Empower Your Business with More Products More Sales in Mexico

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hi everyone welcome to another episode of the latam stocks podcast I'm your host Patrick flood today I'm speaking with Sebastian midali Sebastian is the founder and managing partner of Tempest capital a Mexican private Equity Firm he's had a long and successful career working with private equity in Latin America he was also a founding member of the CFA Society in Mexico so we have a ton of talk about today Mexico's economy private Equity his firm Tempest Capital so let's get right into it ni Sebastian how are you wonderful Patrick thank you for having me no I'm very excited to talk to you today thank you for doing this so before we get into everything can you tell listeners a little bit more about yourself where are you from originally where did you go to school how did you end up managing a private Equity Firm in Mexico oh well long story but basically I'm a mut each one of my grandparents was from a different country and and I've lived in nine different countries I grew up mostly in Mexico and you know made Mexico my home and I'm I'm Mexican I'm a strange Mexican interesting and then and then what about private Equity did you always have an interest in finance was that what you planned to do for a career when you when you went to college yeah basically I've been fascinated by finance and how it represents Society the interactions of society and wealth the allocation of resources and wealth creation since I was little actually and we're talking about like early teenss but I did consider being a physicist I was either going to be a banker or I was going to be a physicist so theoretical physicist did you read anything when you're young that influenced you was a particular book or author that resonated with you that really made you go okay that's what I want to do so for finance not really it was just reading daily about you seeing news reports and reading about the economy and and finance it what I can't say that I was heavily influenced by a particular investor at early on in my career probably the first I read heavily about was George Soros so George Soros in Frank in s templon these would be the first ones that I actually read that was a my late te interesting yeah so I noticed in your work too obviously private Equity you're at the micro level at the firm level investing in companies but you also have macro thesis right like your reports that we're going to talk about in a little bit you talk about macro as much as micro oh yeah because so we're bottom up in our investment selection but you need to choose Industries and sectors that that have attractive Dynamics uh both from a competitive perspective that have high royes that they can maintain those Roy and preferably have some growth in there right and that you can only really do that if you do a macro overlay so we do a macro overlay on the sectors that we find most attractive and we go fishing in those sectors and trying to find good deals there it's part of our process we have our investment process which basically goes through three steps first we look at whether a okay we're dealing with a good idea which is basically that this industry the sector has a large addressable Market that it has interesting growth perspectives potentially barriers of Entry Etc if that we check that box then we go to see whether the company whether the company we're dealing with is a good company basically it's well-run depending on the stage of uh development the company has whether it's processes systems a full built out team the culture if it's an early stage company then we're just looking at the founders right and then finally we look at terms and conditions for listed stocks that's basically the price right Al for earlier stage companies well we might look at the structuring liquidation preferences and govern and governance DRS which are incredibly important they're almost more important than valuation probably more important because they're binary if you don't have governance you just don't go in perod interesting you can't it's binary you either have or you don't and you follow that process because it's very easy for you to fall in love with a founder and forget about valuations forget about whether they're dealing in an interesting industry so you could have a very convincing founder a very convincing management team in a bad industry and you know they might be great people but they're not going to make a great success out of in a bad industry they're just they're wasting their talent similarly if some people like to go for the lowest cost you know the cheapest option within a particular sector because they want exposure to a sector if it's a bad company it's probably going to be a bad investment so no matter how cheap particularly in early stage companies early stage companies are highly binary they may be they're cheap for a reason right so what are some of the the maybe governance due diligence that's unique to Mexico is there anything that maybe an international investor that's never invested in Mexico might Overlook when they do the governance due diligence that you put so much emphasis on well there's a lot to begin with in reality Mexico is about a it's a private market and that you know that's probably why we're talking Patrick because you know there's not a lot of publicly listed stocks in Mexico the the entire near Shoring opportunity is mostly acing to private companies now so first is you're probably going to have to be dealing with private companies in an area where nominally Mexican minority rights and governance are actually relatively strong so that's something that get wrong about Mexico our laws are not that bad the problem is enforcing them so you might think you have certain first you'll be surprised that Minority investors have very significant rights built into most uh legal structures and by default you'll be surprised that they're very hard to exercise even though you have them right you're going to be surprised that you have a concentration of service providers which means that if you're dealing with counter party that's very influential well connected you might actually find that you're it's very difficult to find a service provider that's willing to prepare litigate material to litigate against them and that means that for example you want this is something you need to consider when you're investing alongside influential Mexican families it may be very difficult to exercise your rights against them if something goes wrong I've noticed that you mentioned the Mexican families and I've noticed that at least in a lot of the public equities it's still not family controlled but they're still significant shareholders is that common in the private markets as well are there still