Private Equity Firms Face Hurdles In Search For Mexico Partners

Private equity funds that have amassed more than $6 billion for the Mexican market face the tall task of convincing small, often family-run companies to let them in.

Jaime Salinas, president of Mexican private equity association Amexcap, estimates there are 30,000 small- and medium-sized Mexican companies with annual sales between $10 million and $100 million that could potentially benefit from private equity investments.

Salinas, who is also managing director for Darby Private Equity in Mexico, told Dow Jones Newswires that Mexico disappeared three years ago from the radar of private equity investors, who were very distracted by opportunities in Brazil, and to some degree put off by gory press coverage of Mexico's drug war.

Now, Salinas says investors have realized that Brazil is "very expensive" while valuations in Mexico are attractive and the country's proximity to the U.S. market remains a selling point.

Yet finding willing partners is difficult, as family-run Mexican companies are reluctant to let strangers look at their books or dictate how they should run their businesses. A private equity firm might determine, for instance, that family members should be relieved of duties at the company because they don't bring much value.

In an effort to stir interest in private equity, Wal-Mart de Mexico (WALMEX.MX) hosted a seminar this week for small business owners. The retailer known as Walmex, a unit of Wal-Mart Stores Inc. (WMT), is plunging 14 billion pesos ($1.05 billion) into its operations this year and would like to see its suppliers consider the growth opportunities that private equity can offer.

Roughly 60% of Walmex's more than 20,000 suppliers in Mexico are small businesses.

Walmex invited suppliers that sell its stores between $15 million and $40 million of product a year to attend the event at the Auditorio Sam Walton in Mexico City. More than 100 showed up.

"The growth of Wal-Mart in Mexico and Central America depends on the capacity of our suppliers to invest and grow with us," Walmex Chief Executive Scot Rank told the group.

Representatives from nearly a dozen private equity firms outlined various aspects of the business and described the sort of companies they seek to invest in: typically those in dynamic sectors which are enjoying double-digit sales growth and looking to expand fast.

"Half of what we do is explain ourselves," Arturo Saval, co-founder of Mexican private equity firm Nexxus Capital, told the group of small business owners. "We're not monsters."

Saval dangled some of Nexxus' success stories, such as its 2004 investment in pharmaceutical and personal hygiene product maker Genomma Lab SAB (LAB.MX).

Genomma's market value was $50 million when Nexxus invested $17 million in the firm in exchange for a 30% stake. At the time, Genomma had 56 products available in Mexico. The company listed on the Mexican Stock Exchange in 2008 and now has a market capitalization of $2.5 billion, with more than 500 products in 15 countries.

Genomma's chief financial officer, Oscar Villalobos, said private equity provides the opportunity to take a company to the next level.

"What would you rather have, 100% of a company with 100 million pesos in sales or 70% of a company with 400 million pesos in sales? The 70%, obviously," he told the Walmex suppliers.

-By Amy Guthrie, Dow Jones Newswires; (5255) 5980-5177, [e-mail]