How does the current investment climate in the Mexican infrastructure sector look?
In BlackRock´s view, the current climate for infrastructure investment in Mexico is very positive for a number of reasons.
Demographic and economic fundamentals in Mexico as well as growth make infrastructure key to unlocking the country´s productivity. Infrastructure allows Mexico to make the most of economic development opportunities, particularly those afforded by its strategic geopolitical advantage as part of North America. In order to unlock the country´s economic potential, infrastructure investment is required in all sectors.
The legal framework for public-private partnerships is robust and proven. Having existed in large part since the mid-1990s, PPPs have recently improved significantly, and have been assisted by the passing of major reforms concerning labour, energy and education, as well as the creation of a federal PPP law that is now bearing fruit.
A significant number of projects have been developed to address specific needs. The need for investment is no longer at an abstract level, but has rather been addressed with actual, feasible projects which now need to be financed, built, and operated.
How do peso and dollar investment opportunities compare within the sector?
Opportunities for peso and dollar-driven projects differ more as a result of the sectors that each project tends to fall in than because of the functional currency they are denominated in.
Given their sectors, projects in areas like oil & gas and power, which are denominated in dollars, tend to be larger than those in transportation, water, or social infrastructure.
What risks are present when investing in the sector? How can these be avoided or negated?
Not unlike all types of investments, investing in real assets and infrastructure in particular involves exposure to uncertainty in many areas, from political and macro-economic risk, to sector or asset-specific issues.
A focus on processes to identify, mitigate, manage, and appropriately price risks is at the core of our investment philosophy. There are a number of risks that can be mitigated through active management by experienced teams, which is why we have invested in having an on-the-ground team of experienced professionals to conduct due-diligence, structuring and eventually active and involved management for each of our investments.
In our view, investing in infrastructure, particularly in growth markets such as Mexico and Latin America, requires a very involved, active investment and management strategy.
How does the volatility in the peso weigh on investment decisions?
Our view, in general, is that currency exposure should be matched within a project´s capital structure. Projects with dollar-denominated revenues are more suited to be financed in dollars.
Our local investors have invested into a peso-denominated fund, but investors from other BlackRock-managed pools of capital are usually dollar-based.
We carefully consider currency exposure for each transaction. For the market in general, projects with a currency mismatch can represent a challenge for some investors.
To what extent do PPPs assist in attracting infrastructure investments in Mexico?
PPPs are an attractive tool at the disposal of government clients to address needs where not only the construction of physical assets is necessary, but services around the operation of those assets and the services they provide are also necessary.
In fact, Mexico´s new PPP law is now enabling a number of projects under the Unsolicited Proposal provisions, and is helping governments design comprehensive service-oriented solutions to their infrastructure needs and associated financing.
How do infrastructure investment opportunities compare to other opportunities elsewhere in Latin America?
While Mexico currently enjoys a number of unique factors, including the size, depth and development of its economy, there are a few attractive opportunities in the infrastructure sector throughout Latin America. Naturally, each is subject to its particular context and constraints, and not all markets are the same.
A number of countries in Latin America have, similar to what we see in Mexico, political and economic stability, strong demand fundamentals and infrastructure needs.
What advice would you have for anyone looking to invest in the infrastructure sector in Mexico?
Our recommendation for investors looking to allocate capital to Mexico is to keep a strong focus on having local investment and management capability. Limited partners and institutional investors should, in my opinion, consider selecting world-class institutional managers with strong local capabilities and involved and active asset management practices.