Investors Double Down on Mexico

Trends fuel investment. And trends in Mexico—primarily, opening the energy sector to foreign investors—powered a significant jump in private equity investments in the country in 2014.

Deal volume in Mexico increased to $1.31B last year, roughly double the $651M invested in the nation in 2013, according to the Latin American Private Equity & Venture Capital Association. Among countries in the region, only Brazil-focused funds were busier, capturing $5.56B in 2014. In Latin America overall, 56 funds raised $10.39B, topping the high of $10.27B raised in 2011, and nearly doubling the 2013 total of $5.5B raised in 52 funds.

“There are a number of fundamental factors that explain the attraction of Mexico to investors,” says Pino del Sesto, a partner at Bain & Company and head of the firm’s private equity practice in Mexico and Central America. “The first is a strong economic foundation. Mexico is a stable country in terms of public debt and low inflation. And it has very good fundamentals driven by a number of factors, such as an effective regulatory framework that is increasingly getting better.”

Certainly regulatory changes in Mexico’s energy sector is spurring investment. Two large oil and gas deals accounted for more than half of the total amount invested in Mexico in 2014. Reform in the telecom industry is also creating opportunities.

But other trends are propelling investment as well. One is growing commercial maturity in Mexico and an increasing willingness among local companies to accept investment. Traditional, family-owned businesses are still the backbone of the Mexican economy, and they’re becoming more familiar with the benefits of private equity and the ways it can bring them not only capital, but the talent and connections they need to reach the next level of growth.

Another important factor is Mexico’s growing middle class. The number of middle-class households in the country is expected to double to 37M by 2025, powered by a combination of economic gains, smaller households, and more women in the workforce.

“This creates a lot of interesting growth stories in retail, education, healthcare, financial services,” del Sesto says. “When people transition from lower- to middle-class, they spend more on financial services, they increase spending on education and spending on durable goods by up to 50 percent. We’ve seen recent deals in retail chains and restaurant chains that are representative of this trend.”

Exports are up, and this is driving investment as well. The Pacific Alliance—a free trade bloc of Mexico, Chile, Colombia and Peru, signed in 2012—has boosted exports from member countries and increased economic ties with Asia. Mexico now has 11 free trade agreements with 43 countries and free trade with 75 percent of global GDP.

A large percentage of investment in Mexico is local, and Mexican PE firms have seen substantial growth in the size of their funds compared to even a few years ago. Six new funds backed by local pension funds raised $1.33B in 2014. Additionally, international funds that are new to the country are opening local offices or covering Mexico from home.

Of course, there are challenges for PE in Mexico. Family companies are still learning the value of private equity, so closing a deal may take longer. PE professionals in often must roll up their sleeves and work directly with Mexican companies to increase operational performance and, ultimately, value.

And exits have historically been difficult in Mexico. From 2001 to 2012, there were only 50 exits of PE-backed Mexican companies.

But del Sesto expects Mexico to solve its challenges, and private equity activity in the country to further strengthen.

“Mexico is now a really exciting opportunity for LPs and GPs, and that’s why the private equity world is paying closer attention,” del Sesto says. “Mexico is a more open economy than Brazil. There are more free trade agreements in Mexico, and more international companies here. Even if there is some political turmoil, the market will be OK because of the strong economic foundation and regulatory framework, which are here to stay for the foreseeable future. This makes the market more and more attractive to deploy capital.”