For decades, Mexico remained under the radar as private equity investors with an interest in Latin America poured their money into Brazil. Headline risk around corruption and the war on drugs, a relatively small pool of fund managers, and the high concentration of large, family-owned businesses potentially restricting deal flow were among the many factors that had deterred greater investment. However, the tide appears to be turning—particularly with the entrance of the local pension funds (or Afores), which in 2009 were given the freedom to invest 10% of their assets into private equity under new regulations. Since this time, fund sizes for the more established general partners in the region have grown, while the total number of private equity and venture capital funds operating in the market has multiplied. In the eight years leading to 2016, Mexico-dedicated funds had raised nearly US$8.7 billion, with an additional portion of the US$12.7 billion raised by regional funds earmarked for the market (see Exhibit 1).
Homegrown firms—many of which were supported by local development bank-backed investor Fondo de Fondos (see Sidebar: Building a Local Industry)—began investing in the market in the late 2000s in an effort to prove the concept, while a number of international firms moved in, this time with a much greater emphasis placed on recruiting and building local teams. Once the Afores were given the green light to invest in private equity (as well as real estate and infrastructure) through an innovative, publicly listed instrument called a certificado de capital de desarollo or CKD, the tide began to turn. From a modest fundraising total of US$152 million raised in 2008, Mexico-dedicated private capital vehicles raised US$2.1 billion in 2015, representing a compound annual growth rate of 46% and overtaking Brazil for the first time since EMPEA began tracking fundraising statistics.
Alejandro Rodriguez, Director in the Private Funds Group of PineBridge Investments, notes, “When we started looking at the region back in 2008, there were about 30 managers investing in all of Mexico, and this includes regional funds that were doing investments in the country. Today, we have more than 70. We’ve seen the power that local capital has had on other markets, and this is now happening in Mexico—the involvement of the Afores has been a huge inflection point for the industry.”
The Case for Private Equity in Mexico
Alongside the rise in local investor participation, the global limited partner community has recently begun to take increased notice of the Mexican market. EMPEA’s 2015 Global Limited Partners Survey reveals that Latin America excluding Brazil, of which Mexico represents the largest market, has been ranked as the leading market for general partner investment for the last two years in a row. A number of macro and micro factors are responsible for this uptick in interest.
On the macro front, Mexico, which put in place a number of reforms in response to the financial crises of the 1990s, has demonstrated remarkable stability—if not stellar growth. Johannes Goderbauer, Senior Investment Manager at DEG, shares, “The story of Mexico— and this has been my mantra for years—is that there is no big story, and I mean that as a positive. Following the financial crisis, three significant sources of funding disappeared to a large extent, with remittances down, oil prices tanking and the swine flu causing tourism to drop. Any one of those factors could have led to a major disaster but yet there wasn’t an economic crisis in the country.”
From a micro perspective, a number of Mexico’s fund managers have now had the benefit of going through a few fund cycles, while new entrants continue to crop up and are focusing on a variety of strategies, increasingly including venture capital. Deal flow is reportedly opening up as family-controlled companies pass down through generations and as business owners increasingly understand the benefits of a private equity partner. “Things are going in the right direction,” notes EMX Capital’s Ávila. “Competition is maturing now across a number of industries. As this competition gets tougher, more and more people understand that the opportunity to not only bring in money, but smart money and people who can help you professionalize and improve your speed of growth, is valuable.” In addition, the options for exit are slowly beginning to expand beyond strategic sales to include a growing secondary market as well as public offerings.
The recent growth in Mexico’s private equity industry—albeit starting from a low base—has been extraordinary. The following pages will provide greater color on both the macro and micro drivers that have propelled—and in some cases impeded—this progress.