IPO hope in Mexico

The IPO of Promotora Ambiental, a Darby Overseas-backed waste management company, signals a revival of Mexico’s stock exchange and evidences the usefulness of mezzanine in Latin American investments. By Judy Kuan.

Last month’s initial public offering of Darby Overseas portfolio company Promotora Ambiental SA de CV (PASA) on the Mexican stock exchange drew the attention of investors active in Mexico and the rest of Latin America. The significance of the public offering has been twofold: providing proof of a rejuvenation of Mexico’s stock market as well as proof of the viability of mezzanine products for investing in Latin America.

Cleary: Mezzanine a competitive product in Latin America

Waste management company PASA’s listing on the Bolsa Mexicana de Valores, Mexico’s stock exchange, is a notable divergence from the other types of private equity-backed companies that have gone public in Mexico in recent years. Most of the recent IPOs in Mexico have involved companies operating within the housing and construction space, such as Homex and Urbi. The listing of PASA – the first waste management company to ever trade on the Bolsa – could be the start of a greater diversification of Mexico’s IPO market.

More importantly, Promotora Ambiental’s IPO last month drew attention back to local public markets as a viable and realistic exit option for Mexican companies. In contrast to stock exchanges in Latin America’s other major market, Brazil, the Bolsa has experienced a drought of new listings this year. Due to a combination of portfolio company size and the complications of publicly listing a company in Mexico, private equity investors have tended to look primarily to strategic buyers as an exit route.

However, Darby chose to exit PASA through the public markets – despite receiving interest from strategic investors – and according to Patrick Cleary, the Darby vice president that oversaw the transaction, the process was “pretty smooth”.

PASA was the first IPO exit made by Darby’s Latin American Mezzanine Fund I. According to Cleary, who is on the investment team of the fund, the use of mezzanine products is especially suitable in the context of Latin American investing, where exit solutions may be more elusive than not.

“Mezzanine is a very competitive product in Latin America, especially because the senior debt market – although it has improved greatly in recent years given general global liquidity – is still relatively limited for middle-market companies,” says Cleary. “The only alternative for long-term financing in this market segment is equity. Mezzanine funds, with their long lifespans and more competitive target pricing, fill the gap between senior debt and equity.”

However, apart from Darby, which is said to be raising country-specific mezzanine fund(s) to invest in the region, these types of equity-debt hybrid funds are still rarely seen in the Latin American context. With the recent PASA IPO and other exits from Darby’s mezzanine portfolio, investors in the region now have reason to give mezzanine more than just a second look.