Foreign direct investment can be fickle, especially for emerging market countries. In the case of Mexico, foreign direct investment is flowing in the right direction. According to Mexico’s Economic Ministry, $18.6 billion flowed into Mexico in the first quarter of this year.1 This figure represents a staggering 48 percent increase from regular investment inflows at the same time last year. This positive trend is attributed to the nearshoring boom that Mexico is experiencing (and which is expected to continue for the foreseeable future) as companies continue to move their operations closer to their end market.
Fund sponsors looking to capitalize on this market boom have several investment structure options. Here, we discuss a few simplified investment structures that are commonly used in the market based on the sponsor’s fundraising strategy.
Private Limited Mexican Offering
A Mexican private trust (fideicomiso) is ideal if the fund is primarily targeting Mexican institutional investors. The securities offerings of a private trust are made through private placements and generally only suitable for sophisticated Mexican investors; however, Mexican pension funds (Administradoras de Fondos para el Retiro, “AFOREs”) are not permitted to invest directly in private trusts.2 Mexican private trusts are generally easy to launch and operate as they require limited reporting and corporate governance requirements. Still, to the extent an AFORE becomes an indirect investor in a private trust through its proprietary CERPI (defined below), the AFORE will request that the private trust’s terms match with those of its proprietary vehicle to permit both vehicles to operate in an integrated manner. As such, admitting AFOREs may offset some of the time and cost savings associated with launching and operating a Mexican private trust.
Public Mexican Offering
A Mexican public trust is the entity of choice if the fund is targeting a broad Mexican investor base, including AFOREs. There are three distinct types of public trust structures in the Mexican equity public markets:3
- CKDs,4 which issue publicly traded securities named Certificados Bursatiles Fiduciarios de Desarrollo, are generally used to make investments in real estate, venture capital, growth and late-stage companies;
- FIBRAs,5 which issue publicly traded securities named Certificados Bursátiles Fiduciarios Inmobiliarios, are used to make investments in real estate; and
- CERPIs,6 which issue publicly traded securities named Certificados Bursatiles Fiducarios de Proyectos de Inversión, are generally used by AFOREs as feeder fund structures to make investments in domestic and international investment vehicles.
Depending on the type of public trust used, the trust can admit both retail and institutional investors. Unlike a private trust, the interests are listed on a Mexican stock exchange and AFOREs are permitted to invest directly. However, public trusts have strict governance and reporting requirements. Moreover, the securities offerings require regulatory approval from the Comisión Nacional Bancaria y de Valores (“CNBV”). Consequently, public trusts can be quite expensive and time consuming to launch and operate given the regulatory burdens imposed on such vehicles.
Offshore Private Offering
If the fund is sourcing capital from outside of Mexico, then an investment vehicle residing outside of Mexico will be necessary. The selection of the entity type and its place of jurisdiction will mainly depend on the type of investors it seeks to attract: specifically, their place of residence and organizational status, to maximize any tax efficiencies. Additionally, fund sponsors should also carefully consider any regulatory implications applicable to it and its investment vehicle, including any available exemptions. For instance, if the sponsor seeks to target US investors, then the sponsor should carefully structure the fund and its securities offering so that it relies on available exemptions under US laws to avoid registration with the U.S. Securities and Exchange Commission (“SEC”). For a variety of reasons—including the relative ease of setting them up—Ontario limited partnerships are commonly used in the market. However, recently, Luxemburg-domiciled vehicles targeting European investors have been used by fund sponsors targeting investments in Mexico.
Global Offering
If the sponsor is sourcing capital on a global basis, then a parallel structure will be necessary. In a parallel structure, the offshore fund and the Mexican trust (whether a private or public trust) invest on a side-by-side basis or “in parallel.” The terms by which these two vehicles invest in tandem will generally be governed by a co-investment agreement, which establishes the mechanics in which the investments will be made by both vehicles. Given the complexities of launching two distinct type of investment vehicles with different sets of investor demands and fund terms, fund launches can be staged to avoid protracted delays. In such instances, care must be taken so that both vehicles (in particular, the first investment vehicle that launches) provide the flexibility to launch parallel structures with quite different terms.7
Conclusion
Not all fundraises are alike. Fund sponsors face numerous challenges when seeking to launch and operate an investment fund. Here, we discussed a few common investment structures to provide clients several options when deciding which fundraising path to take. Whether clients are seeking to source capital, either from across the globe or locally in Mexico, Mayer Brown’s broad and multi-jurisdictional fund formation experience enables us to assist clients seeking to capitalize on Mexico’s nearshoring boom to plan and implement practical and flexible fund structures.
1“Mexico’s Foreign Investment Surges 48% as Nearshoring Booms,” Bloomberg (May 22, 2023).
2 Under Mexican law, AFOREs are not permitted to invest directly in a private trust. Consequently, AFOREs will invest indirectly in a private trust through their own proprietary CERPI.
3 “Alternative Fund Investment Structures to Capitalize on Mexico’s Nearshoring Trend,” Mayer Brown (February 10, 2023).
4 “Development Trust Certificates (CKDs),” Mayer Brown (January 19, 2023).
5 “Real Estate Investment Trusts (FIBRAs),” Mayer Brown (February 2, 2023).
6 “Investment Trust Certificates (CERPIs),” Mayer Brown (January 26, 2023).
7 “Alternative Fund Investment Structures to Capitalize on Mexico’s Nearshoring Trend,” Mayer Brown (February 10, 2023).
