The sound of money

While many private equity and real estate firms are investing in faraway locales like India and China, limited partners in the US are finding similar opportunities much closer to home – in Mexico. By Paul Fruchbom.

The North American Free Trade Agreement (NAFTA), which liberalised trade restrictions among Canada, Mexico and the US and went into effect on January 1, 1994, was initially met with stiff resistance from labour unions and an outspoken presidential candidate – Texas billionaire Ross Perot infamously remarked that NAFTA would create a “giant sucking sound” as American jobs were lost to cheaper labour south of the border. More than ten years later, however, it seems those anxieties were misplaced: domestic workers had much more to fear from the Far East than they ever did from Mexico.

Yet as India and China have replaced Mexico as the whipping boy of displaced American workers, Mexico’s economic profile, in turn, has increasingly come to resemble that of the surging Asian economies: impressive growth, a burgeoning middle class and a friendly, pro-business government. And, for US investors, it all comes without the jet lag.

Small wonder, then, that limited partners are starting to take notice.

The Carlyle Group has recently started raising its first private equity fund dedicated to Mexico, which has a target size of approximately $250 million (€213 million) and will focus on companies based in Mexico as well as those in the US “that have a significant Hispanic customer base or cross-border initiatives”. The International Finance Corporation, a division of The World Bank, has already made a $20 million commitment. The New Mexico State Investment Council is reportedly mulling an investment of $25 million.

Zell: viva Mexico 

Other firms active in the country include Darby Overseas Investment, Advent International and Baring Latin America Partners, which is currently raising upwards of $200 million for a Mexico-focused vehicle. Yet the trend has been most pronounced in the country’s private equity real estate market.

The California State Teachers’ Retirement System, for example, recently invested $250 million in two separate private equity real estate development funds managed by Prudential. Earlier this year, the California Public Employees Retirement System entered into a $100 million joint venture with Hines, a Houston-based real estate firm, to invest in Mexican residential and retail properties. And Equity International, the private equity arm of legendary real estate investor Sam Zell, is currently targeting $400 million for its second fund, a significant amount of which will be invested in Mexico; the firm’s first fund made five investments in the country, including one in Corporate Properties of the Americas, a deal that attracted a $250 million co-investment from the Washington State Investment Board.

As the world’s largest buyout firms continue to pursue higher returns around the world, Carlyle’s foray into the Mexican market may be a harbinger of things to come. And be it in property or private equity, limited partners appear eager to follow. Though American jobs aren’t being sucked into Mexico, it appears institutional dollars certainly are.