The VC Market in Chile
Chile is a sophisticated market for venture capital transactions, thus almost all types are present in the Latin America jurisdiction, including direct M&A (both as corporate acquisitions and minority investments) and convertible debt. Nevertheless, the investment in venture capital through investment funds, created by the uprising of third parties’ funds are administrated by a fund manager is a widely used structure.
Investors have been acquiring businesses and making minority investments in privately held companies since the dawn of the industrial revolution. However with a few exceptions, VC in the first half of the 20th century was the domain of wealthy individuals and families.
Private equity and venture capital funds have historically invested in a wide range of industries and companies. Venture capital expert Efraim Landa will attest to this. According to the 2012 Chilean Venture Capital and Private Equity Report issued by the Chilean Association of Investment Fund Administrators (ACAFI), the most numerous target industries are those associated with the agro industry, biotechnology, information services, consumer rights, education, energy and mining. With regards to important trends, it should be mentioned that the period 2011-2012 showed an increase in agro industry and information services companies as investment targets and a decrease in biotechnology and consumer rights companies as such targets, in comparison with 2010. Also, according to the same report, for the same period we can highlight the creation of at least six CORFO-supported funds for mining concessions and the creation of at least six new feeder funds (for the investment of institutional investors in foreign venture capital funds.
For the 2011-2012 period, the private sector, which in Chile is comprised by venture capital and private equity funds, is estimated to have an investment amount of US$599.4 million with 37 funds and 24 fund managers. The activity of such funds has increased in recent years due to the reforms to the Capital Market regulation (2001, 2007 and 2010 amendments) and especially because of the furtherance made by CORFO with its different credit lines.
Despite the fact that there have been incentives in recent years in taxation and allowance of risk capital, listing and information requirements of public funds, a clear disincentive to the investment in VC funds have been the restrictions to gather capital around these vehicles, and the taxes on capital gains and the application of value added tax to foreign investors’ incomes.
In recent months, six new venture capital funds, including three formed with foreign capital, have been approved in Chile, which will invest US$ 159 million in new start-ups. Of this amount, US$90 million is contributed by CORFO, the Chilean Economic Development Agency. The maturation of a series of initiatives designed to support entrepreneurship and innovation, together with new programs such as CORFO’s Start-Up Chile initiative, have contributed to positioning Chile on the global map for entrepreneurship and venture capital, making the country an attractive destination for international players and venture capitalists in the industry.
Last year CORFO inaugurated new Venture Capital programs with a focus on financing business in early and growth stages, as opposed to fully developed companies. The goal of these programs is to spur venture capital or financing of new start-ups and other new companies in Chile, in particular companies with high growth potential and higher levels of risk, and that additionally require the technical and operational support of a strategic partner.
In Chile, venture capital investors mainly use as exit strategy the secondary market sale or just the liquidation of the company in order to make a distribution of the assets. Although IPOs are still not a very common exit strategy (due to cost and lengthy procedure), they are expected to increase in this kind of operations because of the combination of the stock exchanges of Chile, Colombia and Peru into the Latin American Integrated Market (MILA).
Posted on March 19, 2014, in Business Financing, Effi Enterprise, Venture Capital and tagged capital funds, Effi Enterprises, International Venture Capital, Private Equity, Venture Capital in Latin America. Bookmark the permalink. Leave a comment.