July 24, 2013
Interviewed by: David Snow
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Mexican Pensions & PE: A Growing Opportunity

Carlos Ramirez Fuentes, Mexico’s top pension regulator, provides an in-depth look at the country’s pension system and how it deploys capital. He discusses the new ways the pension can invest, where the opportunities lie for private equity investors, and how he expect the future to look even brighter for those looking for long-term market-beating yields.

Carlos Ramirez Fuentes, Mexico’s top pension regulator, provides an in-depth look at the country’s pension system and how it deploys capital. He discusses the new ways the pension can invest, where the opportunities lie for private equity investors, and how he expect the future to look even brighter for those looking for long-term market-beating yields.

Mexican Pensions & PE: A Growing Opportunity

A Privcap Conversation with Carlos Ramirez Fuentes of CONSAR

How has the Mexican pension system changed relative to investing in private equity?

Ramirez Fuentes: So I’m Carlos Ramirez, I’m head of CONSAR. CONSAR is Mexico’s pension regulator. In 1997 there was a big reform to privatize the former pay as you go pension system. And to create a private pension system in which… basically with individual accounts. So all the private workers in Mexico are saving for their retirement through these individual accounts and CONSAR is in charge of regulating the companies that are managing this money and investing this money, the so-called Afores.

Currently there are twelve Afores in the market and the Afores manage US $170 billion. And in the past ten years, the system has been growing at a double digit rate and it’s expect to continue to grow basically in that order of magnitude. In the next coming six years, the system will basically duplicate in size.

So yes, CONSAR is also in charge of creating the investment regime in which the Afores… where the Afores can invest the workers’ savings. And in the past years, the investment regime has been liberalized and the Afores now can invest almost in all type of asset classes including, of course, private equity.

What prompted the liberalization of the investment options available to the pension funds?

Ramirez Fuentes: So at the very beginning of the system in 1997, all of the resources were being channeled to government bonds. So the investment regime was very closed, the Afores could only invest mainly on government and private bonds. And since then, the investment regime has been liberalized gradually in a very pragmatic fashion.

And in 2007, CONSAR with other government officials, decided that it was a great opportunity to channel these resources that are long-term resources that are looking for profitable opportunities to channel part of this money to private equity projects. Private equity is a potential source of profitability, high returns for the workers money.

And that’s where the so-called SECADES were created, which is a Mexican-style type of a private equity, and since then there has been twenty-seven SECADES. Afores have 90% participation on all outstanding SECADES, apparently around US$5 billion and many more coming in the next coming months.

So the Afores have basically created a new market, a market that wasn’t there just some years ago, but now has a huge potential of growth simply because you have an institutional investor that wasn’t there just a decade ago. Really the potential is enormous in terms of the resources growing. The Afores have in the next coming years will have a huge challenge of finding profitable opportunities. With government bonds, yields really reaching a low point in Mexico, the record low in history, the Afores will have to look for other opportunities in order to continue to give good returns for the workers’ money.

So where to look at? Certainly this industry has the enormous potential of bringing high returns, development to the country in the sense of creating new companies, companies that invest in the country, that create jobs. So it’s a win-win situation.

We at CONSAR have to be obviously looking at issues related to the security of how the system best… the corporate governance rules of the SECADES, the type of projects that are being developed through the SECADES…ourselves with the national banking commission…who’s in charge specifically of developing this asset class.

But overall, the outlook is good. Is good not only for the country in general, but certainly for the private equity industry. There is a long-term investor that is looking for high yields, profitable opportunities and I think the private equity industry brings that.

What challenges do the pension funds as new investors in private equity?

Ramirez Fuentes: A big challenge from the point of view of the CONSAR is enhancing, increasing the capacities of the Afores to do a better due diligence and how they’re investing the money. So because of the growth of the resources… resource base, what we have to guarantee is that the decisions being taken by the Afores on how to invest this growing base of resources is… improves consistently.

So we have to have better asset managers, better due diligence, better corporate governance, more participation from the Afores on the decisions on how to… I mean on the SECADE itself. So there is still a lot to do on that front.

We also have to enhance a better diversification of portfolios, right. Not only through private equity itself but other types of asset classes. But still specifically in private equity, right now the Afores have invested close to six or seven billion U.S. dollars when the investment regime allows them to invest more than double that. So there’s still an enormous unused amount of money that can be brought to this industry.

