ZN Mexico Capital Closes on $77M

ZN Mexico Capital Management recently closed its second fund, ZN Mexico Trust, for $77.6 million, and has already completed its first deal. Along with partner, Nexxus Capital SC, the fund invested $15 million in Homex, a major builder of moderately priced homes in Northern Mexico. ZN Mexico’s first fund, also called ZN Mexico Trust, was a $53 million equity vehicle the firm has used to invest in Mexico since 1998.

Richard Vaughan, an investment officer at ZN Mexico, said the firm is not straying far from its original mission. That is, it will mostly target middle market companies – with revenues between $20 million and $100 million – throughout Mexico. Investment sizes can range from $5 million to $20 million, and will typically represent a significant minority stake in the company. Vaughan added, however, that ZN Mexico is also willing to buy significant majority ownership.

Mexican companies, like others throughout most of Latin America, have little access to traditional financing, Vaughan said. At the same time, the effects of the North American Free Trade Agreement have led many companies into an era of high-growth.

Vaughan went on to say that, on a macroeconomic level, Mexico is “substantially de-linked” with the rest of Latin America.

“Mexico does 85% of its trade with the U.S.,” he said. “It’s more stable than the global investment companies give it credit for.”

ZN Mexico’s investment in Homex – it acquired a 17.3% stake in the company – fits in with the firm’s strategy on several levels, Vaughan said.

To begin with, the home-building industry is experiencing high growth right now. “There was demand for one and a half million homes in Mexico last year, but [only] 400,000 were built,” he said. “So there’s a deficit in terms of capacity.” He also said Homex is “extremely well-managed. Its focus is on medium-sized cities. We’re helping increase its working capital efficiency, [and] plan to go public in 2001.”

“There’s already three Mexican home builders listed on the Mexican stock exchange,” he added, noting that one was listed in the U.S. as an American Depository Receipt.

ZN Mexico Trust is a private equity fund, with committed capital organized by the partners of Zephyr Management LP and Nexxus. Zephyr is an emerging markets private investment company based in New York that has organized funds in South Africa as well. Nexxus is an independent, employee-owned private equity firm based in Mexico City.

EU Pact Improves Profile

Mexico’s profile in the international investment community improved in March as a result of both the signing of a Free Trade Agreement (FTA) with the European Union (EU), as well as the upgrading of Mexico’s external debt to investment grade by a credit agency.

The FTA between Mexico and the EU represents the first trade pact signed between the EU and a Latin American country. As a consequence, the office of the ministry of finance in Mexico reported that Mexico now has access to two of the largest markets in the word: the U.S. and the combined countries of the EU. The country additionally has FTAs with several Latin American countries, although not the largest, Brazil and Argentina.

Moody’s Investor Service, which recently upgraded Mexico’s external debt to investment grade for the first time, said it was encouraged by the country’s lower foreign debt burden, as well as its “dynamic” export sector. The new status will mean greater access to foreign capital at lower financial costs to companies and financial institutions alike.