GETTING BETTER ALL THE TIME

Mexico 2020 | FINANCE | FOCUS

Private equity is on the up-and-up, despite its previous low levels, thanks to new government regulations and innovative solutions from e-commerce and fintech companies.

Mexico's private equity market, in spite of the country's steady growth over the last decade, has never been known for its stellar performance. Not only does it lack investors, but also companies willing to go public. Not to say that Mexico doesn't have any investors: fund managers in Mexico raised USD4.4 billion for vehicles invested primarily outside the country over 2018 and 2019. Meanwhile, Mexican fund managers have invested USD900 million for vehicles listed on the Mexican Stock Exchange (BMV). However, changing trends in government regulations around both investing and increasing financial inclusion in the country, along with the rise of e-commerce, fintech solutions, and the creation of a new stock exchange might spell greener futures for Mexico's private equity market.
Two decades ago, Mexico implemented financial liberalization policies seeking to address financial repression and leave resource allocation to the market. These included the liberalization of interest rates, the reduction of reserve rations, and elimination of discretionary allocations of credit, in addition to bank privatization. Despite these changes, following the 1994 crisis, Mexico found itself unable to attract international investors due to fear of corruption and weak institutions.
More recently, however, specific investment tools were introduced to directly address the lack of equity and open up alternative financing sources especially for Mexico's pension fund managers, also known as retirement fund administrators (AFOREs): investment project fiduciary securitization certificates (CerPIs) and development equity certificates (CKDs). CKDs allowed AFORES to diversify their portfolios by investing in private Mexican companies and projects, while CerPIs allow for resources to be collected through funds and companies and reinvested in a wide range of projects, including outside Mexico. Both these innovative tools have allowed for greater investment into infrastructure and energy projects listed on the Mexican stock exchange, promoting greater regional development. Through these innovative tools, Mexico's private equity market has experienced steady growth: In January 2019, the total assets under management of AFOREs reached USD179.27 million, with 6.01% of those resources invested through CKDs and CerPIs.
But for private equity markets to grow wealth in country, there must be local companies to invest in. Mexico's family-owned businesses have shown no interest in going public. But attitudes have begun to change as these firms are taken over by younger generations who understand the benefits of putting their companies on the stock market. To help them, BIVA, Mexico's second stock exchange, was established in 2018 to offer more individual service, smaller costs, and NASDAQ-adapted technology, thus increasing access to capital markets for both companies and investors. Speaking to TBY, CEO María Ariza explained one of the stock exchange missions is to acquaint everyday Mexicans with the benefits, goals, and products of the stock exchange, as individuals only make up 0.3% of investors on the market. This number points to another challenge lying in the way of Mexico's private equity growth: its unbanked population.

Mexico ranks as one of the highest unbanked populations in the world, though the problem is widespread throughout Latin America. Lack of access to financial tools and resources directly translates into a population that does not invest. But new tools through the channels of e-commerce, which has been on the rise in Mexico thanks to the current COVID-19 pandemic, might just be the way to financially reach the unbanked population. E-commerce firms are increasingly investing into offering fintech solutions to their customers as a way to offer credit to those without access to banking institutions. Mercado Libre, for example, has recently introduced a digital wallet that generates interest and offers credit lines to over 2 million customers. According to its country manager, David Geisen, Mexico has 54 million adults who lie outside the formal banking sector. But while they may not have access to bank accounts, they do have access to mobile phones, another tool to be increasingly targeted by fintechs in the region. With the government's push to increase financial inclusion and investment in the country, innovative solutions by fintechs could lead the way in democratizing both financial access and investment tools.