Visitors to Mexico City often are unprepared for the effects of its high altitude and experience a shortness of breath and marked drop in energy upon arrival. It is one of many conditions that favour acclimated locals over newcomers.
A similar dynamic seems to be at play in Mexico’s relatively small private equity market, which has been somewhat impervious to the establishment of global firms in the country. In recent years at least two major private equity franchises have opened branches in Mexico City only to later reverse course. The Carlyle Group, responding to what it saw as a compelling economic story in Mexico, hired a highly regarded local team in 2004 to scour for deals, but last year Carlyle Mexico went independent to become EMX.
Brazilian private equity powerhouse GP Investimentos, also encouraged by the signs of growth in the market, established a Mexico City office in 2007, but this has since been closed due in part to a disappointing deal flow, according to several sources in the Mexican market.
Mexico is one of the largest markets in the world and appears to have missed getting added to the BRIC acronym by a few cruel percentage points, proponents of this market are fond of pointing out. And yet one rarely sees major private equity firms with Mexico City offices. The most prominent firm with a Mexican presence is Advent International, which recently closed Latin America’s largest private equity fund on $1.65 billion. The firm has been in Mexico for 15 years. Other than Advent, Aureos Capital and Darby Overseas are the most prominent global firms with Mexico City offices.
An expected surge in Mexican capital earmarked for private equity may convince more firms to open offices near Chapultepec Park or in Santa Fe, the shiny new business district on the outskirts of the city. Leading this surge is the phenomenon of the CKD, the new publicly listed security structure that allows Mexico’s public pension funds, or Afores, for the first time to invest in private funds, albeit only funds that will do business in Mexico. Already nearly every major local player has either raised, or is attempting to secure, its own CKD.
These “capital development certificates” have cemented the local presence of at least one major international player, Macquarie Capital, which early this year raised Ps5.2 billion (€305 million; $408 million) for an infrastructure fund, much of that funneled into a Macquarie CKD from Mexican pensions.
One source close to Mexican pension officials estimates that, based on the current size of the major pensions and the maximum they are now allowed to allocate to private equity, some $8.5 billion in potential commitments could feasibly be available for the right CKDs. This same source estimates that no more than a total of $4.5 billion has been raised by Mexican GPs over the asset class’s brief history here. The $8.5 billion figure leaves out the potential impact of corporate pensions, which have the ability to commit directly to limited partnerships, and family offices, which have been significant backers of private equity funds in Mexico for some time.
A major government-backed fund of funds is also likely to increase its capital base and commit to local GPs as well as attempt to lure foreign GPs into the Mexican market. The Fondo de Fondos, armed with resources from four national development banks, has a mandate to commit capital to worthy international private equity firms that agree to open an office in Mexico.
Available investment capital may be just the thing to convince many GPs to endure the thin air and difficult deal flow and take a chance on a major, growing market.