Juan Manuel Valle
Director General
Afore XXI Banorte
View from the Top

Change in Afore Rules to Boost Infrastructure Investment

Wed, 11/01/2017 - 11:14

Q: How attractive are infrastructure and real estate for Afores, especially with the emergence of new investment vehicles?

A: Infrastructure projects are the perfect match for pension funds. It is natural that Afores want to participate more in these types of projects. Afore XXI Banorte has put together one of the strongest investment teams in the country that focuses on alternative investments with sound corporate governance and processes. We have been putting together a benchmark portfolio that reflects our strengths.

As of August 2017, we have committed more than MX$60 billion for investment in CKDs, of which approximately MX$17 billion are invested in infrastructure (28 percent) and MX$16.3 in real estate (27 percent). Afore XXI Banorte has been involved in various successful real estate projects and is investing in new projects in Mexico. Among these is a major project that could change the footprint of downtown Mexico City and this could be announced soon and could modify our investment figures.

Managers have been more prompt to invest in real estate than infrastructure in general, possibly because real estate projects are completed much more quickly. In infrastructure, there are projects with a longer “J” curve, where we have yet to see results, whereas in real estate, we are already receiving flows. As an example, we are a significant investor in the Red Compartida project, which will provide Mexico with over 90 percent of coverage in mobile and data service at speeds of 700MHz throughout Mexico.

Q: How does Afore XXI Banorte approve an investment in an infrastructure project?

A: We are active investors in all the projects in which we are involved. It usually takes six months from the first proposal to the time we authorize the investment. Our investment team analyzes each project and once it has a strong case, it is then presented to an internal committee. Several lawyers and I participate in this internal committee, which is where we submit the project as an internal discussion to prepare for presentation to the Investment Committee. In 2016, we approved one of every three projects that we received.

Q: How does the Afore prefer to participate when it comes to large infrastructure projects?

A: For large projects, we work with the strongest players in the international markets such as Caisse de dépôt et placement du Québec (CDPQ), BlackRock and Riverstone. A good example is the Zama well that recently struck significant oil in shallow waters off the coast of Tabasco and is the first successful exploratory well found in the fields auctioned in the bidding rounds. Afore XXI Banorte owns almost 5 percent of that project through two different vehicles issued by Riverstone and BlackRock. We are indirectly investing in this project because both companies approached us to invest in their CKDs.

In the largest CKD that we have, Infraestructura Mexico, we had originally planned to invest independently. But we partnered with CDPQ and the idea of this CKD was that for any investment that CDPQ found interesting, we would invest at the same level, ensuring that neither would have the majority share. The company that would be operating the project would have to have 51 percent of the entire investment. This provides the incentive to have good administrators and operators for the project, as well as institutional investors that are there for the long term. We have been working with funds that have been in the market longer than we have and we receive feedback from them to adopt best practices. Our teams also go abroad and receive training from these large international pension funds. We believe that our approach to creating partnerships with other funds and international players helps improve the success of our investments.

Q: How could Afores help bridge the financial gap in the infrastructure industry and attract investment from international funds?

A: There are many funds interested in investing in sectors such as toll roads, ports, housing, commercial, energy or renewables, but they do not feel comfortable doing it on their own. We want to make them feel comfortable partnering with us. When they see that Mexico’s largest pension fund is involved they tend to feel better about investing. Now that the regulation will change and Afores will be allowed to invest 100 percent of a CKD and no longer be limited to 35 percent, our experience tells us that it is better to co-invest with international funds. The previous regulatory framework limited the ownership of a vehicle by an Afore to a maximum percentage, so the general partners had to collaborate with at least three Afores to raise a successful CKD. Although we will now be able to invest 100 percent, we will not do so and instead invest with dedicated international funds such as Temasek, CDPQ and PSP, among others. For future projects, we want to partner with large funds as co-investors.

Q: How will these changes to the regulatory framework affect the country’s ability to invest in projects?

A: This will be a positive change. For the largest Afores and projects, the way things are set up today limits the capacity for doing things quickly. If four Afores sit at a table with investors to finalize a proposal, everybody wants something different. The current regulatory framework limits the flexibility of investors and large projects require great amounts of funding. The changes will make it easier for fund managers to raise money. Some managers have told us that there is so much interest that they could raise the resources abroad. The best opportunities for us are in Mexico but investing in the BMV is complicated for us because we are too large.

Q: To what extent are Afores ready to boost investment and what needs to be done to make them feel comfortable using this new financial instrument?

A: We analyzed the pros and cons of CerPIs against CKDs. In a CerPI, we do not have the option to decide where it will be invested. If we were to invest in that vehicle, it would be much easier with managers who have proven their capacity. For instance, we would consider partnering in a highway CerPI with a company that has been successful through a CKD in acquiring and managing highways. If RLH Properties for instance had issued a CerPI with the experience that it has, we would have invested because of the company’s experience. We are already own a 35 percent participation in RLH Properties through various projects.

Q: What opportunities do you see in Afores investing in Special Purpose Acquisition Companies (SPAC)?

A: For new instruments such as the CerPI or SPAC, it all depends on who is behind the projects. Riverstone and the former YPF management team are behind the first SPAC, and they are great managers with strong track records. The energy sector has large oil companies, but there are also small ones. There is an opportunity to consolidate a company that may never play with their larger counterparts, but provide economies of scale. In terms of SPAC, managers have to bring the project to us, similar to a CKD but on an international scale. If we decide to invest in a project and the process is finalized, our managers will remove the SPAC and enlist the company. If we decide not to invest, we receive our original commitment. The operational costs are all assumed by the sponsors. Afores are relatively new in Mexico, having been in the market for only 20 years. For many years Afores were only allowed to trade bonds but since the regulatory framework changed, they have been the driving force of these new instruments.