What could be done differently in this sector?
Antonio Nacif Kuri We are finance savvy entrepreneurs. We look at acquisitions as a whole and try to understand the company to its core. Being entrepreneurs, we have a different approach to finance; we are into solid business and good management. We focus on companies that can generate free cash flow with low debt, even if the stock is not as significant or well known. We make private acquisitions, which give us an edge over finance people.
What is the main profile of investors in the fund?
ANK Our clients mostly represent private money. We currently have access to university endowment funds in the US that are interested, and we are far along with some of those processes. However, most of our investors are Mexican. Capital markets in Mexico are still underdeveloped, meaning there is a lot of surplus of money and people want to receive more than the 4-5% returns that they can get putting their money in the bank.
Is there a disconnect between investors and companies in Mexico?
ANK There is a difference between finance in Latin America and in the US. People are more cautious with regard to debt in Latin America because we are used to devaluations and recessions. In the US, investors are happy if they get 5-6% returns on their money, which is considered a safe bet. However, in Latin America you need to have higher returns than that, even in dollars. People in Latin America prefer higher returns over safer bets. We have achieved excellent returns with major companies with little risk.
Do you think having a higher return-low risk investment is only possible in a place without deep capital markets?
ANK It is easier to find an opportunity right now in Europe and Latin America than in US. The finance structure of medium and large companies in the US is far more sophisticated, so they are getting closer to a perfect structure; in Latin America and Europe we find profitable companies with growth expectations and low debt levels in need of a little change in their capital structure to propel their investment opportunities.
What is a permanent business impairment in your sector?
Francisco Carrillo The oil industry is a good example of permanent impairment. We use about 94-95 million barrels of oil everyday, roughly half of which is used for gasoline. It is possible that within the next twenty years the percentage of electric and hybrid cars reaches 30-40 of the total automobile market. At that time, the oil industry as we know it will have become permanently impaired, which would imply the multiples at which big oil companies trade dropping reduced significantly, and rightly so. As a long-term investor, we need to think of all possible risks that a company might face, weigh the chances of that actually happening, and determine how the company or industry will look like if conditions do play out in that way. We have to focus on skillfully measuring risk versus reward when making an investment decision.
How are investors evaluating the conditions for investing in Mexico at this time?
FC In our opinion there is no right or wrong time to invest. If we are able to find a great business for a reasonable price, then we should invest, regardless of market conditions. The country's strongest asset is our demographic makeup; I cannot think of another country in the world that has a better age composition today than Mexico. The combination of excellent demographics with Mexico's tradition of well-run family-owned businesses makes it a highly attractive market for investors.