Certificates of Capital Development (CKDs) are helping investors to access a variety of developing sectors in Mexico – namely infrastructure, real estate, mining, technology and business. Introduced by the Mexican Government in 2009, CKDs are private capital vehicles that allow AFOREs (Mexico’s public pension funds) and other domestic LPs to invest.
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CKDs ultimately enable investors’ access to legitimate alternatives fund managers, safely and securely. This is because the government requires high levels of transparency and scrutiny around these vehicles, ruling that CKDs must be listed and regulated either through the BMV (Mexican Stock Exchange) or BIVA Exchange. These public listings help to curtail any corruption, which is a potential drawback of investing in an emerging market.
CKDs Will Play a Key Role in Economic Plans
While it is still too early to get a handle on the success and overall performance of CKDs, it is clear that the private capital industry continues to boost the Mexican economy. President Andrés Manuel López Obrador will soon reveal a set of major infrastructure projects backed by the private sector to lift the local economy1, kickstart economic growth and attempt to avoid a possible recession. The chart above shows that 69% of CKDs tracked by Preqin are focusing on infrastructure or real estate, and so real assets will likely remain a key feature in López Obrador’s plans to spur the economy.
When the CKD structure was first introduced in 2009, 75% of funds closed and 91% of the aggregate capital raised that year were for infrastructure and real estate investments. Although this bias still exists, the chart shows that a more comprehensive set of CKD strategies has emerged; this includes buyout, fund of funds, growth, hybrid, mezzanine, secondaries, special situations and venture capital. As CKDs have become more established, with the number of funds as well as strategies having grown since the initial vintage, the selection of regulated private capital vehicles for investors in Mexico is wider than ever.
Widening the Scope of Alternatives Exposure
CKDs have largely laid the groundwork for what alternative investments, on an institutional level, have become in Mexico. In 2016, the first CerPi was introduced to Mexican exchanges; CerPis have a similar framework to CKDs, and share the aim of raising capital from AFOREs. Unlike CKDs, which must invest a majority of their capital domestically, CerPis are able to invest internationally with less restriction. Attracted by this flexibility, several ‘brand-name’ global managers such as Blackstone, BlackRock and KKR planted roots and initiated CerPis in Mexico. This development helped to evolve the private alternatives market in Mexico, as AFOREs were able to select from a larger pool of managers to further diversify their holdings.
In January 2018, a ruling by Mexico’s pension regulator, Consar, added another layer to the complexity of the Mexican market. Consar’s new law allows AFOREs to invest in fund managers outside of Mexico and outside of the CerPis and CKDs listed on the domestic exchanges. This expands the scope of exposure AFOREs can reach and increases the diversification of their portfolios.
Over to the GPs and LPs
Thanks to financial developments over the past decade, including CKDs and CerPis, coupled with the enhanced investment capabilities of AFOREs, private capital investment in Mexico is sophisticated, diversified and credible on an institutional level. Though there are still economic and political risks to consider, the Mexican alternative assets industry has grown significantly in the past 10 years. With this forward momentum – and as López Obrador plans for further real assets development – the pressure is on both LPs and GPs to perform well if the evolution of alternatives in Mexico is to continue.
With Preqin Pro, you can now screen fund profiles for their CKD legal structure. Combined with Preqin Pro’s range of functionalities, this allows you to identify potential business development opportunities and compare CKDs against your peers or other funds. Read more about this new feature.
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Article by Justin Bartzsch, Preqin
