Luring the pensions

Mexico’s infrastructure needs are extremely diversified, spanning the painfully under-served rural areas to the sprawling, congested demands of Mexico City. Thankfully, these needs are not going unnoticed.

In August 2007, Mexican president Felipe Calderon put in place an ambitious national five-year infrastructure programme. Then, in early 2008, the government established a national infrastructure fund called FONADIN to supports financing of infrastructure projects across the country.

FONADIN says that it has promoted the development of $11.3 billion worth of projects in the three years following its creation, nearly tripling the $3.2 billion of total funding in the period 2002 to 2006.

One major theme of the Calderon government’s plans is the need for reforms in order to increase private investment.

Players beyond Mexico’s borders are also trying to help open up the country to private investment. The US’ Export-Import Bank signed an agreement with BanObras, Mexico’s development bank for public works, to provide $1 billion in financing for the national infrastructure programme; the Inter-American Development Bank loaned $150 million to the Macquarie Mexico Infrastructure Fund in the hope of fostering more participation in such offerings; and the World Bank, in addition to large investment loans dedicated to sectors such as urban transit, has established a broad $751.9 million development loan to Mexico, one quarter of which will support public-private partnerships and private investment in infrastructure.

“This is not a one-shot reform,” says Esperanza Lasagabaster, a senior financial economist at the World Bank, adding that the process requires changing complex legal and regulatory frameworks. Through FONADIN and other programmes, the government has acknowledged that it does not have the resources to build necessary infrastructure through public spending alone.

“They want to leverage private resources and this is why facilitating the framework for private participation in infrastructure becomes very important,” Lasagabaster says.

This reform has required new financing initiatives. One crucial new financing instrument is called certificados de capital de desarrollo, which has essentially opened Mexico’s Ps$1.3 trillion pensions to a new asset class. The certificados are stock certificates that allow pensions to take an equity stake in private funds previously barred to them.

Thirteen funds raised a total of Ps$36.44 billion (€2.2 billion; $3 billion) during the first two-and-a-half years since the programme started, according to Consar, the regulatory commission for Mexican pensions. Four of these funds focus purely on infrastructure.

It is clear that the weight of powerful institutions is behind the initiative. And pensions can invest up to 15 per cent of their resources in certificados, so there is still much room for growth. What remains to be seen is how the four beneficiaries will fare in a complicated and changing landscape.

Pioneer funds

Thus far, four infrastructure funds have raised a total of nearly Ps$15 billion through the certificados. Investment banks Macquarie and Goldman Sachs sponsored funds which collected Ps$11.1 billion at the end of 2009, while two smaller funds raised Ps$3.7 billion in December 2010. Each of the four funds operates a distinct model.

Goldman Sachs and Mexican construction group Empresas ICA were the first to raise a fund for infrastructure, and the second fund to raise money through certificados. The fund was raised to finance an existing toll road operator in which Goldman Sachs and ICA were shareholders. In 2007, Goldman and ICA were awarded the $4 billion FARAC I toll road concession, which included 30-year operation and maintenance rights for 550 kilometres of roads spanning four states. It was the largest infrastructure project in Mexico’s history and the largest in Latin America that year, according to law firm White & Case, which represented Goldman and ICA on the project.

Two years later, in October 2009, Goldman Sachs and ICA raised a fund that gave Mexican pensions an equity stake in Red de Carreteras Occidente, the toll road operator of the FARAC I concession. Red de Carreteras Occidente collected Ps$7.75 billion in that offering of certificados, according to Consar. Goldman remained majority shareholder in the concessionaire, with the pensions effectively taking a 32 percent stake in the company. ICA said at the time that the money raised through the offering would be used to pay down the toll road operator’s debt.

Two months after that, Macquarie placed its Mexico Infrastructure Fund with a mandate to seek out and invest in roads, rail, airports, ports, energy and utilities, as well as communications infrastructure and social infrastructure projects across Mexico.

Paula Chirhart, spokesperson for Macquarie Group, said Mexico’s trade growth and links to the US economy garnered Macquarie’s interest in investing in the country. She added that Macquarie’s previous experiences in Mexico had opened the firm’s eyes to the broad scope of opportunities in the pipeline.

Macquarie’s fund has both a listed and unlisted component. The listed fund collected Ps$3.415 billion entirely from pensions, according to Consar statistics, while Macquarie contributed Ps$750 million and FONADIN Ps$1.04 billion to an unlisted fund. FONADIN also agreed to be a cornerstone investor of up to Ps$3 billion. Macquarie’s target for the fund is $1.1 billion.

