Specialized Fund Seeks to Trigger Mass InvestmentsWed, 01/21/2015 - 10:08
Q: What is the purpose of the Mexico Energy Fund?
A: In September 2014, the Mexico Energy Fund was created by Fondo de Fondos (Fund of Funds) to provide private equity for energy-related projects and funds in Mexico. This became possible after the secondary legislation of the Energy Reform was passed. Our participation in such projects is dictated by capital injections, just like any other private equity fund. However, we have a clear entry and exit strategy for the projects we choose to invest in. We enter a project or fund for a fixed period of between five and seven years before exiting according to a pre-established strategy. We are obligated to invest up to 80% of our capital in other energy-related funds, while the remaining 20% can be invested directly in projects. Furthermore, we cannot invest independently in direct projects, we need to find other funds to invest along with us. This was all designed to foster the all-around development of energy projects in Mexico. Thus far, we have been looking into projects related to the transportation of natural gas and power generation. We are now starting to look into Round One for projects in hydrocarbons and storage.
Q: What differentiates the Mexico Energy Fund from other national and international investment funds focused on Mexico?
A: To date, most of the funding in the Mexican energy sector comes from abroad, which is likely to continue. As part of the Fondo de Fondos, we stand out because we give other funds the opportunity to raise more money. Additionally, we have a very good track record as well as a strong international reputation. We can come into a project with US$20-30 million and make it much easier for the fund to raise US$200-300 million. There are two reasons for this. We carry out our own due diligence on the projects, and we invest Mexican money. To give an example, the Mexico Energy Fund invested US$20 million in the first phase of a US$530 million pipeline project, which helped the fund in charge to raise the rest of the capital. We trigger fund-raising chances, not only by the money we invest, but by the backup we give to a project. Our maximum commitment varies between US$20-US$30 million per fund. However, to qualify for our investment, energy funds must have a minimum of US$100 million at hand. We always inject at least 10%, or US$10 million. Anything smaller than that is not worth our consideration, given the time it takes for us to do the due diligence. In the Mexican energy sector, we believe rates of return of between 15-18% can reasonably be expected. Finally, Fondo de Fondos has specific views on when to leave a project. The ideal exit strategy for any private equity fund is to do an IPO, but this is not always possible. Another way is to sell your position to a strategic investor, or else to reach an agreement with whoever you invested with to buy you out in five to seven years. Returns on investment are never guaranteed but based on the performance of the fund, so they can never be written in stone.
Q: What are your focus areas in the upstream oil and gas industry?
A: We cannot bring much to the deepwater segment, since only the big players will participate there and they do not need US$10 million. Moreover, they have their own ways to raise capital, which are very well-structured. There are a couple of shallow water projects looking for capital, which can be interesting for us. Mature fields will be very attractive as well due to the potentially large returns, but the supply of services poses a problem. The current oil industry services in Mexico will not be enough to cover the amount of fields that will be licensed. Finally, the shale oil and gas sector remains unknown, and coupled with current prices, it might not be the right area for such investments. We know the Mexico Energy Fund can make a difference in shallow waters and mature fields.
Q: What is the ambition of the Mexico Energy Fund to contribute to the development of the Mexican oil and gas industry?
A: Our main contributions, which we realize are among the most difficult to achieve, will be to help develop the supply chain for the Mexican energy sector and provide funds for suppliers and service providers to the industry to blossom. We are not doing so yet because we have not found any of these projects. For this reason, we are investing in pipelines, gas storage, and power generation plants. However, in the near future, we would like to help build up and bolster funds that support suppliers and service providers.