Arturo Saval, Senior Managing Director of Mexico-based Nexxus Capital talked with LAVCA about the firm’s recent IPO successes and the PE investment environment in the country
LAVCA: Please give us some background about Nexxus Capital. How many funds do you operate? What are your assets under management?
Saval: Nexxus Capital was founded in Mexico City in 1995 and since its inception it has become the largest Mexican private equity manager. Nexxus is the only Mexican private equity fund manager that has created four funds since inception. We have raised more than US$550M via these four funds and have managed roughly US$110M of co-investments in our portfolio companies. Nexxus has a successful track record achieving unleveraged Gross IRR´s of over 25% in US Dollars and over 30% in MXP. Key investments include, Homex (Ticker BMV: HOMEX*, NYSE: HXM), Genomma Lab Internacional (Ticker BMV: LABB) and Grupo Sports World (Ticker BMV: SPORTS).
We currently manage four funds and are in the process of launching our fifth fund, Nexxus V, which we will co-invest with Nexxus IV, a Mexican vehicle raised with resources primarily of the Mexican Pension Funds (Afores).
LAVCA: How did you become involved with your firm? What factors led you to join the firm?
Saval: Prior to joining Nexxus Capital I had been in the financial services sector for over 16 years having participated in investment and commercial banking and in numerous debt, private and public equity transactions, as well as multiple advisory assignments. In 1998 I joined Nexxus Capital as Senior Managing Partner, bringing my expertise to the company, to raise and manage our first fund (ZN Mexico Trust) with total capital commitments of US$76.5M.
LAVCA: You recently closed on your fourth private equity fund (Nexxus Capital IV) via Capital Development Certificates (CKDs). How did you differentiate yourself strategically from other funds?
Saval: Indeed, we launched on October 2010, MXN$2,640M(approximately US$210M) through CKD’s, which are listed in the Mexican Stock Exchange (Ticker BMV: NEXXCK 10). We differentiate ourselves from other funds that have raised capital through CKD’s in our investment strategy, our investment scope and our track record. We focus on mid- market companies with annual revenues ranging from US$30M to US$400Mthat target the expanding Mexican middle class and look for high growth companies that need expansion capital. We have a heavy hands-on strategy in our investments.
LAVCA: You are also currently raising a fifth fund that is mainly focused on foreign institutional investors. What is the target for this fund and how will it be invested?
Saval: We are currently raising our fifth fund (Nexxus Capital V) in which we are seeking to secure between US$100M to US$150Min capital commitments from institutional investors. Nexxus Capital V will act in parallel with its affiliated fund Nexxus Capital IV. Nexxus Capital V and Nexxus Capital IV will make investments on a pro rata basis based on the total available capital of each fund. The aggregate available capital for both funds is expected to range from US$300M to US$350M.
LAVCA: What are the greatest challenges of fundraising for the Mexican market right now? Do you see inconsistency between global investor views of the country and the reality of the deal making opportunities in the country?
Saval: The two biggest challenges are 1) perception of the security in Mexico and 2) the size of the Private Equity market in Mexico. Even though we believe that conditions for private equity in Mexico are better now than in the past, investors still prefer other countries. We believe that we´ll manage a very successful fund due to the lack of competition which translates into attractive valuations, large opportunities derived from the continuous growth of the mid segments of the socio-economic population and the position of Mexico as a country with a very low debt and low fiscal deficit, an ideal combination for growth during the next years.
LAVCA: What is your long term strategy for investing in Mexico, say over the next 5 years? What sectors in Mexico are of particular interest?
Saval: Our areas of interest are in the healthcare, housing, tourism, and consumer products and services sectors, among others. These sectors are the ones that are serviced or at least better serviced by the government in developed countries, unlike in countries such as Mexico. Healthcare and education are very good examples. These are sectors where demand is expanding among Mexican consumers, particularly from low to middle-income groups where purchasing power is increasing.
LAVCA: In October, Nexxus portfolio company, Grupo Sports World, made its Initial Public Offering on the Mexican Stock Exchange. Tell us a bit about this exit – how did it go, does Nexxus maintain any ownership?
Saval: Grupo Sports World is one of the largest family fitness club chains in Mexico with 14 sports clubs and over 25,000 users. On July 2005, Nexxus acquired a majority ownership in Grupo Sports World, and on October 7, 2010 the Company successfully placed its shares on the Mexican Stock Exchange with an aggregate offering value of MXP$789M (approximately US$63M). Of the total offering size, 54% was secondary and 46% was primary. The offering was placed 100% among Mexican investors, of which 50% was allocated among retail investors (this portion was allocated to more than 1,600 retail investors). We still maintain an ownership of 21% in Grupo Sports World, and it is the last asset of Nexxus’ second fund.
LAVCA: You also recently noted that three more of your portfolio companies may be ready to go public on the Mexican Stock Exchange in the near term. Do you feel IPOs are the best exit option in Mexico?
Saval: Historically speaking, the Mexican stock market has not witnessed many IPOs. Nexxus Capital has taken three companies public since its inception. Prior to the recent regulatory changes made to the Mexican pension funds, firms needed to grow their portfolio companies to a very large size in order to perform an IPO. Since domestic and retail investors were not large enough to buy an entire IPO, international investors were needed to acquire a large portion of the offering. Thus, an IPO needed to be roughly $150M to $200M. However, now that AFORES, the domestic pension funds, as well as other institutional investors have been authorized to invest in IPOs, domestic offerings are an attractive option. In light of these new regulatory changes we do view IPOs as the first exit option.
LAVCA: How have past portfolio companies that listed performed since their IPOs?
Saval: Companies have been market outperformers. Desarrolladora Homex was listed in June 2004 at a price per share of MXP$30.05; it reached an all time high in May 2005 of MXP$120.10 which represented 4.00x IPO’s price and is currently trading at 2.33x[1]. Genomma Lab Internacional listed its shares in June 2008 at an IPO price of MXP$8.00 and is currently trading at MXP$29.561, which represents 3.70x IPO’s price. Also, since its IPO, Homex has tripled its EBITDA and Genomma Lab has more than doubled its EBITDA in two and half years. It is too soon to determine Grupo Sports World performance. However, it is currently trading above its IPO price1.
LAVCA: What is the greatest need for regulatory reform that you currently see with regard to private equity in Mexico?
Saval: The greatest regulatory reform needed was allowing Mexican Pension Funds to invest in private equity funds in Mexico. Recent changes have been made in Mexican pension and retirement funds regulation by which Mexican pension funds (known as the AFORES) are now allowed to invest in private equity, making them an extremely attractive source of investors for local and foreign fund managers.
So far, the AFORES have made three investments in pure private equity funds (such as Nexxus Capital), three in real estate funds, three in infrastructure funds, and one in a distressed assets fund. They have retained a large portion of their resources that will not be deployed right away, despite the fast pace of the initial 10 investments. All in all, the AFORES have about $100 billion in assets and can invest up to about 8 percent, or $8 billion, in alternative assets. As of now, they have deployed about $2 billion.
[1] As of December 31st, 2010