Investors Diverge on Forecast for Brazil and Mexico

WSJ Pro PE

By Luis Garcia

Brazil and Mexico saw the election of new presidents in 2018, and both leaders received positive initial feedback from local markets.

But now that they have begun to lay out their plans, they are eliciting disparate reactions from investors heading into the new year: optimism for Brazil and concerns about Mexico.

The divided opinions of the investor class over the new leaders of Latin America’s two largest economies could affect the flow of private-equity capital into the countries as well as the entire region in 2019, consultants said, even though they added it is too early to be certain.

International private-equity investors largely retreated from Brazil and Mexico in the past few years due to local political and economic woes, industry executives said. The Brazilian economy was hit by a recession in 2015 and 2016, while an ongoing corruption investigation sent some of the country’s top politicians to prison. Mexico, in turn, went through a period of currency volatility fueled by concerns over the fate of the North American Free Trade Agreement.

“For Brazil or Latin America-focused [firms], it was a very difficult environment for fundraising, except for those few that had a strong track record,” said André Castellini, a partner in the São Paulo office of consulting firm Bain & Co.

Brazilian private-equity firms likely will find it easier to raise capital now that the country has a new president, Mr. Castellini said. Jair Bolsonaro, a former army captain seen as a conservative populist, is fostering optimism in the Brazilian markets with his pro-business plans. He and his finance minister, former private-equity executive Paulo Guedes, have promised to simplify taxes, reduce trade barriers, speed up the privatization of businesses and tackle the country’s fiscal deficit. The renewed optimism about Brazil could help channel more private capital to the country and Latin America as a whole, industry executives said.

“We expect the flow of commitments to private-equity funds to increase in the entire region in 2019, but driven by Brazil,” said José Fernandez, a partner at advisory firm StepStone Group.

The fundraising outlook for Mexican firms, however, looks less bright. That is because investors increasingly worry about some recent initiatives taken by the country’s new left-leaning president, Andrés Manuel López Obrador, industry executives said. Particularly troubling for investors is his plan to run public referendums to decide public-policy issues, as he did before canceling the construction of a new Mexico City airport.

Mr. Obrador also has criticized market-oriented policies of past governments, including reforms that opened Mexico’s energy industry to private and international investment.

“We spoke to many investors relevant to Mexico, and they are all hitting the brakes because of the political situation,” said Fraser Van Rensburg, a managing partner at placement agent Asante Capital Group.

The decreased appetite for Mexico among international investors comes at a time when Mexican private-equity firms are facing more competition for capital at home. Early in 2018, Mexican regulators allowed local pension funds to invest in alternative assets abroad. The regulatory change led many large global private-equity fund managers to seek pension fund capital in the country.

Multiregional feeder funds accounted for 40% of the $2.16 billion raised by listed private-capital vehicles in Mexico during the first three quarters of 2018, according to data from the Emerging Markets Private Equity Association, a trade group. Mexico-focused funds raised 29.4% of the total capital, while the remaining 30.6% went to Latin American regional funds. Until 2017, when Mexican pension funds could only invest in Mexico, all the capital raised through these vehicles went to Mexico-focused funds, Empea data show.

Investors, many of whom already breathed a sigh of relief with a new trade pact between the U.S. and Mexico, may become more bullish about Mexico if Mr. Obrador’s policies turn out to be less interventionist than some fear. Mexico’s economy is growing steadily, and local private-equity firms continue to benefit from an expanding middle class.

Although competition for capital from global firms can bring immediate challenges to some local fund managers, it likely will bolster the overall Mexican private-equity industry in the long term, industry executives said.

“We think the regulatory changes allowing pension funds to invest outside Mexico are very positive,” Mr. Fernandez said. “That will generate a good amount of activity in the country.”

At the same time, in Brazil, investors will wait for more concrete signs that optimism about the new government is warranted, Mr. Castellini said. In particular, they will watch whether Mr. Bolsonaro manages to get the Brazilian congress to approve reforms of the pension system considered vital to balancing the country’s budget, he said.

“There’s a burden to prove that the reforms will be approved,” he said.

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