a lot of family businesses you look at absolutely so a lot of the Mexican listed companies are essentially private companies because they have such a low float in real terms they're private yeah and nominally those listed companies have strong govern there strong governance rights and protections for minority interests but then you find out that you know sometimes the the controlling investor is doing things he probably shouldn't right and the boards are they use the term in Mexico honorary why they're honorary because there's limited downside to there's limited liability in case things go south so fiduciary duty is CLA fidu breaches of fiduciary duty claims in Mexico are not usually enforced interesting that's why you generally have weak boards and that's something you have to use it as part of your screening criteria is that one of the reasons then at Tempest you describe yourselves as activists so do you go in and make sure that the boards you invest in are not weak boards is that a key point for you that is one of our key points interesting makes sense so at certain points you have to get be willing to get on the floor and wrestle people yeah so it's not necessarily a passive investors Market there's no more suited to an activist style someone that's willing to be there boots on the ground or I think in Mexico requires an activist fund and that to unlock value in the publicly listed company sector so we're think of it as analogous to the 1970s in the US right before the corporator showed up and you know actually put a little bit of order in US listed corporates so you can access the opportunities and you can obviously do it through an ETF and I would say ETF to have it well Diversified because of the governance issues in Mexico it does introduce an element of unpredictability and if you're an individual investor you can't influence that you can't control that so you want to diversify it away now that said it's getting better you are starting to see litig corporate litigation you are starting to see people pursuing claims against boards and pursuing claims against management teams that is new in Mexico it's evolving that's part of what makes this exciting Mexico is developing both as an economy and as a market they're interrelated but they're not EX exactly the same thing so let's talk about a little bit of that development I want to ask you about your growth perspective so in 2020 you wrote a piece called the US China divorce the rise of the Mexican decade and then you recently followed that up at the end of 2023 with the Mexican decade the first derivative is here so can you maybe walk listeners through what was the original piece in 2020 about what was it calling for how has that played out and then where are we today yeah so it was originally it was first published it in December 19 basically what we were seeing is that there was a necessary shift go at a macro level that would a shift from supply chain efficiency to supply chain security basically because the West Was and is significantly if not irremediably dependent on China it's not a good idea to be depend for your supply chain to depend on your geopolitical enemy your geopolitical rival if you want to talk about it that way but definitely not somebody that you're actually threatening to go to war with and it never was a good idea it was never a good idea that type of concentration Mexico in the 80s early 90s was experiencing significant growth decelerated for a lot of reasons one of the reasons was that Mexico entered in a de facto commercial war with China so we were competing for the same markets with the same we a very similar strategy with China and China won what's happened now is that China is out of the investment equation they're definitely still there in the international trade and the international commercial market and they will continue to be there this is not the end of globalization it's not possible to end globalization what we are talking about is the more essential part of the supply chain needs to relocate to areas where security and access to that supply chain can be guaranteed and we we can talk about a lot of options but the reality is that that's governed by proximity you cannot control something that's across the ocean so we use the term Mexican decade we don't really like the term we use the term Mexican decade we use near sharing we don't like the term of Ally Shoring that a lot of people throw around because we don't think it covers the actual situation I think from the US perspective the US likes to pretend that there's a lot of options out there but there aren't if you invest in India well container ships have a very very contentious relationship with Torpedoes they don't get along so no it does not give you supply chain security China has the largest submarine Fleet in the world if you ever had a conflict with China you'd be cut off from that supply chain so Ally Shoring does not work proximity does so it is near Shoring the US would ideally like reshoring they can't do reshoring it has a deficit of 5 million qualified workers today only about 13 16% of us high schoolers wants to work in a factory the US has not completely but it's significantly de-industrialized and the only way it to reverse that it would be to open its doors up to massive amounts of immigration that's politically unfeasible we're seeing that the immigration is becoming one of the key issues for the election and it will continue to be that we don't see that change Canada doesn't have a population the only people that have somewhat available Workforce and somewhat of a spare capacity is Mexico and the rest of Central America Mexico cannot substitute China by the way we don't have enough people we don't have enough spare Capac we can only cover this essential part of the supply chain usually that Supply essential part is actually also the more value ad locative par so that's still a incredibly attractive for Mexico we estimate that that's going to be about 17 billion dollar in additional foreign direct investment per year for the next decade which will back into 2020 we started saying Mexico is going to be growing at approximately an annualized growth rate of 3 and a half to 4% over the next year we're already there today this year we're slowing down and it's kind of uneven you know the sovereign states in Mexico they're growing at 6% right it's going to slow down this year but on going forward we're actually upping our estimate to about four and a half% of annualized GDP growth for the next decade next 15 years basically Mexico needs to double increase two and a half times GDP in the next 15 years so when you say Mexico can't compete with China are the industries you expect Mexico to be competitive in and compete with and are those the first derivative industries that you mention in your most