KITE Invest met with Mr. Joaquín Avila, the Co-Founder of EMX Capital, to discuss the outlook of investment opportunities in Mexico, and possible investment ties between Mexico and the UK. EMX Capital, originally formed in part by world renowned Carlyle Group, has been one of Mexico’s leading private equity for 10 years, attributing its success to their focus and attention to management.
KITE Invest: Last year estimates expected that Mexico would grow around 4-5%; it now appears that growth will actually be 2-3%. In your opinion, what are the growth projections presented by Mexico during the coming years, and which factors imply that the projected growth rates are not being met?
Joaquín Avila: I think Mexico is a country that has done many things well and others not so well. Among the things that have not been done so well, we still have pending tasks. We take pride in our economic stability and our reserves, and that is something positive; but the tasks ahead deal with the fact that we have not been able to grow over the last 20-30 years.
If we look at the marginal growth rate, it’s 2-3%, and this has important implications. In 1910, Mexico was a country of about 15 million people; today we are 120 million. Few countries have had this level of population growth, and this means that every year we have to be able to produce approximately one million new jobs. If we compare ourselves with the United States, its economy is 13 to 14 times larger than that of Mexico, has 320 million inhabitants and in its best year, generated 3 million jobs. Mexico needs to make a huge effort to accommodate this situation. The fact that we have not achieved this is a pending task for all Mexicans.
KITE: Informality and productivity are two residing issues in the Mexican economy. How can the situation be resolved? Is it getting better?
JA: There are fantastic studies on this subject. We do have a very strong economy, in the auto parts sector for example, and a large informal world that is not productive. However, is this informal world is by decision or is it the country’s inability to get a million people to work within the economy.
Even though, I am not in favor of informality I think the problem is that faced with a situation with no available workplaces in the formal economy often there is no choice but informality. Today we have people who are working practically for free in the Mexican Republic, hired by American companies, and in those cases where are our laws? That’s informality.
Obviously the lack of productivity is severe, it can encompass many things, such as not having adequate infrastructure, having quasi monopolies in virtually all sectors, and somehow a lack of access to financing. No economy can work if there isn’t an efficient banking sector. For these reasons, it is not easy today to end with informality.
KITE: What is your assessment about the perception of Mexico’s brand internationally?
JA: It is a brand that I am proud of. I am proud of being Mexican. I feel fortunate for the opportunities I see in Mexico. I feel a little indebted to the country, because in my generation we have not been able to exploit our brand. Mexico’s brand is volatile. We have gone from being the country of resurgence, and being on all the covers of the mainstream media, to being the country where everything is wrong, and back again. Neither is correct, I believe that structural reforms were overestimated. These are welcome, but as President Peña Nieto announced, they will take time.
Mexico certainly has major problems with corruption, and that’s one of my biggest concerns. We are troubled by safety problems. It is a reality with which we live, and we have to manage and overcome this. Having said that, the Mexican brand has so much potential; it has not been fully exploited.
KITE: What impact will the reforms have in terms of attracting more investment?
JA: The impact is something that will not happen overnight, it is something that will happen over the medium term. I think it also depends on the secondary legislation. The main reforms are already there, but in its implementation lies its success or failure. We are already starting to see some overtones of something good; AT&T already has presence in Mexico for example. If the reforms and secondary legislation lead to a concentration of economic and political power, then, rather than reform they will be a setback. It is the responsibility of all Mexicans, and even more for legislators to pay the necessary attention to that.
KITE: Tell us about the history of EMX Capital, what have been your greatest achievements and the main factors that have led to its growth and current positioning?
JA: Given that, by Private Equity, we mean leverage buyouts, which are what we do, I think it has been proven globally that it is a way to revive the economy, to internationalize companies, and therefore, a very important catalyst for economies. When we opened and we formed a team for Carlyle in Mexico, we obtained very good results; however, the size of the opportunities in the sector of Private Equity LBO for a firm of Carlyle’s size were relatively small.
But for the partners of EMX, the opportunity in Mexico is attractive. Investing in Private Equity is to invest in people, and we are one of the few teams that have been working for more than 10 years together. It is very important for the investor to have a solid team that knows how to work together, how to generate value, and similarly know how to settle differences. That is a great asset. We have positioned ourselves as a serious Private Equity firm, where we work for our LPs (Limited Partners). We are a binary firm, and most importantly, we are a team truly committed to social responsibility and high moral principles.
KITE: What have been the vision and investment policies implemented by EMX Capital since its inception?
JA: Mexico is a country where private equity cannot be identified as specialty funds. There are not enough transactions to make this possible. You need to be an opportunist, i.e. see opportunity in all sectors. We have focused in sectors where we do not buy companies but buy “management” and we share visions. The key feature is that there is some sort of visionary in the companies in which we invest, and that is where we have focused. We have focused on the base of the pyramid, because it is the class that is growing the most, and the needs that come with that must be addressed. We have also focused in areas where we feel that with the proper “management”, the money you contribute and other resources we have, we can create value in a different way and make it grow. That is our investment thesis, and we have achieved quite a bit of success.
