Alfredo Alfaro
Managing Partner
Northgate Mexico
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View from the Top

Medium-Sized Companies: Neglected Market With Great Potential

Fri, 05/25/2018 - 18:02

Q: What opportunities did you see in the Mexican market to establish here?
A: Northgate Capital started operating in Mexico in 2012. We became interested in the country after pension funds, through Afores, were approved to invest in private equity with capability to execute public issuances through CKDs on the Mexican Stock Exchange. Given Northgate Capital’s international experience, the company decided to offer its fund management expertise and developed a local team to render these services.
The central element of our investment strategy in Mexico is growth focused on medium-sized companies, which also allows us to differentiate from other funds pursuing larger investments. We are a generalist fund and we are focused on investments that range between MX$300 million (US$15.5 million) and MX$800 million (US$41.3 million), which is the amount that has proven to generate impact on the expansion plans of medium-size companies. In 2012, we launched our fist equity CKD and in 2015, we launched our fist Mezzanine debt CKD, giving Mexican companies two financing options: equity and debt. In December 2017, we launched our second equity CKD. We have put around MX$12 billion (US$620 million) into the Mexican market.
Q: What risks do medium-sized companies face when trying to expand their operations?
A: One fundamental challenge is available capital and financing options. The reality in Mexico is that medium-sized companies have access to financing alternatives or loans that are very limited because banks tend to be more conservative toward SMEs, providing more moderate financial support. Consequently, to accelerate growth, these companies need capital investment and that is where funds can participate.
Once companies decide to request investment from private funds, the next challenge lies in making the company’s information available to the fund. In exchange for shared risk, companies must undergo institutionalization processes that involve making decisions based on analytical information processes and generating information in a disciplined, comprehensive and efficient manner.
Q: What risks has Northgate identified that could hinder investment in Mexico?
A: SMEs are a resource for the development of any economy. The country will need to boost commercial activities and resources so that entrepreneurial activity can prosper. This goes beyond the arrival of a government that can centralize some of the most important economic activities, like the energy sector. We do not believe that these conditions hamper the development of the SME sector. Uncertainty goes beyond the dynamism of the internal market. Having conditions where macroeconomic variables such as exchange and interest rates are affected, with an internal market that is not growing, could harm internal consumption. That is where we see a little more risk: that the conditions for economic growth might decay.
What can be improved is the use of technology, especially as it relates to the needs of medium-sized companies. One of the most important factors we take into consideration in our decision-making process is our analysis of how the use of technology can have a greater impact on two central company areas: expansion and productivity.
Q: Which sectors are most interesting for Northgate Capital in terms of investment allocation?
A: In the entertainment sector, we partnered with Grupo Diniz, which operates ¡Recórcholis! and is launching an amusement park named ¡Kataplum! in 2018 at a Mexico City mall. We are also invested in a company called Elara that operates in the telecommunications sector. Through ABC Leasing we participate in financial leasing activities that target medium-sized companies. Another niche in which we are working is the hotel segment. We have invested in a company called Extended Suites that is focused on long-term business stays. Our latest investment is in the development of a chain of natural gas service stations for the Bajio region.