Is it time for a private equity boom in Mexico?


Financier Worldwide Magazine

September 2016 Issue

September 2016 Issue

Although many traditional private equity funds have avoided Mexico due to its historical and institutional challenges, in 2015 Mexico surpassed Brazil becoming the most popular destination for country dedicated private capital vehicles in Latin America. While the 2008 economic crisis devastated private equity activity in many emerging markets, Mexico has seen an acceleration of investment activity over the last eight years. The sleeping (yet still developing) giant may undergo a renaissance due to steady GDP growth and a series of pro-growth reforms.

A solid economic foundation

As investors face normalisation in aggregate deal multiples and rising US interest rates, Mexico is showing a positive macroeconomic outlook based on steady growth rates. With an approximate annual GDP growth rate of 2.5 percent between 2013 and 2016, as well as mild inflation and low levels of public debt, the number of GPs operating in Mexico has grown from 32 to over 155 over the past decade, according to a report by Empea Consulting Services. According to Pro Mexico Trade and Investment, Mexico is also one of the world’s most globalised countries, boasting international customers, 10 free trade agreements and 32 reciprocal investment promotion protection agreements. Mexico’s diversified export line is ranked 13th in the world and it is the seventh-largest car manufacturer in the world.

With a growing middle class that has expanded access to credit and rising incomes, Mexico presents favourable opportunities for private equity in key industries such as housing, education, financial services and healthcare. Moreover, the Mexican government’s focus on large infrastructure and energy projects has spurred opportunities for private equity firms that provide construction or transportation services. For example, Credit Suisse has reportedly raised $1.1bn in two diversified credit funds, while Mexican private equity firm Nexxus Capital has reportedly raised a $550m infrastructure fund.

However, even with the recent growth in private equity activity, Mexico is often overlooked in favour of other markets (such as China and India), in part due to concerns surrounding corruption and the depreciation of the peso. These reservations may not be unfounded, according to EMPEA; since 2014, the peso has lost almost 30 percent of its value against the US dollar, leading to a significant drop in Mexico’s foreign reserve assets. Memories of the private equity dry out in the early 2000s, coupled with headlines of kidnappings and cartel violence, have damaged the perception of the country. Yet, despite these challenges, the Mexican government has taken significant steps to implement reforms designed to signal a new approach to private equity.

Pro-growth reforms

Specifically, the Mexican government has demonstrated a recent commitment to pro-growth measures aimed at attracting international investors – including private equity – to this emerging market. In a major first step, the Mexican government implemented a reform in 2009 enabling domestic pension funds to invest a significant portion of their assets in domestic private equity, leading to a $4bn infusion of fresh capital between 2009 and 2012. The policy change likely contributed to the growth of the number and size of venture capital and private equity funds operating in the Mexican market. According to EMPEA, Mexico dedicated private capital vehicles went from raising a modest $152m in 2008 to $2.1bn in 2015.

Private equity also has a significant opportunity in Mexico in light of new rules permitting gasoline distributors to bid in the fuel market. As early as this autumn, distributors may be authorised to transport fuel to the US from Mexico’s state-owned facilities. According to Bloomberg, the country’s energy overhaul, coming after almost 80 years of monopolised control, has helped attract approximately $156bn of investment since 2014. In fact, the seven energy deals completed in 2014 and the 10 energy deals completed in 2015 were record highs for Mexico. These transactions included a reported $900m investment by Blackrock and First Reserve into Pemex’s Los Ramones II gas pipeline and Partners Group’s reported $500m funding to help Fermaca bolster its gas infrastructure platform. Reports also indicate that Mexico’s Pemex is currently working with a US private equity fund on finalising a $1.2bn sale and leaseback agreement.

To attract top global and national asset managers, president Nieto announced the creation of CerPIs and FIBRA E. CerPIs, or Fiduciary Investment Project Securitisation Certificates, were formed to attract the development of enterprises in a GP-LP private equity-like framework by providing flexibility to foreign and domestic institutional investors to allow them to invest in a wide array of energy projects. Additionally, the FIBRA E is a trust that will provide private and public investors the ability to monetise assets in the infrastructure and energy sector under a fiscal regime that provides for lower taxes and predictable cash flows. The FIBRA E was based on the FIBRA, which provides similar tax benefits for real estate purposes and has shown promise for private equity investors in Mexico. Specifically, according to EMPEA, the total market capitalisation of FIBRA vehicles since 2011 has been an impressive $14.3bn.

Unlike actions taken by other emerging markets in the region, many believe Mexico’s pro-growth regulatory reforms will likely be longer lasting and translate into greater opportunities for long-term growth. Still, well-founded reform measures must be vigorously enforced to attract substantial private equity investment in Mexico. In practice, the Mexican legal system’s reputation of lax enforcement may undercut and frustrate the value of an improved regulatory framework. For example, according to a report by Bain & Company, the results in the bankruptcies of Mexicana de Aviacion and Bufete Industrial have led to uncertainty among investors and have fuelled doubts about the real impact of the newly imposed regulatory reforms. By doing a better job of communicating its policy improvements and anti-corruption measures, the Mexican government could go a long way to quell the fears of hesitant investors.

Final thoughts

With local competition dominating Mexico, private equity firms may serve as an engine to help consolidate the smaller, family-owned companies that make up much of Mexico’s economy. This is important because international companies that find Mexico appealing may also find the Mexican market difficult to penetrate on their own. Additionally, as domestic companies in Mexico become potential buyers of Mexican and international businesses, private equity fund managers may use strategic acquisitions as a means to help these domestic companies grow.

Despite its challenges as an emerging market, Mexico’s solid economic foundation and pro-growth measures should attract greater private equity investment in the coming years.


Michael Woronoff is co-head of the global Mergers & Acquisitions and Private Equity Groups, and Alex M. Yebri is a summer associate, at Proskauer Rose LLP. Mr Woronoff can be contacted on +1 (310) 284 4550 or by email:

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