The Colombian private equity industry is expanding its
boundaries to attract new investors. Local pension funds are
increasingly cautious about committing additional capital to
new funds given that they are reaching the limits stated in the
local investment regime, and they are waiting to review the
performance of funds that are reaching their full term.
With this in mind, in October 2018, the Ministry of Finance
(MoF) enacted a new set of regulations to take private equity
funds to new levels. The priority of the regulator is to
bolster the development of the industry through the adoption of
international standards and to resolve some of the challenges
that have arisen in the industry over the last 10 years.
One of the most relevant components included in the new set
of regulations is the possibility for private equity funds to
publicly issue bonds. Even where private equity funds are
registered instruments in Colombia, it was not previously clear
in the regulations whether it was possible to issue bonds.
Under the new decree, a private equity fund will be able to
increase its leverage by issuing debt instruments.
Additionally, it was not clear whether the funds structure
was permitted, meaning that a private equity fund was not free
to invest in another private equity fund. The MoF has finally
permitted this structure, which will open the door to a whole
new segment of potential investors.
This new set of regulations, combined with the tax outlook
for these vehicles, will make Colombia an even more interesting
jurisdiction for private equity investments.
From a tax perspective, private equity funds are
pass-through entities with relative tax transparency in that
they are not liable to tax, and income is only taxed at
investor level, which provides for legitimate tax deferral.
However, withholding taxes will apply upon the distribution of
profits according to the type of income that produces the
profit. An important feature for tax purposes is that private
equity funds can redeem capital before distributing profits,
which allows for a second level of deferral. Distributed
profits can be from any source (capital gains, leases and so
on). There are no distribution requirements, and in fact 100%
of funds can be reinvested.