Mexico finds itself in an unenviable position, from the perspective of development banks: stuck between higher-yielding locales in Latin America and other regions more acutely in need of development.
“We are allocating globally, and from there Mexico is in a bit of a tough spot,” said Jochen von Frowein, director equity Latin America for DEG, a subsidiary of German development bank KfW. “On the one hand if you look for returns in emerging markets you have other regions that provide on average stronger returns in Latin America as a whole. If you’re looking for impact, I think quite a few eyes have shifted to least-developed countries.”
von Frowein spoke on a panel on Wednesday at la Cumbre de Capital Privado, an annual summit organised by The Mexican Association of Private Equity (AMEXCAP). He heads the team responsible for direct investments and private equity fund commitments in Latin America.
DEG, as an international development bank, considers both risk/return as well as ESG and impact profiles, and has been investing in the region for more than 40 years. The group finances investments of private-sector companies in developing and emerging-market countries.
“Locally, we’re actively seeking [equity investment opportunities], but investments have been quite limited,” said von Frowein.
Despite structural challenges to investment and those presented by the pandemic, 2020 was DEG’s third-biggest year on record in Mexico for investment volume, according to von Forwein. “There are quite a few winners in some of the more established sectors in the financial services industry and the healthcare industry, but also in certain sectors that have benefited from the crisis,” he said.
Mexico still remains a target market for DEG, von Forwein said. “But especially on the PE side and [for DEG’s] traditional focus on growth capital, [it] has been challenging.” Investors generally have concerns about Latin America. Political and currency risk remain the two biggest constraints on additional commitments to Latin America (ex-Brazil) at large, according to data from The Association for Private Capital Investment in Latin America’s 16th Annual Global Limited Partners Survey.
Currency concerns have eased marginally, with 43 percent of LPs citing that as a deterrent to new investment, compared with 53 percent a year before. Political risk perception has remained unchanged, with 43 percent of respondents citing it as a deterrent – the same amount as a year before.
Further, investors do not have a diversity of funds to select from. Since 2015, only 14 funds with some focus on the region have raised capital, and only five of those funds are headquartered in Mexico, according to PEI data.
There is still a positive note: Latin America remains an attractive market in terms of the need for capital in-flows, according to an anonymous LP quoted in the LAVCA report.