Investing In Factoring In Colombia

One of the benefits of hosting conferences around the world is the chance they give me to spend focused time with key contacts in key markets. It’s at our conferences that I find out about ear-to-the-ground kinds of opportunities that usually don’t make it beyond a small circle of investor-friends.

This week in Medellin, for example, for our Live and Invest in Colombia Conference I was able to check in on an investment opportunity in this market that I find interesting even though, surprisingly, it is not real estate-related. It’s to do with factoring payments from lawsuits won in Colombia against the Colombian government.

When I was in the States recently, whenever I happened to be someplace where a television was playing in the background, I noticed commercials pushing the idea of getting cash up front for a structured settlement. Typically, these commercials were from groups trying to get people to call them to sell their structured settlements from lawsuits or other payouts. The person with the structured settlement gets cash today, and the investor (the group running the ads) buys a set of cash flows at a discount. It’s the kind of thing a Finance 101 teacher might use as part of a lesson on how to calculate the net-present-value of cash flow.

In the case of the Colombia opportunity my colleague presented to the group in Medellin this week, the lawsuits, as I said, have all been won against the Colombian government. The payouts aren’t structured over time, but the government takes 8 to 24 months to make them. Considering plaintiffs may have waited five to eight years to get the judgment, they aren’t thrilled to wait up to two more years to get paid.

That’s where my Colombian colleague comes in. His firm packages the judgments and pays out cash to the plaintiffs at a discount. The investors get a nice interest rate for the period they hold the claims. Specifically, each investor earns an annualized yield of 13% for the 10 months after the judgment and 16% for the period after that time.

As the government is the debtor, the likelihood of not getting paid is small, but the timeline isn’t precise. The government is meant to pay within 10 months but can take longer…even up to two years. However, after 10 months, a penalty interest rate kicks in, so, on one hand, the longer the payout takes, the better the return for investors. All of the parameters are set out in the relevant law.

In addition to the risk the government doesn’t pay, which is low, another risk is the exchange rate. These deals are done in Colombian pesos. Right now, the peso is relatively weak against the U.S. dollar, meaning you can buy more pesos with your dollar. By the time your payment comes through, the peso could be stronger, meaning a better dollar return…or it could go the other direction, meaning a lesser dollar return. One never knows. Of course, you could always roll over your pesos into another investment. Either way, exchange rate risk has to be considered.

Investing in Colombia is straightforward despite currency controls. Investors have to register their foreign investment funds when sending them into the country. Complete and file the correct forms properly when you send in your funds, and repatriating your money won’t be a problem (as long as you’ve paid any taxes due in Colombia). Don’t complete the forms or complete them incorrectly, and you’ll have trouble. I recommend using an attorney to make sure you get it right, at least the first time.

There’s also a fraud risk—that is, a risk that a plaintiff sell you his payments but then not transfer them to you. However, my colleague’s firm does the due diligence on each settlement and ensures that the rights to the settlement are properly transferred before releasing funds to plaintiffs.

Of the first 400 million Colombian pesos (about US$200,000) being put together for this first-round opportunity, 60% has been raised in a week of mentioning the opportunity to friends and colleagues. As I said, getting in on these kinds of opportunities isn’t easy. This kind of thing is usually snatched up quickly by folks on the ground when the opportunity arises. In this case, most of the investment has come from local friends of my friend.

By way of full disclosure, I’m investing myself.

The minimum investment is US$25,000, so the capital requirement isn’t great. It’s low enough to let you get your foot in the door to test the waters without putting too much at risk.

For more information, you can get in touch here.

Lief Simon

“Lief, I see you’re now promoting Medellin, Colombia…but you’re the same people who think living in Belize is a good idea. Which may be true if someone wants to have a death by drug gang or home invasion.”

R.P.

I’ve been talking about Medellin for at least four years and have an apartment in the city. I’ve walked around many neighborhoods over the years I’ve been spending time here and have never felt unsafe or had any problems.

That’s not to say people don’t have problems.

A tourist was killed a few years ago in a hostel in El Poblado. The tourist was in his 50s hanging out with other travelers in their 20s. The 50-something was likely on the hunt for women and drugs, and police were looking at other hostel guests as the suspects rather than a local from Medellin.

You can be as safe or unsafe as you want in any country. All U.S. cities have bad neighborhoods and good ones. Even small towns have bad areas…”the other side of the tracks,” so to speak.

Belize is a small country with a small, poor population. The bad neighborhood in this case is essentially most of Belize City, which is where the gangs are based. I wouldn’t recommend living in Belize City unless you were planning to work there. Retirees look to Placencia, Ambergris Caye, and the Cayo. Do those areas have crime, too? Certainly. It’s a poor country, as I said. You have to take precautions as you would in the United States or anywhere.

If you’re not comfortable with that, then don’t move to Belize. Probably, you should stay put wherever you are.