Facing impressive opportunities in private equity investments in Mexico, the Afores are seeking to increase their investments in alternative assets and the regulator, CONSAR, is preparing changes to the investment regime that will facilitate the process. Leon de Paul, Chief Risk Officer at Afore Citibanamex -the Afore with the largest investments in alternative assets, and according to the Institute of Sovereign Wealth Funds (SWFI), one of the best public investors in the world, spoke with Funds Society about its process, and expansion plans.
The investment team led by Leon is focused on the real assets and private equity side of alternative investments, such as real estate in its different sectors, infrastructure, energy and private loans. This is an asset class that the manager likes because "their returns can differentiate us from the rest of the managers and it can offer us higher risk-adjusted returns." Citibanamex believes that private equity presents a great opportunity in Mexico for four reasons: Structural reforms, Regulatory changes - offering new investment vehicles, The appetite of foreign investors for participating in Mexican alternative assets and, mainly, Mexico's demographics. "When you invest in an asset you want it to be profitable and have a market that demands it. Mexico is a very young country with an average age of 24 years. In 20 years, Mexico will need at least 60% more urban infrastructure, which means that we will need the assets. Someone has to built them and that someonehas to have a profit. In addition, with the current pensions' structure, one of defined contributions, you can bring the assets to present value and invest in the long term to improve returns," says the manager.
Regarding their due diligence, the Afore with the highest percentage of its assets, and amount, invested in alternatives has sought since 2008 to learn from its partners and is focused on creating the best investment team in the sector. They currently have seven professionals dedicated to reviewing the processes and expertise of the GP teams and are constantly growing because, considering their assets' growth - one which makes it so that every five years they double their AUM, to simply keep 10% of their assets in Alternatives, they must maintain a robust and constant pipeline. Only in the last year and a half the risk team has doubled in size and the alternatives' team has been created, says Paul.
However, there is still a long way to go... Between 2015 and 2016, only in infrastructure and energy in Mexico, more than 90,000 million pesos (more than 5.1 billion dollars) were committed and, according to Paul, the Afores, despite their mandate to invest in the long run, did not even invest 1% of that. "We must grow our teams to have more operations, to be able to invest relevant amounts and approach the authorities to look for small regulatory changes so that, taking care of the interests of pensioners, we can allow access other investments with international partners." He is certain that as the Afores further invest in this asset class, that will attract more foreign investment "which will translate into greater infrastructure and therefore greater growth and quality of life." As an example of this, the manager highlights the discovery of an oil field in shallow waters off the coast of Tabasco, the first one in years and the result od a co-investment in energy that Afore Citibanamex forms part, while with the Shared Network, Mexico will guarantee access to the best wireless technology in the world, at competitive costs, to almost 92% of the population, using the 700 MHz band spectrum. But this, is just the beginning...