MEXICO

EMPEA • MAY 2016 | 5
For decades, Mexico remained under the radar as private equity
investors with an interest in Latin America poured their money
into Brazil. Headline risk around corruption and the war on
drugs, a relatively small pool of fund managers, and the high
concentration of large, family-owned businesses potentially
restricting deal flow were among the many factors that had
deterred greater investment. However, the tide appears to be
turning—particularly with the entrance of the local pension funds
(or Afores), which in 2009 were given the freedom to invest 10%
of their assets into private equity under new regulations. Since
this time, fund sizes for the more established general partners
in the region have grown, while the total number of private
equity and venture capital funds operating in the market has
multiplied. In the eight years leading to 2016, Mexico-dedicated
funds had raised nearly US$8.7 billion, with an additional portion
of the US$12.7 billion raised by regional funds earmarked for
the market (see Exhibit 1).
Perhaps the most important driver, however, in pushing the
asset class forward has been the Mexican government. It has
demonstrated a deep appreciation for how private equity can
help develop the economy, lead to job creation and instill best
practices throughout local businesses, which puts the country
well ahead of the curve in relation to a number of its emerging
market peers. While the road is not always a straight one, the
government, along with the local industry, has been focused on
making continuous improvements to the legal and regulatory
framework in favor of private equity, one small step at a time.
A ROCKY ROAD
The earliest private equity fund managers, the majority of which
were large buyout firms based in the United States, began to flock
to Latin America during the 1990s. On the back of their success
with the asset class at home, many of these firms’ institutional investors
were flush with cash and saw the fact that many emerging
markets were increasingly opening up their economies as a means
to generate high returns and diversify their portfolios. By the end of
1999, over 100 private equity funds were deploying capital in Latin
America. 1 Mexico—as well as a number of other countries across the
region—saw substantial volumes of capital flow into the market.
Unfortunately, a bust quickly followed the boom, and by the early
2000s, many of these pioneers had not survived. In 2002, the former
Texas-based buyout firm Hicks, Muse, Tate & First, Inc. and GE Private
Equity, an investment arm of General Electric Co., both shut down
their Mexico City offices, representing just two examples of firms on
the retreat. The reasons were multifold: a growing realization that the
model that had worked so well in a developed market context was
not a plug-and-play that could be applied to Latin America, coupled
with broader regional macroeconomic woes—including the aftermath
of the 1994 Tequila Crisis—resulted in overall poor performance.
“These early investors were not very happy because their results
never materialized,” recalls Joaquín Ávila, Co-founder of EMX Capital.
“What followed was a drying out of equity, and it took quite some
time before people and money started to return to this industry.
With the next wave, we started humble and small, but the opening
of the local pension funds has really moved the needle.”
Exhibit 1: Cumulative Private Capital Fundraising for Select Emerging Markets, 2008-2015 (US$B)
$60
$40
4
3
9
Other
Colombia
$100
$80
89
US$ Billions
$20
13
Peru
Mexico
Latin America regional
26
Brazil
US$ Billions
$60
$40
56
29
$0
$20
20 19
$0
China Latin America India CEE and CIS Sub-Saharan Africa
Source: EMPEA. Data as of 31 December 2015.
1. For more information on the history of private equity in emerging markets, see Roger Leeds, Private Equity Investing in Emerging Markets. New York: Palgrave Macmillan, 2015.