The Business Year

Marí­a Ariza

Former General Director, Mexican Association of PE and VC Funds (AMEXCAP)

Private equity has been growing at an impressive rate over the last 15 years, and we have been growing at a rate of 20%, which is very promising compared to other emerging markets. This growth is a sum of factors. First of all, public policy around private equity in Mexico has facilitated growth and supported entrepreneurship in the country. Prior to fondo de fondos, or fund of funds, the only investors in Mexico were international; no locals were taking the risk, so fondo de fondos emerged in 2006, and with it the government took part in the development of the industry by taking the risk indirectly. As of now, Fondo de fondos has invested in 70 private equity funds in Mexico and has a major impact on the growth of private equity. After that, the most important change was the change of pension funds to an asset class as of 2011. They have now deployed around USD9 billion out of 18 billion in that asset class. They are investing in private equity, infrastructure, and real estate. Another major public policy surrounding SMEs was the creation of the National Entrepreneur Institute (INADEM), which discovered that entrepreneurs in Mexico were not getting funding. As of now, they have invested in 42 different capital funds, each of which can invest in at least 10 start-ups.

Mario Gabriel Budedo

General Director, EXI Fund

There are not many options in the Mexican market, but CKDs are a vehicle where most institutional investors are allowed to participate in Mexican infrastructure. This is a regulation that came into force approximately seven years ago. Until then, AFORES, Mexican pension funds, were allowed only to invest in stock and bonds—though this included both public and private, and international and national—but not in projects directly with the risk associated to the project or developer. This is a relatively new regulation, and by implementing this, AFORES, which have some USD160 billion under their management, were allowed to participate in financing infrastructure. The major advantage of this vehicle is the possibility of pension funds financing highways, water projects, electricity plants, and pipelines without the requirement of investing in a company that has many different sectors. Our first fund was USD175 million and our second was close to USD400 million. Once they saw they were interesting projects, they decided to move ahead with a larger amount. The appetite for risk is now larger than it used to be, and people better understand the risks compared to 20 years ago. They have been professionalizing the teams inside the pension funds, which also allows for investments in areas not previously explored.

Hernán Fernández

CEO, Hernán Fernández

The Pacific Alliance II Fund is the official fund of the Pacific Alliance, which encompasses the countries of Mexico, Chile, Colombia, and Peru. For several years, we have noticed amazing entrepreneurs coming from these four countries. We see entrepreneurs in Mexico City wanting to grow their business in Colombia or Chile, and vice versa. When it comes to telling the story of Latin America outside of the region, it is important to show stability, size, and perceived risk. These are four countries that have somewhat stable democracies, independent central banks, and floating currency exchanges. When we are trying to raise funds, we talk to the world’s big tech companies, which all want to participate. However, it is a hard region to tackle, and we do not have yet the best possible reputation. We have learned tons of lessons from the first to second fund. Fund one was mostly about Mexico, which at that point in time made sense because we were mostly in Mexico. We started to see pipelines and explore trends, and we were trying to form our own opinion about what was an excellent, exciting, and entrepreneurial company. It took us four years from starting the investor network to setting up our first fund, the Angel Ventures Investment Fund One.

Scott McDonough

Managing Partner, Alta Growth Capital

Alta Growth Capital’s previous two funds taught a number of lessons, most notably, the value of raising enough capital to execute a strategy correctly. Raising capital for the first fund during the 2008 financial crisis was challenging as it turned out to be smaller than planned. Raising adequate funds to create a healthy and diversified fund of portfolio companies is vital. We were able to raise more capital for the second fund, and we hope to raise the bar higher with future funds. Also, challenges related to regulatory changes have made us extra careful about investing in companies in highly regulated industries. There is a higher degree of risk in highly regulated companies, particularly as it relates to regulatory changes and alternating interpretations, but our strategy will largely remain the same for subsequent funds. By focusing on the lower-middle market, we are maximizing our growth potential. The segment has limited access to capital in terms of both equity and debt. On the equity side, relatively few players are pursuing this area. Our average investment is USD10-30 million, so there are a few similar players. The majority of our investment capital comes from the US, though we do raise some capital from Mexico and Europe. One of the challenges is the relatively small private equity industry in Mexico.

Joaquí­n Ávila

Co-Founder, EMX Capital

Private equity in Mexico is completely underpenetrated. On the one hand, it is a challenge, though on the other it is a great opportunity. The private equity industry is one of the most employment inducing and creative in terms of corporate governance and putting companies back to work under the rule of law. Mexico has tremendous needs and capital, which is a perfect recipe for growing private equity. We opened The Carlyle Group office in Mexico, in which we raised USD134 million, although for a USD100-billion company, this is fairly small. It decided that because of the size of the Mexican market, it would allow us to manage its assets while raising our own fund. This is the origin of EMX. The very fact that a large player such as Carlyle was unable to find attractive opportunities is mind-boggling, although this is because there are many needs and requirements in this dynamic and growing country. One of the biggest challenges in the industry is the number of deals. There are no more than 20-30 buyouts a year, which is extremely small. Of these deals, the average value is USD20-30 million in transactions. Despite the decline in exchange rates and the relative weakness of the economy, we have achieved great things.



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