LAVCA caught up with Edgar Enrique Sandoval, Partner and CFO of Kandeo, to learn more about their core markets (Colombia, Mexico, and Peru) and how the integration of these economies as a result of the Pacific Alliance is creating an opportunity for mid-market private equity.
LAVCA: Please provide some background on Kandeo
Sandoval: Kandeo was founded in 2010 by senior investment professionals with experience in banking, consulting, investment banking, provision of massive goods to the population and private equity across Latin America. Kandeo raised and has been managing its first fund, Kandeo I Colombia, which closed on $126 million in capital commitments in 2011. Fund II will seek to continue the firm’s successful investment strategy, executed by Fund I, of investing in growth companies across Colombia, Mexico, and Peru with proven business models focused on the provision of financial services to the lowest socioeconomic segments of the population and SMEs.
Kandeo has offices in Colombia, Mexico, Peru, and the U.S and is comprised of seventeen total professionals, with two additional independent advisors. Kandeo is expecting to close this year with around US$400m in AUM.
LAVCA: What is your background?
Sandoval: Prior to joining Kandeo, I was Partner & Director at SIGMA GP Ltd, where I implemented projects to reinforce the urban transportation regulatory systems to a more sustainable and integrated mass public transportation systems worldwide with public funds and the support of the World Bank, the Inter-American Development Bank, the LATAM Development Bank (CAF) and some American NGOs. I also served as CEO of Transmilenio, which is the mass transportation system for Bogota-Colombia, in which we designed, structured, and managed the Bus Rapid Transit since the beginning and during its initial operation for five consecutive years. In addition, I served as Chief of Staff for Mayor Enrique Peñalosa’s office in Bogotá where I held several board positions in the Public Works Agency, Social Security Council, and Fiscal Policy District Council. I helped created the landmark formula (PICO Y PLACA) for the restriction of private vehicles to improve the transit in Bogota, which is still on place. I graduated with a B.S. in Economics and have completed various post-graduate studies in Business Administration.
LAVCA: Kandeo has a very specific strategy around credit/financial services. What void did you see in Latin America that motivated you to raise your first fund? How has the current macroeconomic environment affected this strategy?
Sandoval: Financial services penetration and total lending volume in Latin America remain relatively low compared to other parts of the world, although annual growth rates for the number of citizens with open loans across Colombia, Mexico, and Peru have continued to increase. We believe that the current macro and sector-specific environments across Kandeo’s target markets support the Fund’s strategy of targeting companies with proven business models focused on the provision of financial services to the lowest socioeconomic segments of the consumer base and SMEs.
From a macro perspective, the economic landscape across Colombia, Mexico, and Peru continues to exhibit strength in front of the other emerging countries, measured by key growth indicators such as GDP. Increasing political stability has further supported growth across these markets, lending to increase domestic consumer confidence, as well as palpable conviction from the foreign investment community in the long term.
LAVCA: What’s the competitive landscape for providing capital to SMEs in Latin America?
Sandoval: In Latin America, SMEs continue down a path of change, developing and evolving amid the backdrop of deepening consumer and provision of new services to the big conglomerates. The development of regulatory frameworks, improvements to portfolio quality and the availability of funds are growing for our emerging markets because we have interesting returns in qualified assets.
LAVCA: How has the appetite for exposure to Latin America evolved over the last 5 years? What types of investors are most attracted to pan-regional funds? Who are your investors?
Sandoval: In Latin America, it is difficult to find private equity funds with significant operational involvement in their underlying assets. Managers must be well-respected in the region, well-known, and have strong operational backgrounds. Finding specialized fund managers in the region is very attractive to international limited partners in order to obtain the best benefits to invest in LatAm. These kinds of investments and management teams are always in high demand from investors.
Institutional investors, pension funds, development finance institutions, global investment institutions and funds of funds, like Kandeo´s LPs appreciate our mid term strategy, not only for our involvement but also for our single “industry” focus, from a risk/return approach, that it behaves like a diversified portfolio across a number of different sectors (retail, automotive, mortgages, etc.). Additionally, cash flow volatility is mitigated by the multi- country, multi-sector/subsector.
LAVCA:Are ESG considerations a priority for the types of investments you make? Do your LPs require any special ESG reporting?
Sandoval: Social and environmental impacts are not the focus of Kandeo’s investments but ESG elements are tied into every aspect of the investment process. In addition to the fact that Kandeo’s investment thesis inherently lends itself to financial inclusion in all investments, Kandeo also follows specific ESG guidelines and takes an active role in improving the ESG performance in the GP level and its underlying assets. According to Kandeo’s investor agreements, Kandeo must screen all potential investments for a variety of specific guidelines, including the IFC’s exclusion list which dictates certain activities where the fund cannot invest. The results of this due diligence culminate in a report that includes the recommendation to or not to invest and a plan to revise these areas of non-compliance following the investment. Following that, Kandeo revises and reports on a variety of ESG KPI’s once a year, and plays an active role in improving the companies’ social and environmental responsibility, as with the development of the projects with MEDA (Mennonite Economic Development Association), for example.
LAVCA: What is the typical ticket size of your investments? Do you normally take control positions in companies or minority stakes?
Sandoval: In most cases, Kandeo will aim to secure control positions without majority ownership, furthermore aligning closely with each company the decision-making rights.
In keeping with the firm’s overall strategy, Kandeo seeks to make investments of between $15 million and $50 million in companies.
LAVCA: Kandeo has historically focused on Colombia, Mexico, and Peru. Are you exploring any new markets, considering recent political changes in countries like Argentina?
Sandoval: For now, our only focus is in Colombia, Mexico, and Peru. We believe that this specific investment focus, largely supported by strong sector growth and relatively limited competition with traditional banking and other financial services institutions, provides Kandeo with a unique opportunity to achieve attractive performance results while concurrently exerting a positive social influence in these three countries.
LAVCA: Do you see the integration of economies as a result of the Pacific Alliance creating new opportunities for Kandeo?
Sandoval: Absolutely, treaties and alliances such as the Pacific Alliance gives political stability to the region and at the same time promotes security for foreign investment to stimulate growth and prosperity to its members. Mexico, Colombia, Peru and Chile share common values in trade, regulations, and most importantly have had stable democracies in the past decades. The four countries have prudent and conservative monetary and fiscal policies, with limited government intervention into the private sector which creates many opportunities for Kandeo and the industry in general.
LAVCA: Please describe one of your portfolio companies. How has Kandeo added value?
Sandoval: With an equity investment of $16.5 million, Kandeo Fund II successfully closed its first portfolio investment in December 2014 – Progresemos – a microfinance institution oriented principally to the provision of working capital group loans to Mexico’s rural sector, with appreciable focus on low-income, female micro entrepreneurs. Kandeo’s capital infusion is positioned to help fund the company’s growth initiatives, strengthen Progresemos’ capital structure and contribute to the implementation of operational assessment tools, as well as the development of new financial products.
LAVCA: What is the strategy for exiting your investments? Who are potential buyers?
Sandoval: Kandeo will pursue a variety of different exit methods. Overall, Kandeo believes that its investment strategy is well-positioned to capitalize on potential exit opportunities, as both local and international strategic players continue to show interest in purchasing financial businesses in the region to further their respective growth objectives.
LAVCA:Why did you join LAVCA?
Sandoval: We believe that is extremely important to be part of an organization that promotes private investment in Latin America and for Kandeo it is an honor to be part of such an exclusive organization. It is essential for Kandeo to belong to LAVCA which has helped us with introductions, facilitating projects, educating our associates thru prestigious industry courses, and all the events we’ve attended promoted by LAVCA have been exceptionally