KITE: If you had to choose between a good management team and an investment opportunity that is presented well in the market, which would you say is most important for a fund such as EMX?
JA: Very simple. An extraordinarily good opportunity in a sector with a bad management does not materialize, whereas a mediocre opportunity in a sector or industry with extraordinary management does. Undoubtedly the most important thing is the management. Human capital,obviously with the right support, because money can’t be the only input EMX can provide.
KITE: Let’s talk about EMX Capital’s portfolio companies and the experience of working with all these companies.
JA: From Carlyle we only have two investments left. One is Arabela and the other is IHS. The two companies are very interesting opportunities, particularly in the case of Arabela. This is a company that we have grown 3 times. Paying dividends with debt is rarely seen in Mexico and we have done it with Arabela. This is a company that generates so much cash, a valuable company because it gives us a measure of the economy and the thermometer of the country. We have over two hundred thousand female sales representatives in Mexico and Central America.
KITE: What is the business model of Arabela? What is direct selling?
A: Direct selling has become much demonized lately, especially the multi-level marketing. Some think that in direct selling sale representatives will never win, how we do direct selling is that all the sales representatives are both brokers and sellers of our products to the consumer. It is a sale “push” not a sale “pull”, which means that, to those who buy the product, is not vital. The representatives works with her closer circle of friends, family, in order to sell the products.
It is a business model that works very well in Mexico, although it is a complicated model. We have 26 campaigns a year, where once every two weeks we send over a hundred thousand different boxes throughout Mexico and Central America. So it becomes a logistics company more than anything else. It is a company in which the catalogue is quite expensive, but I think for Mexico and other countries it is a model that has great potential. In countries whose economy and infrastructure are more developed the direct sales model it is a little exhausted, as is the case of the United States where almost everything can be bought online and the sale is not a sale “push”, because it is a market where the consumer decides what they buy in front of a computer.
KITE: What is your perspective on creating value for customers of Arabela and shareholders from Central America?
JA: There are three things to keep in mind. The first is the consumer, because they will sell products without guile. Second, it is a product with very attractive value. You can buy it at a great price. And third, for the female representatives it is a source of income and for investors it is a way to generate money, which is not so simple. In Arabela thanks to the team, the female representatives and the Board of Directors we have created a spectacular company, with levels of growth and a mystic, and that all together creates value.
KITE: And, as for the rest of companies in the portfolio of EMX?
JA: EMX has four investments at this time. One is Autotransportes Bisonte, a transport company. It is oriented to conducting its activities in the centre of the country, that is demonstrating good growth, and some relation to automotive transportation, and it is growing precisely in this area, has a very good management, and we see a great opportunity for further growth.
We have ILSP, a security and logistics service provider. We use technology, route planning, operator selection, coordination, and we have found that the main concern of large companies like Procter & Gamble is that do not want their product stolen and ending up in the black market at a fraction of price. ILSP is the company that offers security in this specific area.
Farmapiel is a dermatological products company. There is great activity in pharmaceutical labs, many mergers and many orphans. We have identified an opportunity in the Mexican market to develop these products with a great entrepreneur, where we have made an aggressive investment plan, bought a plant in San Juan del Rio, and are very close to getting certified with COFEPRIS. I think it will have tremendous benefits for us.
Our latest venture is a company that makes flexible packaging. It is a company that has fantastic facilities, with a scalable management team, in a sector that has a very strong correlation with the Mexican economy.
KITE: With regards to the Dual Year, an initiative underway to strengthen the bilateral relationship between the two nations, and as you know, each year there is a greater penetration of British companies in the Mexican market. What do you think of this new approach to the UK market?
JA: I think it’s very important. Mexico has to develop to a point where it is not so dependent on what might happen in the US and has quality companies wanting to do things right in Mexico, such as the industrial corridor in Queretaro. Why not bring these two aspects together? I think Mexico has already expressed its willingness to make this possible, and likewise there are interesting companies in the UK that can contribute a lot.
KITE: Within what the portfolio companies of the investment fund, do you believe that some of them have a higher projection for the British market?
JA: In some specific cases yes. For example, there is a company called G4, which is British. The issue of security is going global, and with this in mind, yes it could do many things. In pharmaceutical there is certainly a great opportunity, for prescription products bought in the UK and manufactured in Mexico under all market rules is an important example. The same is for labels, we also have the capacity for made in Mexico, sold in the UK. There are many opportunities.
KITE: Let’s talk about your career and your impressive background experience.
JA: In this business you say, “you are as good as your last deal.” The most important thing for my career is to have done well for investors. And above all, creating a foundation. For EMX my mission is twofold: to give money back to investors and make the best EMX Private Equity Fund of Mexico. EMX has talent and infrastructure which will continue to exist beyond any of the partners, and that is what matters to me.