Eight years ago, Mexico’s private equity industry was tiny and domestic pension funds barred from investing in it. However, since government regulation was passed to open up the asset class, Mexico has become a rising private equity star.
Afores, as the pensions are known locally, controlled $190 billion in total assets as of 2014, almost 15 percent of the country’s GDP, according to Willis Towers Watson, and access to private equity investments came in the form of CKDs, a type of publicly traded trustee market certificate.
The result was a shot in the arm for Mexican private equity, not only for infrastructure projects but also private companies. With the newfound capital, Mexico has been driving the growth of private equity in Latin America, says an investment professional at a mid-market New York firm who focuses on the region’s investment.
In fact, according to the Latin American Private Equity and Venture Capital Association (LAVCA), Mexico had a record $2.3 billion in private equity and venture capital investments via 88 deals in 2015, up 72 percent in value and 80 percent in number of transactions from 12 months earlier.
“Mexico, in particular, has garnered more interest given that it’s much larger than Andean countries like Chile, but not as overheated as the Peruvian market,” John McCormick, partner at placement agent Monument Group, tells PEI.
“With close affiliation with the US, Mexico tends to be less volatile, with devaluation not nearly as severe as that faced by Brazil. Mexico is also experiencing significant and potentially transformational changes in its energy sector.”
The caveat is that since CKDs were developed mainly to finance long-term, domestic infrastructure projects and mid-sized domestic companies, they are limited to investments in Mexico. To tap capital from foreign private equity managers, local pension funds have had to rely on CKDs set up by overseas firms that run parallel to their main funds.
Such structures have the potential to be “a really important part” of the growth of private equity in Mexico, LAVCA president and executive director Cate Ambrose tells PEI.
Among the incomers is emerging markets-focused Abraaj Group, which closed its Mexican CKD on $191 million in October as it seeks opportunities fuelled by growing private consumption and domestic demand from the country’s growing middle class.
The next stage appears to be loosening the restrictions on where Mexican pension funds can invest and speculation has been growing that the international gates will be opened for CKDs.
“Why would any pension fund want to invest all their money in one market?” Ambrose asks. “Based on our interactions, the pension funds are eager to have that opportunity to diversify internationally.”
While some may dislike seeing the pensioners’ retirement savings going overseas and others argue that the current system of parallel structures works fine, Ambrose believes “there’s clearly expectation that Mexican pension funds will be able to invest internationally – the question is when.”