Investment is Expected to Accelerate After Elections: Actinver

Q: How would you describe the current sentiment of investors and companies in Mexico?

A: The sentiment among investors and companies in Mexico is generally positive. We are seeing a “Mexico Moment 2.0” resulting from Mexico’s stable macroeconomic outlook and currency coupled with its favorable demographics. The absence of significant geopolitical tensions and the nearshoring wave are also contributing to a growth environment. As interest rates stabilize and political clarity increases, the conditions are expected to further improve, fostering a virtuous cycle for investment in Mexico.

Many sectors in Mexico, such as education, healthcare and transportation/logistics, are still prime for consolidation and subject to aggressive M&A roll-up strategies. We are also seeing other tendencies such as large Mexican companies looking abroad for M&A opportunities as well as medium-sized, family-owned businesses that are transitioning to more institutional growth capital or exploring inorganic growth. 

Paradoxically, higher interest rates and reduced competition from financial sponsors such as private equity firms have translated into more attractive valuations and a “buyer’s market” that is conducive to M&A activity.

Q: What trends within the industry have the potential to shift the investment ecosystem?

A: A notable trend is the emergence of financial sponsors in a new wave of managers in the search fund and private equity sector. This trend is only starting and has not fully matured, although it has the potential to significantly shift M&A activity and investments generally by bringing more transactionality, exit scenarios, and institutional capital into Mexican private companies. 

The initial surge in private equity in Mexico occurred between 2009 and 2015, driven by regulatory changes that allowed Mexican pension funds to invest in alternative assets such as private equity. However, the performance of these first-generation funds was generally mediocre, dampening the enthusiasm of Mexican pension funds for local fund managers. 

We are seeing a wave of next generation, first-time fund managers that are looking to revert this tendency against a backdrop where AFOREs have set up their own CERPI vehicles which allows them to invest up to 90% of their alternative investments abroad. These new managers are expected to bring fresh perspectives and innovative approaches to investing. 

Additionally, new changes to our securities laws are expected to promote more IPOs and capital markets activity of medium-sized companies; this is a crucial challenge which in my view depends a lot more on bringing a broader base of retail investors into the Mexican ecosystem. This is something we constantly promote at Actinver as one of Mexico’s largest retail investment banks.

Q: What areas does Actinver target for specialization to support M&A transactions?

A: Actinver specializes in several key sectors, driven by the mandates we take on and the industries our clients are involved in. As a midmarket M&A firm, we typically assist companies in raising capital or those with an enterprise value ranging from US$20 million to US$100 million. We have specialized in sectors such as healthcare; consumer such as food and beverage, retail, food services providers and personal care; logistics and transportation. 

Real estate, particularly industrial buildings and warehouses, remains a significant sector for us and where there is still the most transactionality in terms of M&A activity. We also like infrastructure, particularly the water and renewable energy sectors; we anticipate the latter will pick back up once there is more clarity in public energy policy following the upcoming elections.

Having said this, we continually strive to serve our clients or would-be clients in whatever sector they are involved in. We consider ourselves both financial advisors and business consultants that adapt to different sectors and business models. 

Q: How does Actinver identify and cultivate client relationships in the mergers and acquisitions segment?

A: We start by continuously analyzing market trends and transaction activities using general news publications and sector-specific reports to have an idea of the companies that are active or showing potential in the M&A space. Based on this analysis, we focus on sectors that align with our expertise or where there is higher growth potential coupled with investor appetite. For example, the valuation multiples for sectors, like healthcare, where the population is more underserved, are higher than those of more established sectors. We then proactively reach out to key decision-makers, primarily CEOs, business owners, CFOs, and M&A heads, to establish initial contact and arrange introductory meetings.

Internally, we also leverage Actinver’s extensive internal networks, including our corporate and private banking divisions, allowing us to connect with potential clients by tapping into existing relationships and identifying new opportunities within our current customer base. We also have the ability of putting our own balance into play by doing leveraged buyouts in M&A deals.

Finally, we actively participate in industry conferences, family office events, and other significant gatherings to increase our visibility and connect with potential clients. Gaining the trust of our clients and prospects is crucial. We achieve this by understanding their needs, providing valuable insights, and positioning ourselves as reliable advisors throughout the M&A process. 

Q: What strategies does Actinver use for structuring M&A deals to maximize value for clients? 

A: Actinver employs several effective strategies for structuring M&A deals to maximize value for clients based on  their specific needs. We often represent the sell-side but we also represent buyers when needed. For sell-side or private capital raise mandates, for example, we start by thoroughly analyzing the company to ensure it is marketable. This involves evaluating the sector, business model/differentiators, management team/key persons, customer concentration, revenue stability, historical financial information, quality of financial information valuation expectation, and overall business size. If the company is deemed marketable, we proceed to close the mandate and work closely with the client to prepare the necessary documentation, including an internal valuation and a confidential investment memorandum. We also collaborate with company executives to develop a financial projection (usually five years ahead), ensuring the growth path is realistic and supported by historical data.

During this stage we naturally perform a valuation of the target company, using valuation methodologies such as the discounted cash flow method (DCF) and valuation by public company comparables or transaction comparables. The DCF method looks prospectively into a company’s outlook into the future while the multiple comparisons looks more at their current levels of sales and profitability. Finding comparables in Mexico can be more difficult as public information is harder to find. This leads to using comparables from companies from other countries or sizes that have to be risk-adjusted to the target company being analyzed. 

Simultaneously, we draw up a list of potential buyers or investors and secure the client’s approval before contacting them. We also work together with our client in terms of understanding and providing guidance as to who the best buyer or investor could be and, whenever possible, run a competitive bid process to maximize leverage.

M&A advisors provide a lot of value during this stage, particularly in finding the right buyer and investor; we are also crucial in drawing up deal terms such as payment of purchase price, involvement of key persons and corporate  governance (the latter particularly relevant agreements in partial sale scenarios).

Q: With increasing globalization, how does Actinver facilitate M&A transactions across international borders? What are the key challenges and considerations?

A: Actinver facilitates M&A transactions across international borders. Following the wave of interest from the international community, particularly from the United States and China, Actinver has observed heightened attention on cross-border deals. This trend has been accentuated by the reconfiguration of supply chains following the COVID-19 pandemic. 

To navigate these transactions effectively, private companies are required to enhance their professionalism and institutionalization, particularly those that are family-owned. This entails implementing robust management practices, ensuring financial transparency through financial statements that are audited or prepared in accordance with commonly used reporting systems, having good IT systems, and fostering a culture of trust with foreign investors. 

Governments also play a key role in providing the necessary framework to facilitate foreign investment, which includes reliable energy infrastructure and favorable regulatory and “doing business” environments.

Q: What does Actinver hope to achieve this year in terms of goals and milestones?

A: Actinver has a positive outlook for the remainder of the year, despite the typical cautiousness associated with election years. We anticipate a continued pick-up in activity in the second half of the year. Actinver is pleased with its market position and has a robust pipeline of potential mandates and ongoing projects slated for closure. 

Our ultimate goal is to serve our clients as best we can. With our flexible approach, dedicated team, and sound platform, our M&A team is well positioned to do this.