Private equity for real estate in Mexico : overview, challenges and opportunities

Abstract

Considering Mexico's size and fundamentals, the Private Equity Industry in Mexico is underdeveloped but quickly growing. In an emerging market with over 60% of its population in its work force, and whose middle class will almost double by 2025, opportunities are emerging in all sectors. Private Equity funds could play a key role in financing and seizing them. Private Equity has had a low penetration in Mexico because of an immature financial sector, a legal system with a weak judiciary branch and a high concentration of family-owned businesses without institutional practices, among other reasons. However, this sector's potential in coming years is significant. The industry attempts to double its size by the end of this decade, translating into more available money at better prices. The question is: how can the government and industry leaders unlock this potential? Several actions at all levels of the public and private sectors are needed to access available capital. The purpose of this thesis is to show the trends, opportunities and challenges regarding the Mexican Private Equity Industry, focusing on real estate investments. Today, the investment cycle in the real estate arena is complete, generating confidence for Private Equity funds. A lack of supply in the Mexican market, regulatory changes allowing local pension funds to invest in alternative investments, and the introduction of Mexican Real Estate Investment Trusts as institutional buyers have provided managers and developers everything they need to capitalize real estate investment opportunities. Still, there are multiple challenges for the growth of the Private Equity Industry: authorities need to ensure regulation enforcement, existing vehicles such as "Structured Equity Securities" must improve for fund managers to raise and deploy capital, and the reforms underway (specifically the financial reform) must bring better long-term debt opportunities. If public and private entities decide to get in the same boat, Private Equity Investments can bring unprecedented benefits for funds, developers and the whole nation. The equity is now available and regulatory framework seems more investor-friendly. It is the turn for industry leaders and managers to guide their businesses in seeking institutional funding and thus contributing to Mexico's growth.