July 25, 2013
Interviewed by: David Snow
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Meet Mexico’s Fondo de Fondos

Felipe Vila Gonzalez, CEO of Fondo de Fondos, a major Mexican LP, describes the challenges and opportunities of Mexican private equity investing, and the things every foreign investor should know before diving in.

Felipe Vila Gonzalez, CEO of Fondo de Fondos, a major Mexican LP, describes the challenges and opportunities of Mexican private equity investing, and the things every foreign investor should know before diving in.

Mexico’s Fund of Funds Industry

A Privcap Conversation with Felipe Vila Gonzalez of Fondo de Fondos

What is Fondo de Fondos?

Gonzalez: Fondo de Fondos is a private sector company; however, the shareholders of the company are four government-owned development banks, in which they incorporated the company six years ago to promote and to invest in the private equity venture capital industry.  Since then we have been able to commit almost $600 million in 46 funds.

And the philosophy is to… the philosophy of my shareholders is to promote economic development in the country and the philosophy that was imposed on me by my board of directors was that a wise investment in the sense of returns suggested by risk – solid returns suggested by risk – could be the best way to foster the economic development in Mexico.

So we take decisions on risk basis and returns basis, and we have been doing that since I took over this company.

What are some of the biggest challenges in Mexican private equity today?

Gonzalez: I would say that one of the biggest challenges of the industry in Mexico is its own size, and that means also an opportunity.  However, to raise capital from international investors and from domestic investors, it has to… the industry has to have a momentum, and the momentum has not been gained there as yet, and that’s why the Mexican fund managers have been struggling to raise capital for their funds.

However, this condition has been improving over the time and you have to remember that ten years ago there were only five, six fund managers; nowadays we have more than fifty fund managers working in Mexico, including regional fund managers that we have had in Mexico.  That will be the main situation.

The second would be worthwhile to improve the regulation in some aspects, mostly to allow mandatory pension funds to invest in this industry in a manner that is less cumbersome than the situation in which we have now.  We have a situation in which pension fund managers have to invest through a public listed instrument into a private equity situation, and that’s… we have to work towards that.

What problems does the current “public equity” structure for Mexican pension investment in PE present?

Gonzalez: There is a disclosure problem, because fund managers in Mexico, they have been dealing with international LPs, so they are very transparent and they produce very good information to their investors.  They produce the information to their investors in the way that their investors need, so there is not transparency of information.

The problem is, if they are in a publicly traded instrument, even if there is no secondary market, which is a situation, they will provide information to the investors, but they have to be polished on the stock market means and things like that.  So they will give away information to people who shouldn’t be receiving that.

How do you evaluate GPs? What skills and traits do you value most?

Gonzalez: The first thing that we look for a GP, is to somehow try to assess the quality of the management of the GP. Management will be the first thing that we would look for.

Since we invest quite a bit – or we have invested quite a bit – in first-time fund managers, then it is not that easy to relate the quality of the management in previous track record, because it was the first time that they were able to help money – investors’ money – to be investing in private equity.

So we started looking at the quality of the management in terms of the performance they have had in situations different to private equity.  If they are ex-investment bankers, we would try to see how was the deals performed, how many deals they did, what was the quality of those deals and what was the size of the deals they performed?

The second thing that we have to guess for first-time managers is, are they really going to add value to the management of the company they are going to invest?  When you go to second-time, to third-time funds, that is an easy task to do, because you will see that you can have some actual firms in which they invested and divested, either successfully or unsuccessfully.  And in financial terms, you could see if they were proactive and they could really add value or not.

When they are first-time managers, then we’ll have to perceive if the composition of the theme we allow them to be and to perform an active role in adding value to the management of the companies.

What advice would you give to a foreign investor looking to deploy capital in Mexico?

Gonzalez: I will international investors to look the country from several levels of altitude, and several angles, to look at the country.  The first will be the strength of the economy, and the strength of the economy could be such that economic growth could be perceived to be the most likely situation in the future.  But then, once you prove that there is this likelihood that the economy will grow, it means all business will start doing well in that situation.  You will have to see if this economic… or expected economic growth is going to be sustainable or not.  That will be the second, but they will have to… second level they would have to do.

And they will have to go in to see if the fundamentals of the economy are there; if the leadership of the economy is really well-disciplined to keep the economy moving ahead.

Where do you see the greatest opportunities for investment today?

Gonzalez: I will be deploying money in the domestic consumption oriented projects or investments.  After having signed NAFTA – NAFTA had been the source or engine for economic growth – however, having experienced an economic growth faster than the population world for fifteen years in a row, except in 2009, then it meant to me that the Mexican middle-class has been improving quite a bit, and the next wave… the next engine for economic growth in Mexico will be mostly domestic consumption.

The demographics are there, the Mexican population is very much unleveraged and that is not an issue for Mexicans, because financial institutions were not providing that during the last ten, fifteen years.  So I will believe that we will make the strongest profits from all the investment in all the sectors that will have to deal with domestic consumption.

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