Mexico loosens pension private equity rules

Mexico has eased its pre-funding requirements for public pensions’ commitments to private equity, but does the rule change make the asset class even more complicated?

Mexican private equity received a shot in the arm last month when regulators eased restrictions that had required the country’s public pension systems, known as Afores, to provide entire commitments to funds up-front, foregoing capital calls. 

Afores are prohibited from investing directly in private equity funds. Instead, they commit to public vehicles, called certificados de capitals de desarollo (CCDs), constructed by general partners as listed funds. 

In terms of having a relationship with your investors, it's better to have the capital calls than the prefunded.

Manuel Rodriguez Arregui

Under new guidelines, approved by the Mexico’s Ministry of Finance and Credit on 27 July, Afores’ commitments to CCDs must be 20 percent pre-funded. The remaining 80 percent of a commitment can be met through capital calls. 

“We were completely in favor in the change in the regulation,” said Manuel Rodriguez Arregui, director general of infrastructure for Grupo Bursatil Mexicano (Mexican Stock Exchange Group). “In the long term, it’s better. In terms of having a relationship with your investors, it’s better to have the capital calls than the prefunded.”

The development was accompanied by a second change that allows individual Afores to commit more than 35 percent of a given fund. If a private equity firm engages outside capital, either in the form of a CCD or another private vehicle, a single pension can now commit up to 80 percent of a fund’s overall target. 

The changes could increase the pensions’ exposure to the asset class, which came about with the development of CCDs in 2009. Since then, only a handful of local private equity funds have engaged the pensions as a potential source of capital. As of January, private equity funds collected a total of $372 million from Afores, with WAMEX Capital getting $61 million, Atlas Discovery Mexico grabbing about $98 million and Nexxus Capital IV receiving $213 million.

“It provides more flexibility for people who want to raise CCDs, and for Afores. Part of the challenge for CCDs is the marketing process, and sort of the group think around it … it wasn’t enough to convince one Afore, you had to convince others, and if they all talked to each other like ‘oh, you like this one?’ it created a kind of interesting environment for [fundraising],” said Scott McDonough, managing director of Mexican-focused private equity firm Alta Growth Capital.


However, several sources indicated that the regulatory changes could temporarily stifle commitments from Afores, as many were still getting used to investing through the first incarnation of the CCD. One general partner said that some firms may continue using the older version of the public vehicle, at least until the ecosystem becomes more developed.  

“Now, in theory, if an LP wants to do 80 percent, they’re going to do it,” Joaquin Avila of EMX Capital said. “My perception is that none of the Afores will reach a percentage close to 80 percent.” EMX, a spinout of Carlyle Mexico Partners, raised $127 million for Mexican private equity earlier this year.