March 19, 2019 / 6:04 AM / 5 months ago

Blackstone joins KKR and BlackRock in Mexico private equity fundraising

MEXICO CITY, March 19 (Reuters) - Blackstone Group has raised $695 million from Mexican pension funds for its first two local private equity funds, filings showed, joining Black Rock and KKR & Co in expanding in Mexico following regulatory changes.

Several of the world's top private equity managers have quietly raised billions of dollars from Mexican pension funds, known as afores, since new rules were enacted early last year, filings to the Mexican Stock Exchange and a non-public document reviewed by Reuters showed. Regulators have authorized some managers to raise more over time.

It was not immediately clear how much in total has been raised to date in Mexico by equity managers, which include Discovery Capital Management, General Atlantic, Partners Group, Lexington Partners and HarbourVest Partners.

Their arrival in Latin America's second-largest economy comes after a regulatory change in January 2018 that allowed foreign private equity managers to tap into $179 billion worth of pension fund assets for the first time and eased some restrictions on how pension funds invest their assets.

Mexico's lower house of Congress is about to vote on a draft law by Mexican President Andres Manuel Lopez Obrador's ruling National Regeneration Movement (MORENA) that would give pension funds further flexibility.

Blackstone Managing Director Matthew Pedley said in an interview that pension funds were taking advantage of the recent change in regulation to add exposure to international alternatives and diversify their portfolios.

Others consulted by Reuters on their funds in Mexico declined to be identified.

The private equity funds could help Mexican pension funds spread risk with international investments ranging from infrastructure to energy and special situations hedge funds.

Luis Sayeg, investment management director at Citibanamex, which manages one of the leading pension funds in the country, said the new funds could benefit pensions.

"It is a new opportunity to diversify the portfolio into alternative asset classes, with likely attractive returns, that do not necessarily exist in Mexico," Sayeg said.

The draft law was praised by ratings agency Fitch although some critics have expressed concern that the government wants to tap pensions to help finance pet projects.

PENSION POT

Black Rock was one of the first foreign asset managers to expand into Mexico, raising $615 million for two funds, one of which will focus on infrastructure investments, a non-public document detailing fundraising activity showed.

KKR & Co raised $683 million for two funds, including one that will invest across private equity, growth equity, real assets as well as special situations hedge funds and private credit funds, the document showed.

The new funds are all listed on the Mexican Stock Exchange.

Mexico is attractive to those looking to raise assets for long-term investment.

The country has the largest and one of the fastest-growing private pension fund systems in Latin America, almost doubling in size in seven years, a global pension fund assets analysis by consultancy Willis Towers Watson found.

Mexican pension funds' investment outside the country is still limited to 20 percent of overall assets while their investment in alternatives like private equity is also limited to 20 percent.

This gives them little room for diversification at a time when most other maturing pension fund systems are loosening investment restrictions to help address problems like funding gaps and an ageing population.

Investing in new asset classes or geographies adds layers of complexity. This often requires more sophisticated investment processes, risk management and corporate governance practices.

Tonatiuh Rodriguez, chief executive at one of Mexico's leading pension funds, Afore Azteca, said its investment committee had decided not to invest in private equity for now.

"The risk of these investments is a risk that needs to be monitored and managed in a different way," Rodriguez said. "The returns we get from investments in the public market, which, by definition, is more regulated, are good."

Regulation stipulates that the private equity managers need to invest at least 10 percent of the capital in Mexico and commit at least 2 percent as co-investment alongside the pension funds.

Despite his risk aversion, Rodriguez said: "The fact that those are large, well-known managers, with best practices, minimizes the risks for pension funds." (Reporting by Stefanie Eschenbacher; additional reporting by Joshua Franklin in New York; editing by Frank Jack Daniel and Cynthia Osterman)

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