The LAVCA team decamped to Bogota and Medellin earlier this month for our annual Colombia Forum, and I had a great opportunity to take the pulse of the market in meetings with fund managers, investors, regulators and other industry players.

I came away with a sense of great momentum – public and private sector forces are driving the country’s development as a major hub for PE in Latin America. But that momentum raises important questions: is fund formation getting ahead of the rest of the investment ecosystem? And will the country be able to live up to investor expectations?

It has only been six years since the first PE industry regulation went into effect in Colombia, creating a local fund structure and allowing the country’s pension funds to invest in domestic PE vehicles. About a half dozen local firms including Altra, LAEFM, SEAF and Tribeca tapped this new source of capital to finance first funds in 2006-2008, and today some of those managers have realized exits and are marketing second funds internationally.

Regional and global players have also established offices in Bogota and are actively competing for deals, with Aureos, Southern Cross, Linzor, Advent, Victoria, Darby, and Brookfield in the mix. Chilean and Peruvian teams like Nexus Group or Larrain Vial are looking at cross border opportunities, and still others are targeting the country opportunistically from abroad, including CVCI, Carlyle, Acon and The Rohatyn Group. Real estate and infrastructure is also fueling new fund formation, with local and international teams coming together.

While the purely local players manage funds with AUM under $200m and typically write tickets of $5-50m, many of the larger regional and global players would ideally like to write checks of $100m or more given the chance. So the pool of PE capital available for deals in the Colombian market is significant and growing.

Another sign of increasing momentum is the creation of a national PE/VC association, a project which was in the making for several years. La Asociacion Colombiana de Capital Privada, or ColCapital, has consolidated the support of 26 founding member firms and was officially launched in a presentation at the LAVCA Colombia Forum.

Looking at the country’s overall ecosystem for investment, it would be hard to overestimate the role of the pension funds over the past six years, both as a source of capital for first time local managers and in attracting global firms to the country.

At the same time, the government’s enthusiasm for cultivating a dynamic funds industry with local and global players has also been remarkable. The first public programs targeting PE/VC promotion were launched under the Uribe administration around 2007, and since then have been expanded and institutionalized within the national development bank Bancoldex. This year the Multilateral Investment Fund of the IDB signed a major agreement for technical assistance and funding to Bancoldex for VC programs and projects.

Colombian policymakers have also been remarkably proactive on PE/VC regulation, and have demonstrated an admirable willingness to address key issues with industry players. For the third year running, LAVCA and Bancoldex co-hosted a policy meeting with decision makers from the banking superintendency and finance ministry, along with Colombian lawyers, pension fund investment officers and PE fund managers, to discuss everything from caps on institutional investor commitments to reporting requirements and tax treatment of early redemptions.

On a side note, this year the meeting took place immediately following the announcement that the country’s financial market regulator had intervened to liquidate Interbolsa, Colombia’s largest brokerage house. A quick and decisive response by regulators to stem any wider fallout from the failure was initially well received by both local and international investors.

But while government promotion and global investor interest are fueling a record supply of PE money in Colombia, today there is a still a fundamental mismatch with the number of business owners seeking capital from financial investors.

Colombia’s private sector is dominated by family owned firms that are often unwilling to cede even a minority stake to an outsider. GPs currently sourcing deals in Colombia face an uphill battle in winning over CEOs that are generally well capitalized and complacent, and/or that don’t appreciate the strategic advantage of partnering with a PE firm to reform corporate governance or expand with new businesses and markets.

This is a challenge which should resolve itself over time, as more exits are realized and successful cases emerge. Today two of Colombia’s most recognized brands – restaurant chain Andres Carne de Res and fitness club chain BodyTech – are PE backed. By some accounts Body Tech will be seeking an IPO on the Colombian exchange when market conditions allow.

Another critical factor will lie in the country’s ability to leverage its considerable entrepreneurial talent to generate a pipeline of opportunities for angel, seed and venture capital investors. Medellin is widely recognized as a source of technical talent and entrepreneurial activity, but today Promotora is the only active institutional venture capital firm in that city, and in fact in all of Colombia.

Following the Colombia Forum in Bogota, LAVCA headed to Medellin with a group of seasoned early stage investors from Brazil, Mexico, Chile, Argentina and Silicon Valley to host an educational seminar with local angel groups, accelerators and entrepreneurs. It was a great experience all around, with the visitors sharing lessons learned and practical insights.