Mexican investors, are they risk-averse?
Much is said in different forums and publications that wealthy businessmen and women in the country do not consider integrating into their portfolios, entrepreneurial projects and/or investments in private equity funds.
It is said, and rightly so, that they represent a very high risk or involve a lot of time in managing this type of investment which is far from the management required by a consolidated company or monitoring of investments in bonds, futures, derivatives, public markets among other asset classes.
To make a fair judgment of the above, let us first analyze some data: The Mexican Private Equity Association (AMEXCAP) documented that, in the last 10 years, have been invested in Mexico 1.5 billion dollars in about 700 companies and through 1,233 transactions which, although far from the almost 28 billion dollars invested in the United States in the third quarter of 2018 alone, does allow us to identify a growing and favorable trend, especially if we take into account another very revealing fact: in 2019, the capital invested increased by 57 percent while the number of transactions decreased by 40 percent. What does this mean? Well, there is capital available, but we are also lacking in generating serious projects that are ready to capture all that appetite for investment. We invest more, but in fewer options. Of that size is the opportunity.
Now, what are the reasons why an investor might pass up the opportunity to invest in either entrepreneurs or equity funds? I think the first reason is that the investor avoids investing in underdeveloped ideas where the founding team does not demonstrate mastery of their business model or investment thesis that would allow them to anticipate everything that might go wrong. Another reason is the lack of transparency in the use of resources. It is important to be very clear on what and for what the resources will be used; furthermore, they do not like (and with good reason) the lack of diligence in the administration of these resources or the lack of professionalism of those who manage the company and/or fund. Last but not least: the investor avoids losing the visibility of his money, therefore, timely, regular and above all accurate reporting is essential if you are looking to manage private capital either from your company or a fund.
There is a very favorable situation for the entrepreneurial ecosystem. Remember that typically when there is an economic contraction and a slowdown in the real estate market, it is precisely the venture capital investment component that can balance the portfolio resulting from a low correlation of private capital with the other asset classes.
In the next few years, we should expect very little from the government, but private capital will be there, ready and available to be taken by those who demonstrate that they have the skills, execution capacity, diligence, transparency, experience and above all, that they know how to adapt to the demands of an increasingly demanding and complex market.
The challenge is not capital, it is project supply.