EQUITY CAPITAL MARKETS activity in Mexico has started to pick up this year and is likely to become much stronger in coming years as pension funds turn to variable income assets, say local experts.
Mexico remains more of a debt capital markets and M&A story than an ECM story compared with other Latin American countries, especially Brazil. However, investment bankers say this is likely to change within the next five years, as the country’s pension funds (afores, which already have $125 billion under management), continue to grow and look to diversify their range of investments. Bankers say that this is good news for their fee income, already recovering since the trough at the time of the international financial crisis, because ECM work pays better than other financial markets sectors.
For the year to October 7, total ECM activity in Mexico amounted to $3.198 billion from seven separate transactions compared with $2.4 billion from eight deals last year, $2.1 billion from seven deals in 2009 and $2.3 billion from three deals in 2008, according to Dealogic.
For the year to October 19, DCM activity totalled $28.9 billion from 63 separate deals, compared with last year’s $45.7 billion from 89 transactions. In 2009, total issuance was $23.4 billion from 63 deals and in 2008 it totalled $17.3 billion from 77 transactions.
For the year to October 7, Mexico had a total M&A volume of $16.3 billion from 133 transactions, again way below last year’s $44.2 billion from 166 deals. In 2009, total activity added up to $4 billion from 109 transactions and in 2008 it topped $8.8 billion from 179 deals.
"Mexico’s capital markets have incredible potential," says Jaime Martinez-Negrete, president of Morgan Stanley in Mexico. "Three years ago, afores could not invest in equities, today they can. This is starting to change the game. Before there was only retail demand for equities, now there is much more institutional appetite. Mexico also has a very compelling macro and financial story. I think this will encourage international investors to look at the country once appetite for risk assets returns."
Alejandro Valenzuela, chief executive at Banorte, Mexico’s third-biggest bank, says: "Today, pension funds invest 30% of their total assets in equities. Over time, I totally agree that the ECM market will become more important in the country. The family-owned companies are conservative and will only open up gradually, similar to what we saw happen in Chile. However, I think we will start to see institutional investors participate more on firms’ boards and this will encourage them to look at the ECM market."
For the year to October 7, Mexico contributed 12.1% of all ECM activity in Latin America against 4.4% last year, 7% in 2009, and 9.3% in 2008, according to Dealogic. Brazil’s share has slipped to 41.4% this year from 85% to 89% between 2008 and last year.
For the year to October 7, Mexico accounted for 30.8% of DCM activity in Latin America against 39.5% last year, 29% in 2009 and 41.3% in 2008. Brazil accounted for 46% this year against 42% last year, 37% in 2009 and 30% in 2008.
For the year to October 7, Mexico contributed 16.2% of the region’s M&A activity against 18.3% last year, 4.7% in 2009 and 8.1% in 2008. Brazil makes up 61.4% this year against 63.5% last year, 70% in 2009 and 73.7% in 2008.
Fee income
After adjusting for large transactions in terms of volume and no fees, total fee income for all investment banks in Mexico this year is estimated to be $260 million, much better than the trough year of 2008 at $140 million but still below the peak year of 2007 at $370 million, according to Dealogic. Last year income stood at $230 million and in 2009 at $215 million.
"The investment banking wallet in Mexico remains much lower than Brazil’s which is around $1 billion," says Lisandro Miguens, head of investment banking for Mexico and the Andean region at JPMorgan. "However, it’s been consistently rising since the 2008 low point, but still hasn’t reached the 2007 high point."
During the past four years, DCM deals have made up 50% of the wallet in Mexico whereas ECM transactions have accounted for 30% and M&A deals 20%. In most other countries, M&A accounts for around 30% to 35% of all investment banking fee income.
Lisandro adds that the ECM fee income in Mexico is normally highly dependent on large elephant deals, which leads to a lot of ups and downs for investment banks.
Mexico suffers from structural problems, mostly cultural, that mean that far fewer companies go public than in Brazil. Many of the country’s biggest companies remain family owned and traditionally they have been reluctant to enter the equity markets. The country also has some industrial sectors that are dominated by just one or two groups. For example, América Movíl, controlled by Carlos Slim, the world’s richest man according to Forbes, has a monopoly over the telecommunications industry in the country and private companies do not operate to any important degree in the utilities sector.
Mexico is also well known for having a highly illiquid stock market: around 130 companies are listed but most of the stocks are thinly traded and closely held.
"During the next five years, we will see a lot of change in the Mexican market," says Mark Ramsey, president of Macquarie in Mexico. "This will be driven by the pension funds, which will have greater and greater sums of assets under management. I expect them to become much more active players. The regulatory environment is becoming much more liberal. In time, this will break down the family structures and lead to many more IPOs."
