Future challenges in the private equity industry and adapting to changing conditions in Mexico and Latin America

“Generating returns was almost too easy in the last decade,” remarked Marc Nachmann, Global Head of Asset and Wealth Management at Goldman Sachs, at the SuperReturn International conference in Berlin earlier this month.

Nachmann’s comment highlights the unprecedented boom the global private equity industry has enjoyed since 2010, driven by low interest rates and high stock market valuations. According to Bain & Company, from 2010 to the first half of 2022, the industry hit record highs, closing 2022 with $654 billion in buyouts, $565 billion in exits, and $347 billion in fundraising.

However, in the dynamic world of private equity, the adage “what goes up must come down” is particularly resonant. After reaching historic highs, the market now faces an inevitable correction. While stock market valuations remain high, the Federal Reserve and other central banks have started raising interest rates, reducing cheap financing and, consequently, exits and fundraising.

As Scott Kleinman, Co-President of Apollo Asset Management, put it, “The types of returns enjoyed for many years until 2022 won’t be seen again until the snake digests the pig. That’s simply the reality of where we are.”

After two years (2022-2024) of declining deal numbers and returns, the industry is questioning if it has hit rock bottom and is seeking to generate momentum through “micro” solutions to macroeconomic complexities.

“Operational excellence” was a recurring theme at SuperReturn, referring to the ability of private equity funds to engage in and improve the operations and management of acquired companies, boosting margins and returns for shareholders.

Mexican and Latin American companies are not immune to this economic cycle. They must prepare, much like Sisyphus challenging gravity.

Beyond macroeconomic factors, the private equity industry in Mexico and Latin America faces unique challenges. In Mexico, sociopolitical changes present a significant obstacle. The leftward shift in political power since 2018 is expected to continue until at least 2030, potentially impacting private equity through proposed reforms like the popular election of Supreme Court justices.

This presents a challenge to the institutional counterbalance that has supported private enterprise, creating a scenario of political and economic uncertainty that could negatively impact legal security, essential for the flourishing of private equity.

Although Mexico’s virtual president-elect has taken steps to reassure investors—meeting with around 500 business leaders, receiving a positive response to her cabinet, and presenting her “Shared Prosperity” project—political and economic concerns remain.

Nevertheless, this is not the time to sound alarms. While returns may not come as easily as in the last decade, it is an era for bold players to thrive, those who find the best market opportunities and implement superior operational solutions, achieving significant returns for shareholders in the short and medium term and potentially establishing a long-term presence in the Mexican and Latin American markets, which promise expansion in the coming years and perhaps a return to the extraordinary returns seen in the past decade.

Santiago Ferrer
Partner of Cuatrecasas Mexico

Emilio Ruvalcaba
Associate at Cuatrecasas Mexico