How Mexico is laying the groundwork for significant alternatives opportunity.
Mexico has lately bobbled in and out of favour with global investors. Recent news media on the country’s trade debates with the US has broadcasted mixed signals on the economic policy of Mexico’s newly elected President Andrés Manuel López Obrador’s (AMLO).
Looking under the hood, Mexico quietly remains one of Latin America’s hotspots for both domestic and foreign investment, and opportunity is growing, particularly in infrastructure and renewable energy projects. Is now the time to look into alternatives in Mexico?
The Pros and Cons
Mexico boasts a fast-growing private capital sector, strong economic fundamentals and supportive political institutions, not to mention a burgeoning middle class and a young demographic bulge. Investors and fund managers are increasingly putting this promising emerging economy – the world’s 15th largest with $1.28tn in GDP – onto their radar.
The Mexico story is not without risk, though. Mexico depends heavily on US trade and, since 2015, investors have been cautiously watching NAFTA’s renegotiation, USMCA’s pending ratification and intermittent announcements of tariffs on Mexico’s goods. AMLO’s decision back in 2018 to scrap the construction of the New International Airport of Mexico City – a major public infrastructure project – sent a clear signal to investors: implementing austerity measures on public spending was a priority.
In spite of this, Mexico’s economy continues to grow, although at a slower-than-expected pace. For bullish investors, political risk is mitigated by Mexico’s supportive trade policies and mature fiscal institutions that promote responsible policies.
How Are Alternatives Faring?
According to AMEXCAP (Mexico’s Association for Private Capital), cumulative capital commitments by Mexican funds rose by 11.4% from 2017 to 2018. And venture capital – especially technology – is booming: more than 120 active venture capital managers in Mexico have invested over $1.8bn in start-ups and companies over the past five years.
The Latin American Private Equity and Venture Capital Association (LAVCA) reveals that 2016 was a standout year for Mexican venture capital, recording the highest number of venture capital deals in Latin America across all investment stages, surpassing Brazil with 63 deals. Brazil was the largest recipient of funding in 2017, with Mexico coming second. Funding rounds are increasing in size and the exit opportunities are generating attractive returns for investors.
We expect more Mexican capital to flow into the domestic and international markets. AFORES, which governs the country’s pension fund administrators, amended regulation earlier this year to increase workers’ contributions and allow administrators to invest outside Mexico. AFORES manages more than $175bn. By 2030, this is expected to increase to nearly $490bn, representing more than 35% of local GDP. This capital will seek new opportunities both within Mexico and internationally.
The growth of AFORES and its ability to invest outside government bonds has increased the presence of fund managers in Mexico, which are beginning to look to alternatives such as infrastructure, renewable energy, real estate and healthcare. Loosening regulation can deepen capital markets as it enables foreign investment in the country, too.
CKDs and CerPis
CKDs, which are development equity certificates designed to finance a variety of real estate and infrastructure projects, have matured since their introduction in 2009. CKDs were created as a way for AFORES to diversify their portfolios by increasing investment in alternatives. Since, they have attracted investor appetite beyond AFORES. The first four CKDs will be expiring this year, with more coming to term in 2021.
There has also been recent growth in CerPis (created in 2016 as a complement to CKDs), which are long-term investment vehicles for infrastructure and energy projects in Mexico, and are listed on the stock exchange (BMV). New CKDs and CerPis continue to be listed on Mexico’s BMV. Since October 2018, new CKDs and CerPis listed are responsible for more than $850mn of investment in infrastructure, private equity and energy projects in the country.
Mexico’s Fondo de Fondos listed a new CKD vehicle in August 2018 on the BMV for up to $200mn. The CKD aims to invest via private funds to develop 12 projects targeting infrastructure and renewable energy assets. In October last year, KKR listed a $500mn CerPi on the BMV to invest in private capital, energy and infrastructure projects, both in Mexico and abroad. KKR Mexico made its first allocation for $100mn in the listed CerPi. In May 2019, ACTIS also listed a $150mn CerPi targeting investment in energy and infrastructure in Mexico and other emerging markets.
The Infrastructure Push
We expect increased investment in infrastructure in particular. In an attempt to recover some investor confidence, the current administration announced that $2.7bn will be headed for projects including roads, transportation, urban development, water and waste management. The private sector has welcomed recent government moves to increase expenditure on public infrastructure. The newly listed CKDs and CerPis could meet the need for additional investment in these public works.
A New Age
Mexico is undergoing a historic political transition. AMLO’s initiatives to combat poverty and corruption to improve socioeconomic conditions is resonating among many investors. Aided by a strong regulatory regime and stable macroeconomics, Mexico continues to position itself as a key player in the Latin American region, offering investors a new frontier for alternatives.
Industry experts share their views in a new report, Private Equity in Mexico. Produced in collaboration with AMEXCAP, a non-profit association focused on developing private equity in Mexico, this report takes an in-depth look at the current market in Mexico and investors’ plans for the future. Plus, there’s a special focus on investment opportunities in venture capital, real estate, infrastructure and more.