru’s mining sector, as well as in creating real estate investment funds and placing assets in Peru’s AFP, the organization that administers pension funds.
Another factor to consider are the business possibilities created by MILA, the Latin American Integrated Market, which comprises the financial markets of Chile, Peru and Colombia, notes Gregoire. Although the impact of MILA is only in its early stages, “in the future, the alliance could wind up having an important impact on the finances of the three nations.”
MILA, which began to operate in May 2011, includes the Stock Exchange of Santiago de Chile; the Stock Exchange of Lima (BVL) and the Stock Exchange of Colombia (BVC). Its goal is to integrate these countries’ variable income markets in order to diversify them and make them more attractive for both domestic and foreign investors.
Although today’s recessionary economy has compelled the countries of the region to lower their forecasts for economic growth in 2012, forecasters say that it is still possible for Peru’s financial sector to enjoy double-digit growth this year, thanks to the greater number of financial companies that are investing in this market, says Valenzuela. “Beyond that, you need to add that Peruvian companies are becoming more professional, which means they could manage to raise capital in the stock market, especially those that have plans to grow.”
Nor should the success stories of Chilean retailers in Peru – such as Cencosud, Falabella and Homecenter Sodimac – be forgotten, notes Valenzuela. LAN Airlines, which began operations in Peru in 2002, also favors Chilean holding companies, since their experience “contributes valuable know-how and knowledge that will help them put into play their strategies.”
Laying out Their Strategies
So far, the playing field has remained wide open with opportunities and challenges ahead for Chilean firms. But what strategies should Chilean holding companies pursue in order to overcome the challenges?
One key is to offer financial products and services at the lowest possible prices, says Gregoire. Chilean firms must take advantage of the existence of economies of scale, as well as exploit certain key elements in order to make good use of strategic information, develop their brands, and expand the territorial reach of their corporations by launching branch offices.
"In some areas, such as the underwriting of financial instruments, the underwriter’s reputation is very crucial," he notes, "so it is quite possible for these Chilean holding companies to use their history of successful placements in numerous local and international markets while not necessarily competing against Peruvian and Colombian actors based on better prices or fees." In this regard, Gregoire adds, it is important to recall the operations of Chilean firm Capital Celfin in Peru, where it acted as a sponsor during the arrival and registration of the Canadian mining company Gold Moon (in 2011) on the Lima Stock Exchange, with excellent results.
Just as important is the decision to work on the basis of strategic alliances and joint action with local intermediaries, he says. The best example of that is the key role played by LarrainVial in Peru in 2008, where it negotiated with Colliers International, one of the biggest real estate companies in Peru, to create the Real Estate Investment Fund (known for short as “Fibra LVC”), which committed itself to using some $525 million, over a 10-year period, to finance real estate projects.One of the advantages of working with local partners and players who know the domestic market very well is that they reduce the regulatory risks of any business venture in the financial sector, he adds.
Another good tactic for Chilean operators to follow, says Valenzuela, is to incorporate Peruvian and Colombian investors into the ownership of the company, "since it can be a good precedent in case political and social conditions in the Andean countries become difficult."
Moving into Other Countries
Chilean companies that are competing in Colombia and Peru have not exhausted their options, analysts say. It is still possible that Chile’s financial holding companies will enter other markets in the region, since they share a common language and similar cultural codes.
According to Gregoire, it makes sense for Chilean companies to try to enter other neighboring markets because Chile is also a small market. But, he cautions, they must target countries that are good hosts for foreign companies, and where — as is the case with Peru and Colombia in recent years — "authorities welcome and facilitate the arrival of foreign firms in the context of a favorable political and economic climate."
The ideal situation, he says, is for Chilean firms to commit to emerging economies that are growing fast and are associated with a specific commodity, because that will create opportunities for financial intermediation — more specifically, for specialized placements of corporate debt and equity capital, initial public offerings (IPOs), and the creation of investment funds of various types and complexity.
Similarly, Chilean holding companies need to be cost-efficient,says Gregoire, and build asound reputation and successful track record inany country’s local market so they can improve their chances of linking with local partners.
Eventually, says Valenzuela, Chilean players could replicate their business models in Mexico and Brazil. "However, these are major markets. In fact, Brazil is the number one financial market in the region — the equivalent of 20 or 30 times that of Chile — while Mexico is ten times larger than the Chilean market." Because they are larger markets, he notes, they are more developed and provide a greater supply of products. “The Chilean model might work well in these countries, but you have to see how it evolves in practice. Brazil has the language barrier [of Portuguese], and in that sense, Mexico has an advantage [over Brazil]," says Valenzuela.
Despite all the expert forecasts, the region recently learned that BTG Pactual, the giant Brazilian financial firm, merged with Chile’s Celfin Capital. The deal will enable the Chilean firm to have a presence in the niche of Private Equity, an area where BTG Pactual is very active.In addition, the merger will enable Brazil’s BTG to make a smooth entrance into the Colombian market (where it has not had a presence), since Chile’s Celfin is building an extensive network of institutional clients in Colombia. According to the Chilean media, the two companies reached an agreement through which Celfin will have primary responsibility for the development, management and implementation of BTG Group's activities in the Andean region, including Chile, Peru and Colombia.
Nevertheless, it will take quite a while to evaluate the performance of this Chilean-Brazilian firm in the Andean countries,as well as to find outif Chile’s financial sector manages to succeed in Brazil’s highly competitive market.