AMEXCAP: Finding operating partners is “the choking point”

For many Mexico-focused fund managers, one of the biggest challenges of investing in the country has been identifying a strong local partner.

The typical private equity model for investing in new geographic markets is to team up with a local partner. However, in Mexico, such an arrangement is much more easily said than done.

“It is the choking point in the industry,” said Francisco Andragnes, head of real estate at Compass Group, a Latin America-focused investment advisor. In the US, a firm has 1,000 developers to choose from as potential partners, but Mexico only offers a handful by comparison.

Recalling his days as chief investment officer at Prudential Real Estate Investors Latin America, Andragnes noted that the firm had more than 35 partners in the country. However, “there were no more than five that I would say were really good partners,” he said, speaking at AMEXCAP’s Mexico PE Day conference in New York late last week. “It is how it is.”

Gabriel Fernandez, managing director at Real Capital Investment Management, a Mexico- and Colombia-focused fund manager, noted that a way to get around finding a local operating partner in Mexico is establishing one’s own platform in the country, much like Denver-based Black Creek Group has done successfully. At the same time, he said it was challenging to find staff, particularly at the junior level, to help build such a platform. “There’s such a dearth of talent at the middle level that we have found it hard to find people,” he added.

Meanwhile, Antonio Davila, chief executive of Adamantine, a Mexico City-based real estate finance firm, said his company initially began its business, which primarily focuses on restructurings and workouts, by working with partners. Still, “we ended up doing a lot of it by ourselves,” he said.

Adamantine created its own debt servicing platform while acquiring another servicing business that went bankrupt, and it also became more involved in real estate development. “Those were the sorts of the things that we had to look for because we did not find someone who would do everything,” Davila said.

Building one’s own platform has become a growing trend for general partners in Mexico, noted Eduardo Guemez, head of Mexico at LaSalle Investment Management. “A lot of people are moving a lot of these functions in-house to be able to control them better,” he said. This is particularly the case with firms that are investing capital from US institutions. “If there’s something that you need to take care of, you’re better served by taking it in-house,” he added.