Carlyle Mexico spin-out raises $127m

EMX Capital, led by Joaquin Avila, raised the bulk of its debut fund from Mexican pensions called Afores that have only been allowed to invest in private equity in the last two years.

EMX Capital, a firm that spun out of The Carlyle Group’s Mexico investment team, has raised Ps.1,530 billion (€91 million; $127 million), mostly from Mexican pensions called Afores, for its debut fund.

EMX Capital I will target investments in family-owned businesses looking for liquidity, companies in industries that are consolidating, financial restructurings and growth investments. The firm does not state a preference for specific industries, but is opportunistic across the Mexican economy, according to filings with the Bolsa, the Mexican Stock Exchange.

The EMX team, led by Joaquin Avila, formerly ran Carlyle Mexico Partners, a $134 million fund raised in 2005. The team spun out in 2009 and continues to manage the remaining three companies in the Carlyle Mexico portfolio, according to Avila.

The team built a solid track record in the Carlyle Mexico fund, which is producing a 19.9 percent internal rate of return and a 1.40x multiple.

The bulk of capital in EMX’s debut fund came from Afores, but some commitments also came from wealthy individuals and corporate pensions in Mexico, Avila said.

Under rules that allow the Afores to invest in private equity, all the capital collected from the pensions goes into a trust right away, rather than be subject to capital calls by managers.

Mexico is ripe with deal opportunities, especially for transactions in which equity checks of $30 million to $40 million are appropriate, Avila said.

There's opportunity to make real returns.

Joaquin Avila

The firm uses “experts” to assist when it makes a deal in a particular industry in which it may not have a lot of experience, Avila said. Those experts are often added to boards of directors in deals that close, he said.

The firm’s investment focus is about capitalising on the rapid growth of the middle class, Avila said.

“There’s [a lot] of people with great needs …they need to send their kids to school, to buy clothes, to do many things, and it’s a huge market,” Avila said. “We have a lot of people with significant purchasing power.”

Mexico presents an attractive opportunity because it is still relatively developing, especially compared to Brazil, and there are fewer firms competing for deals. Prices in Mexico, again compared to Brazil, are relatively low, he said.

“It’s relatively easy to generate value by making companies grow, bringing in corporate governance, expanding into other markets,” Avila said. “There’s opportunity to make real returns.”

Financing is still tough to get for deals in Mexico, especially compared to the financing market in the US, so Mexican deals depend more on operational expertise rather than financial engineering, he said. Also, the exit opportunities in Mexico depend on strategic buyers like other investment firms or corporations. The public markets are still growing, and Avila said he expects in the next few years the Mexican Stock Exchange to become more of a factor in exits.

“It’s a cycle; it won’t happen in one year,” Avila said. “The size of deals will continue to grow as more companies understand the real value of having private equity money. Everything will continue to grow, there will be more money available. This will create a positive cycle.”