Macquarie has so far completed only one deal, the Ps$1.54 billion acquisition of Desarrollos Carreteros del Estado de Durango (Decarred). The company was acquired late last year from Cemex, a building materials firm, and Rostec, a local road construction and infrastructure company. Decarred has 20-year contracts to reconstruct and maintain 320 kilometres of existing toll-free highways.

Macquarie sought to invest in the FARAC III toll road concession, which covered nearly 300 kilometres of roads in the northeastern state of Tamaulipas. As part of a consortium with Portuguese transport firm Ascendi and Brazilian toll road operator CCR, Macquarie submitted the best offer, but the Mexican government eventually rejected all bids.

Outgrowing construction

Last December, Mexican pensions committed Ps$2.7 billion to I Cuadrada, a fund affiliated with US private equity firm Black Creek Group’s Mexico Retail Properties (MRP) unit. The total fund size is Ps$3 billion.

I Cuadrada is arguably an unusual model given its real estate roots through the affiliation with MRP, which has acquired and developed net-lease properties to large retailers in Mexico like Home Depot, Walmart and Costco since 2002, according to its website.

But Jose María Zertuche, chief financial and investment officer at I Cuadrada, points out that the firm was already comfortable working with developers and with the government. He adds that I Cuadrada, which is in the process of making its first investments, was focusing on “low-complexity” infrastructure projects in the water, social infrastructure and transport sectors that presented “highly similar” challenges to the ones faced in real estate.

“The switch or the transition from real estate to investing in infrastructure isn’t that significant for us,” Zertuche says. “We have very good relationships with local state and federal governments that see us a tool to help them.”

Zertuche says the challenge was that fundraising essentially happened in one shot. Everything depended on one offering – the fund could not have closes leading up to a final close.

Disclosure requirements were less challenging, he says, and reporting to the Bolsa – the Mexican stock exchange – was not considerably different from institutional reporting requirements, according to Zertuche. But he says it was sometimes difficult to negotiate “how you communicate with the market without revealing your target project”.

In the same month as I Cuadrada’s fundraise, Marhnos, Mexico’s first developer fund, collected Ps$1 billion in an offering of certificados. Growing out of a local construction business, Marhnos has a different model.

José Manuel Fortes, head of Marhnos’s infrastructure division, says pensions were initially wary of signing up to a developer fund, and questioned whether the fund was just an excuse to create construction work for Marhnos. But the fund had at least one established project, backed by the International Finance Corporation, in which to invest. Fortes says the project is a public-private partnership to construct a regional hospital in the state of Mexico which will require investment of Ps$1 billion. Marhnos will contribute 20 percent equity – 30 percent of which will come from the developer, and 70 percent from certificados.

Project pipeline

What remains to be seen is how quickly the government will line up projects for these funds to acquire. Marhnos and Red de Carreteras Occidente, to different degrees, already had projects in place when they raised their funds. Zertuche says I Cuadrada was “fortunate to be looking at a pretty good pipeline,” adding that it was focused on assets which already had concessions.

The fact that Macquarie’s fund has only completed one deal so far may not sound promising, but the need for such funds has increased over the past couple of years and Chirhart says the recession has created opportunities by reinforcing the need for equity investment in infrastructure projects from private sources.

Mauricio Costemalle, a partner at financial services firm Deloitte in Mexico City who covers project finance, confirmed this was part of a wider trend.

“The world changed from 80 percent debt, 20 percent equity,” Costemalle says. “You see now more half and half.”

But Costemalle says he expects there to be a lull in infrastructure certificados offerings as investors wait to see how the existing funds fare in a changing environment.

“You need to have a human structure to put together projects,” Costemalle says. “Suddenly you decided you put the financial pieces of this business together, but you don’t have the human pieces of the government.”

The investment models are also different – and remain test cases. The Macquarie Mexico Infrastructure Fund, for example, has an investment period of up to six years from its initial December 2009 fundraise.

“It has been a learning process like every learning process. People are figuring things out and getting their feet wet,” Zertuche says.

But he emphasises that the fundamentals in Mexico are strong. “There is a significant underlying trend of Mexico modernising,” Zertuche says, adding that he sees the new investments and financing tools as a way of “channeling” Mexico’s savings into projects that will foster continued growth in the country.