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Investors See Mexico Opportunities

Private equity investors see new opportunities in Mexico this year despite -- or because of -- the economic downturn.

BY CATE AMBROSE

Many emerging market analysts are taking a comparatively bullish stance on Latin America in the context of the global economic slump, but are quick to note that Mexico will suffer most given its high correlation with the United States through exports and remittances. So why, despite flat or negative GDP growth projections for 2009, does Mexico continue to attract global private capital investors?

Martín Díaz Plata, who heads the efforts of Capital International Private Equity Funds in Latin America, sums up the country's strategic advantages succinctly:"I spend a significant part of my time in Mexico for two simple reasons: it is after all and by far, the second largest economy in Latin America, and it has reached a decent level of institutional stability." Capital International raised $2.25 billion for emerging markets private equity in 2008.

CHALLENGES

While market size and economic stability have attracted several large global firms to Mexico in the past few years, managers new to the country often find the scope for deal flow more limited than expected. Strategic sectors such as oil and gas or telecoms are controlled by monopolies, and Mexican business owners are reticent to give up control of their companies to PE investors.

But managers who know the local market best coincide that a fundamental shift is underway in 2009. Ricardo Rodriguez, a founding partner of the regional LatAm PE firm Southern Cross Group, points out that "Many companies have been affected by the economic down turn, or by a 50 percent devaluation in the peso, and will require a capital infusion to subsist and return to growth. In other cases, frequently involving sectors with high working capital requirements, growing companies that relied on relatively high levels of leverage, sometimes in U.S. dollars, to finance their growth, are today facing a difficult situation to keep up with their interest and amortization payments."

Arturo Saval, a Managing Director with Mexican firm Nexxus Capital concurs that the pipeline has been increasing significantly during recent months as a result of the macroeconomic environment, and specifically cites "opportunities with companies that are facing severe financial problems even though their operations are healthy."

GAP IN VALUATIONS

Mexican managers report that an increase in the number of discussions with target companies has not yet translated into an increase in transactions. In January the Mexican mid-market firm Alta Growth Capital announced an investment in healthcare provider Amerimed, but no other deals have been reported in Mexico in 2009. This can be attributed largely to a gap in valuations, where shareholders of private companies have not yet realized that valuations have changed significantly during the past few months.

Rodriguez identified a number of uncertainties that sellers and PE firms face in reaching definitive agreements. "Market multiples, which have always provided a reference for valuations, have changed significantly in the current market volatility. Then, the lack of available debt coupled with moderate growth prospects has put additional pressure on valuations. Finally, there is considerable uncertainty on the peso exchange rate going forward."

"In the second half of 2009 some of this uncertainty will be resolved, bid-ask spreads will tighten, and PE firms will see attractive opportunities."

This view was echoed by Marcio Tabatchnik Trigueiro, a managing partner with Brazil's GP Investimentos who moved to Mexico in 2008, and comments that "the right time to do a transaction will be towards the end of 2009 and in 2010".

Cate Ambrose is the executive director of the Latin American Venture Capital Association (http://www.lavca.org/). This column orginally appeared in the LAVCA Reporter. Republished with permission.

 

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