And finally, I would have to mention that this is a very interesting time for Mexico. From a private investor perspective, why look at Mexico? Well, Mexico is at a very… at a turning point, right, a very interesting time, very committed precedent to the long delayed reforms, increase the growth potential of the country and certainly if these reforms are approved in the next coming months and so far the track record is pretty good with three important reforms being approved just in the past six or seven months, and three likely to come in the next six months. Well, the growth potential of the country could increase significantly with very interesting demographics, a very good demographic profile, a financial sector that simply has all the potential to continue to grow and an institutional investor with more money to invest. So that’s the perfect environment to look at these types of projects that private equity brings.

And so it is a good moment for to think about this perspective for the country and certainly for the industry.

What do you consider the best opportunities for PE investment in Mexico today?

Yeah, that’s a very good question. I would start by saying Mexico’s infrastructure in general is underdeveloped. During the past three decades, the country… and particularly during the eighties and nineties, the country under-invested in infrastructure because of the recurrent economic crisis, financial crisis that the country experienced. Really there was no money to invest in infrastructure.

The past decade, some money went to infrastructure but still, the potential to invest more in infrastructure remains really high. And the country needs to revamp its infrastructure. So one area of opportunity where certainly the pension funds will be looking for alternatives in terms of investment will be the infrastructure sector.

And by this, I mean every infrastructure project in which the government is going to launch soon, the infrastructure plan for the entire Peña Nieto administration and you’ll see there that there are huge opportunities, but obviously there’s also the need of funding. Who can provide that provide that funding? Certainly the pension funds could be an important provider of that.

Then you have the energy sector by itself, right. The energy sector has been basically closed for the entire history of the country. So if a reform comes late this year, and I’m fairly positive that it will, there could be enormous opportunities there too, right. And again, here is where the combination of an institutional investor and private investors looking for profitable opportunities could come in.

The energy, the infrastructure, obviously real estate is growing in importance in Mexico. Again, real estate has been relatively quiet for the past two or three decades in the country and it’s starting to get a little bit more attraction. The FIBRAs have been an excellent way to fund and invest in this sector and I think there’s still a huge potential for that also.

So overall, what the pension funds will be looking for in the next coming years is for yields, for returns, everyone is looking for that. But I think there’s a great opportunity of bringing together the long-term objective of paying higher pensions through higher returns.

With at the same time, projects that bring productive… high productivity for the country, productive opportunities. The mix is really looking good. The potential is huge and Mexico will certainly need to develop different area of its economy in the next coming where certainly the Afores will be participating in the process.

CKDs are great in that they allow the pensions to invest in PE, but the process is different—and perhaps more cumbersome—than in other PE markets? How do you expect things to evolve?

Ramirez Fuentes: Okay, yeah, that’s a very good question. During the sixteen years of the private pension system, CONSAR has liberalized gradually the investment regime of the Afores. And it has been a very pragmatic process in which at the same time you are working on the development of the capabilities of the Afores to invest in more complex asset classes and vehicles. And at the same time, well you have to make sure that you have a broader diversified portfolio. In the next coming years, this trend of liberalizing the investment regime will continue. We think there are still opportunities although the Afores can now invest almost in all type of asset classes and more and more vehicles, there are still some opportunities. For example, we created the SECADE which is basically the law of the system basically states that it has to a public offering. So that was the way we thought it was possible to comply with the law and at the same time start using these resources in a more long term perspective.

I think at some stage, we’ll have to think about investing more directly in private equity itself. But that needs obviously to change of law, that is a more complex process. But I think that the trend is clear in that way. And some point the pension funds will have to do their own due diligence, not going through the market as other pension do it in other places in the developed world.

It’s going to take time. I mean, I’m not saying it’s going to happen soon, but we have it in the agenda and certainly that’s something we will have in mind. We’re also going to look at the possibility of the Afores eventually investing abroad in private equity directly, which is something that they cannot do today. It’s early in the process but it’s also on the agenda.

We think that the SECADES still needs some adjustments, that it could be improved as a vehicle. So obviously again, the National Banking Commission is in charge of the process of the SECADE and the FIBRA itself. But we, the regulators in Mexico think that both vehicles still have some improvement, some room to improve in the sense of… I mean, bringing more flexibility to the process.

And we’ll be working on that in the next coming months and years. So in both… not only liberalizing more the investment regime, but also improving what we have already which is a vehicle that has… I mean, that is working but it still can work better and certainly bring more flexibility to the way the Afores are investing in it and other investors because one thing that is clear now is that 90% of the total outstanding SECADES is in hands of the Afores. So we need to attract other type of investors and the way to do it is bringing more flexibility to the process, working on that also.


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