KITE Invest had the chance to recently meet with Mexico’s largest independent private equity firm: Nexxus Capital. The firm, which is 100% Mexican owned and operated, has one of the longest and most successful track records of any Mexico-focused private equity firm, with five funds raised since inception, approximately US$1 billion in assets under management and has invested in 18 different portfolio companies. Nexxus Capital’s Managing Director & Chief Investor Relation Officer, Roberto Terrazas, talked with KITE Invest about the Mexico’s dynamic and emerging private equity industry.
KITE Invest: In Mexico the private equity industry is still relatively young, although growing at a much faster rate than even ten years ago. With the energy sector reform alone, private equity funds capital will amount to US$45 billion. To these points can you comment on the outlook of the PE industry in Mexico?
Roberto Terrazas: The private equity industry in Mexico is highly underdeveloped, simply due to the low numbers of fund managers, deal transactions and IPOs (initial public offerings). For instance, in the United States the number of IPOs was record breaking in 2014, meanwhile in Mexico until November there was only one, which we took public, Grupo Hotelero Santa Fe. For a country that has a trillion dollar economy – among the top 15th economies in the world – this is frustrating for those who participate in the Mexican private equity industry.
While people perceive that the Mexican private equity industry is growing, it is not as significant as people want to believe. Yes there has been a boost due to the participation of the Mexican Pension Funds investing in alternative assets, but in 2014 they only supported two groups. Mexico’s private equity industry needs more activity, and in order to get more activity, the entire ecosystem (government, managers, and entrepreneurs) needs to be involved.
In terms of the energy sector, investments in oil, natural gas and, electricity, these are not the traditional investments done by a Mexican private equity group. The opportunities presented by the energy reform are investments that will be done in the great majority by strategic investors who come to the country from abroad.
KITE: What kind of companies and sectors are PE funds in Mexico targeting nowadays?
RT: The industries that Nexxus finds to be the most attractive are any of those that have to deal with internal consumption: consumer products, specialty retail, and services (financial, healthcare, tourism, education). Nexxus looks at around 100 investment opportunities on average each year.
In Mexico, it is not a matter of a lack of opportunities – the opportunities are here. Due to low penetration of private equity in Mexico there are not that many success cases; therefore, when companies and entrepreneurs are approached there is a large portion of time dealt with convincing and explanation due to the general lack of knowledge about the private equity industry.
KITE: What is Nexxus’ investment and selection strategy?
RT: We have a clear view of the basics, which are finding companies with large growth potential, a keen focus on partnering with the right people and management, being very active and spending time with the portfolio companies, and lastly having a very clear view prior to making the investment of what is going to be the exit route. Our preferred exit channel is an IPO, we have taken five portfolio companies public (half of our exits).
KITE: In terms of relationships with foreign investors what sectors do you anticipate to be of great interest?
RT: Mexico is an open economy in terms of trade in exports going to countries all around the world. I also believe that Mexico’s trade with the UK, Europe, and of course, the US is going to increase in the coming years.
In terms of sectors, export manufacturing companies is a sector that Nexxus is not very active in, because there are very few clients and we would not be comfortable in assuming that amount of risk. However, having said that Nexxus has spoken about becoming more active in looking at export manufacturing companies, if they have a diversified base of clients.
KITE: In the case of foreign companies coming to Mexico, the UK is set to double their commercial presence in Mexico in the coming year. What strategic importance do you think Mexico has with foreign companies?
RT: Mexico is well positioned; it has a large border with the largest economy in the world. Mexico also has skillful manufacturing, with a skilled and competitive labor force. Two of Mexico’s greatest strengths are Mexico’s geographic positioning and labor force, and these are what make the country attractive in terms of trade and exports with countries, like the UK.
KITE: Lastly, do you think Mexico’s perception and security issues are affecting business and swaying foreign investors?
RT: It is definitely not helping Mexico, and unfortunately, this perception is something that has been going on for about the last eight years.
From a business perspective most of the violence in areas where economic activity is quite low and it does not affect business that much; it is a matter of perception.