Overview of Venture Capital and Private Equity Funds

An Expert's View about Banking, Lending, Leasing in Mexico

Posted on: 30 Dec 2011

In Mexico, small and medium sized companies generate 50% of GDP and create 70% of jobs. Some of them are classified as “gazelle companies”, which have 10 to 250 employees and yearly sales of USD $1 to $3 million. These companies consider that access to capital is the most important feature for growth.
However, a larger portion of Mexico’s economy is comprised by informal business sector. According to INEGI 29% of the labor force works in the informal sector. Thus, combining the formal and informal economy Mexico has a strong entrepreneurial culture.
Venture Capital (VC) and Private Equity (PE) funds were common trend to strengthen their operations. This report will provide a general overview of the Venture Capital and Private Equity fund industries in Mexico as well as the strengths and weaknesses of the Mexican market.

Market Demand
Mexico has a large, stable and growing economy which is the 14th largest economy in the world and projected to be the 6th largest in 2050. Following the financial crisis of 2008-2009, the Mexican economy showed some signs of recovery.

Currently, small and medium size companies (SME’s) are the fastest growing segment of the economy and banks do not typically lend to this segment. According to Mexican Central Bank, 95% of the Mexican private sector is comprised of micro companies, most of which, have limited access to credit.

In Mexico, SME’s as well as well structured family-owned businesses represents a great opportunity for venture capitalists and private equity funds. According to the Mexican Central Bank, only 21% of Mexican companies receive financing from banks, while more than 84% obtained it through suppliers or relatives. Moreover, 95% of the Mexican private sector is comprised of micro companies, most of which, have limited access to credit.
Usually, Private Equity financing occurred in the early or growth stages of the company’s business cycle. However, Mexican Governmental Institutions and other organizations have pushed to promote the financing of startup projects through Venture Capital. For that reason, the understanding of VC and PE industry is growing in Mexico.

Market Data
After the NAFTA agreement was signed, Mexico was considered one of the key destinations for PE in Latin America; at the beginning of 2000 the industry began to grow cautiously. The first PE and VC funds that entered Mexico in the mid 1990’s were middle or large funds.
Private Equity and Venture Capital is a relatively recent trend in Mexico. However, the Mexican Development Bank, Nacional Financiera, has supported and encouraged the venture capital industry as a key factor to finance SMEs and companies with a strong business structure.
In general there are four types of PE funds:

a) Venture Capital: Generally, for specialized organizations in high growth and high risk. Often IT firms that need to finance R&D would use equity instead of debt.

b) Private Equity in Leverage buyouts of public companies: Transactions that have the purpose of taking over a private company.

c) Classic Private Equity placements: Transactions that take place in traditional industries such as manufacturing, communication, publishing and insurance, these transaction may or may not involve the sale of control

d) Mezzanine Instruments: Subordinated debt with equity conversion rights.

The venture capital business cycle is comprised by entrepreneurs who identify a niche market and investors with venture capital who finance them. Currently, Mexican Government is encouraging and promoting venture capital industry due the economic importance of SMEs in order to create jobs in the formal economy and promote financial inclusion. Currently, Mexican Universities and postgraduate programs have special courses or seminars that directly address this industry showing that Mexico is developing and entrepreneurial culture.

Best Prospects
The following sectors are the most attractive for PE and VC funds in Mexico:
Housing: Despite the financial crisis, this sector has experienced a growth given that the population is young and demands new homes. The government is supporting housing loans to low income class which are made using fixed rates. Some PE and VC funds are financing housing developers due the growing importance of this market.
Telecom and Technology: Mexico is an important market for this sector, the quantity of personal computers, cell phones and TV penetration is experiencing the fastest growth over last decade. In addition, in 2007 the Ministry of Communication and Transportation (SCT) published the “Technology Convergence Law” allowing media company to offer services in telecom and vice versa which represents an opportunity for PE funds to finance large projects in this industry.
Financial Services: Companies in this sector are exploring niche markets that are growing such as micro finance and non banking industry. In addition, lack of financial support and banking access to some sectors represent a key opportunity for VC and PE funds.
Renewable Energy: This is a priority sector for Mexican Government and there are several projects in the pipeline seeking for financing options, some PE funds are specialized in this sector and seeking specific opportunities in the market.
Media & Entertainment, Education, Food and Beverages: Due Mexico’s demography, 50% of the population is under 25 years and middle class is growing. Commercial credit is expensive in Mexico and several quality companies need access to capital to continue growing.

Read the full market research report

Posted: 30 December 2011

See more from Banking, Lending, Leasing in Mexico

Expert Views    
Financial Services   By UK Trade & Investment
Overview of Venture Capital and Private Equity Funds   By U.S. Commercial Service
Financial Services   By UK Trade & Investment