By Taina Rosa
May 11, 2012 – An investment environment that is improving on several fronts could lead to a banner year for private equity firms in Mexico, according to local firms and trade groups.
On Wednesday, May 9, the Latin American Private Equity & Venture Capital Association, known as Lavca, released its 2012 scorecard, which ranks Latin American markets according to their regulatory environments. Mexico, with a score of 65 out of 100, remained in the third spot behind Chile, ranked No.1 with a score of 75, and Brazil, in second place with a score of 72.
Nevertheless, while the first two countries’ scores remained unchanged, Mexico’s grade went up two notches over last year.
“The country’s score on capital markets development now matches that of Chile and Brazil, thanks to ongoing efforts by the Mexican stock exchange to improve access and increased participation from local pension funds,” said Cate Ambrose, president and executive director of Lavca.
The inclusion of local pension funds has proved critical to the development of private equity in Mexico. The creation of publicly listed trusts known as development capital certificates, or CKDs, in 2009 allowed pension funds to invest in private equity, infrastructure and real estate funds.
According to the Emerging Markets Private Equity Association, Mexican pension funds manage about $120 billion in assets. And since the creation of CKDs, private equity firms in the country have raised $3 billion from local pension funds.
Most private equity firms in Mexico also raise parallel funds with commitments from international investors while raising their CKD funds with commitments from local pension funds.
And even though it is safe to predict that Brazil will take the lion’s share of fundraising commitments in Latin America in 2011 Brazilian firms raised $8.1 billion while Mexico funds raised $363 million. Some Mexican firms are already beating their own fundraising expectations.
In April, Mexico City-based Wamex Private Equity announced the final closing of its second growth equity fund, MIF II, with $160 million, more than the
$150 million the firm expected to raise. “We are very pleased to have exceeded our target under very tight funding conditions. Mexico is surging amongst emerging markets, and we have a rich pipeline for building a portfolio of leading companies,” Wamex managing partner Ernesto Warnholtz said.
The largest locally owned Mexican private equity firm is Nexxus Capital. Founded in 1995, the firm closed a $315 million fund, composed of a $220 million CKD fund and a $95 million parallel fund, in March 2011.
Officials at other Mexican firms on the fundraising trail said that although Brazil still poses tough competition, they expect their new funds to be larger than those they have closed in previous years.
According to data from Empea, some of the private equity firms that are on the road raising funds to be solely invested in Mexico are Macquarie Group Ltd., which is raising $1 billion for its Macquarie Mexican Infrastructure Fund, and Alta Ventures Mexico, which is raising $75 million for its Alta Ventures Mexico Fund I.
More fundraising opportunities eventually lead to more dealmaking, and by the end of 2012, private equity investment in Mexican companies is expected to more than double in comparison to last year. “Private equity investments in Mexico are expected to reach $1 billion this year,” said Arturo Saval, a partner at Nexxus Capital and president of Asociación Mexicana de Capital Privado AC, or Amexcap, Mexico’s private equity association. Saval expects between 30 and 35 transactions to take place in 2012.
According to Lavca data, in 2011 private equity firms invested $459 million in 22 deals in Mexico. That’s a 118% increase over 2010, when $212 million were invested in 19 transactions, all in the middle market.
Private equity firms tend not to announce the amounts they pay for acquisitions. Some of the larger deals to have taken place in Mexico for which terms were announced are Macquarie’s acquisition of a package of 199 telecommunications towers from Mexico City telecom company Pegaso PCS SA de CV for about $36 million in 2011, Eton Park Capital Management LP’s acquisition of Financiera Independencia for $53.5 million in 2010 and Conduit Capital Partners LLC’s acquisition of Impro for $41.3 million in 2009.
Buyout firms have run into some difficulties, mainly skepticism among business owners. To overcome that resistance, Amexcap is focusing on educating local owners on the benefits of taking in a private equity partner. For its annual event, held May 8, the association invited a number of business owners so they could network with the private equity firms in attendance.
“It is true that Mexico’s business owners prefer to have control over their companies, but they are learning that a private equity partner can help companies finance expansion and attract highly competitive management teams,” said Joaquín Avila, managing director of EMX Capital Partners.
Saval agrees. “Business owners’ perception of private equity is definitely changing for the better,” he said.
There’s plenty of room for private equity to grow in Mexico, as the sector represents only 0.02% of gross domestic product. In comparison, in the U.K., to which Lavca gives a score of 96, private equity represents 0.5% of GDP.
In Israel, with a score of 78, private equity represents 0.7% of GDP. The U.S. is not included in Lavca’s report.
And as Darby Private Equity managing director Jaime Salinas told Empea:
“There are more than 30,000 companies in Mexico with revenues between $10 million and $100 million. The opportunity is huge, and funds are not competing at all. We don’t meet our friends or competitors when looking at deals.”
“Mexico is very well positioned for growth. It is an underserved market with great opportunities for dealmaking,” said Scott McDonough, managing director of Alta Growth Capital. “Mexico is poised to have great things happen.”