phallerMexico is the ‘hot’ LATAM private equity (PE) market to watch in 2012 according to Cate Ambrose, President of the Latin America Venture Capital Association (LAVCA). As a follow up to her recent executive brief on Mexico’s PE landscape, we questioned Cate on the recent attention Mexico has gained in PE circles.
According to LAVCA data, LATAM PE investments reached record highs in 2011 totaling $10.3 billion USD, an increase of 27% from the previous year. While Mexico accounted for only seven percent of the regional total (Brazil 63%), Ambrose believes 2012 and beyond will likely see PE capital flows opening up in Mexico. Ambrose pointed to growing competition in Colombia and Brazil, economic stability, and easing of regulation on Mexico’s pension funds as central factors for the recent expansion of PE activity in the country.
NSAM: Why are you bullish on Mexico?
Ambrose: Private equity is a longer term investment play, typically five to seven years, so safety and stability is what fund managers are looking for. Mexico’s slower-growth market [relative to Brazil’s inflationary market] instills confidence. Particularly in the current global landscape with turmoil in Europe but also regionally, with investor risk tolerance tested after the recent Argentine government takeover of Spanish oil company YPF.
Global investors are also looking for alternatives as money pours into Brazil and Colombia which is driving up valuation and competition for deals in those markets. Mexico is also tied to the US economy [80 percent of Mexico exports go to US] which diverted fund manager attention to other LATAM markets. Today’s more stable US landscape is now pushing investors to look at Mexico more closely.
It’s very difficult to spend money in Mexico without lining the pockets of the big investment families including Carlos Slim’s Grupo Carso.
NSAM: Why has the private equity market been so slow to develop in Mexico?
Ambrose: Indeed the country’s private equity industry is quite small for an OECD country. PE investment represents a much smaller fraction of GDP compared to Brazil. Much of this has to do with the availability of local sources of capital to fund first time fund managers. Looking at other markets [in LATAM], there is a direct correlation between total investments and regulations limiting local pension funds to back private equity firms. Brazilian pension funds started backing domestic PE managers over a decade ago which has created a stronger PE culture there. In Colombia and Peru the domestic PE industry opened up around 2006 when pension funds began backing local managers. Regulatory bodies in Mexico only began allowing pension funds (afores) to invest in PE funds since 2009. There has been a visible impact with 20 new funds opening since 2009.
NSAM: Which sectors do you see attracting the most interest?
Ambrose: Everything consumer driven has gained the most traction mainly because of Mexico’s large and young population. Nexxus Capital is one of the leading private equity firms specializing in Mexico and they’ve been very interested in health club chains, fast food restaurants, as well as middle income housing. Nexxus was behind HOMEX now a publicly traded company on the NYSE focused on affordable entry-level and middle income housing in Mexico and Brazil. Everything to do with consumer credit is also big: Housing mortgages, leasing, credit cards. Infrastructure and logistics are also popular as economic growth creates huge demand for roads and electrical power generation.
NSAM: Are there any down sides to the Mexico PE market?
Ambrose: There’s definitely a shortage of big ticket opportunities. Mexico has a highly concentrated business sector which is dominated by a handful of private business groups and state monopolies. It’s very difficult to spend money in Mexico without lining the pockets of the big investment families including Carlos Slim’s Grupo Carso. Mexican business owners running large companies are also often unwilling to give up control or to tap financial investors as a source of capital. It’s a more institutionalized approach to business and less understanding of the value that PE investors can offer to growing companies. This creates barriers to investment in key sectors such as energy, telecommunications and media. For the moment local managers are looking at mid-market opportunities. However the business culture is changing as the underlying economic landscape continues to improve.
Prior to joining LAVCA in 2007, Cate Ambrose was the Executive Director of Progammes for the Economist Group and Chief of Advocacy for the United Nations Commission on Legal Empowerment of the Poor.
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