recent piece which were Automotive Aerospace and machinery and electronics let me explain that we can't compete by popul we can't substitute China we cannot substitute China by sheer simply because of size so China has an effective size of the Chinese population that is that lives in an area that is subject to the it's industrialized region it's about 400 million people so you're talking about three times Mexico so we can't really compete we can't substitute 400 million people Mexico is at historically low unemployment rates we've never had lower unemployment so we are already in a very tight labor market in Mexico so that's what I mean that we're going to be picking up the most essential Industries and the most necessary Industries and we're going to have a double impact we're going to have first we're going to have the growth in these industries and then we're going to have the increase in the multiplier in the valuation multiplier Mexico has some of the cheapest stocks well a little bit less cheap than they were a couple years ago but overall some of the cheapest valuations for corporates across the board so it used to be that it was possible not usual but you could buy a Mexican private company for two three times a bit though you could those valuations are going up we're certainly not at levels where you see it in the US at 12 15 times right which usually in the US buying at less than that tends to be distressed territory and highly specialized strategies you can there are some funds that will tell you they still do it and I'm sure they some of them can do it and do it successfully but it becomes a very very specialized game if you start going for those valuations the reality is in Mexico those valuations were available across the board if you knew where to look they've gone up it is getting more expensive but we're going to have growth and we're going to have valuations so that's a very interesting Dynamic additionally there's a very low availability of credit in Mexico historically that's one of the reasons that pressure the peso is appreciated by the way so a lot of people are asking why is the peso appreciating the way it is but part of it is that fundamental demand for the peso has gone up so we have an we have increased demand for the peso because of near sh less Mexican corporates are actually investing at a record level within their own plants so capex and Mexican firms has gone up so instead of families taking dividends putting them abroad they're reinvesting them into their own firm then we're having an increase in um foreign direct investment historical level of increase in in foreign direct investment and we're having historical increase in remittances from workers it's actually a very positive cycle that we're going through right now that of course means higher demand but additionally very low Supply Mexican Banks don't like to lend they are some of the most profitable banks in the world 20 25% Roes and that's lending to large very AAA clients so basically if it ain't broke white fix it they're very happy with their business right their business model right now is very very good some banks like Bova Bova it's not really an International Bank it's a Mexican B Bank something I believe it was 80% of their profit comes from Mexico profit it's just a very very luid banking franchise that means that corporates both large and small are under levered L small Mexican smmes basically are unable to access Credit almost at any price so you come into Mexico if you're able to bundle the companies together get them to a certain size sophistication clean up some of their accounting issues which are becoming less and less because of the unlike the US Mexico most of Latin America you're based in Brazil most of Latin America now uses digital invoicing and that has significantly improved governance and Counting across the board it's become much much more difficult for companies to aade taxes to have double bookkeeping that used to be a very very important issue 10 20 years ago it's rapidly decreasing in importance and um contingent liabilities in Mexican firms are much easier to to manage not so much the governance part that we discussed but the contingent liability part the FIS the potential fiscal liabilities that's not the issue it used to be anyways going back to this so that means that it's now possible to help these company access leverage which means that you can also include a third value generation lever which is actual adding lever to your investment so it's a very attractive combination that's uh setting itself up in Mexico interesting so let me ask you then about the Mexican consumer so you have this tight labor market strong peso so are some of the second and third derivative Industries like retail or domestic tourism have those started to be prosperous or not yet has it not filtered through yet to those Industries early stages so and I'm glad that you went through our paper carefully early stages so the way we discussed it is exactly like that first derivative is the direct impacts from near and that's already ongoing right and we're estimating for our investable universe about $1 136 billion dollar of opportunities in the first derivative of investable opportunities the second derivative is essentially the secondary impacts which is a little bit more on enabling Technologies and enabling services that take a little that have a longer uh like time and it's a little bit smaller it's also because the sectors we're targeting we believe that it's about 96 billion dollars in Opportunities so that's Telecom construction material cold chain Logistics everything that a growing middle class consumes additional it comes Frozen medicines fruits vegetables meat we're already at an incredibly tight cold chain a lot of the product actually it's kind of not very good but a lot of the medical cold chain in Mexico is deficient and a lot of the product you're buying in particularly in the Mexican rural cities actually does not would be non-conforming by inter National Health stand so the supply chain was broken somewhere along the line in real terms there's a lot of buffer built in there obviously will people will be taking their insulin even though they shouldn't right same thing with then the third derivative is exactly when we have that significant growth in the middle class and discretionary consumption and that's the internal tourism there is a little bit of that going on but we like to think about it the larger part of that impact is five seven years down the line so our plan is to basically you know we're one of half dozen private Equity firms operating in the country a what we're planning on doing is surfing the wave as the sectors as these sectors evolve that would maximize our irr across the board across several vintages doesn't mean we won't enter a sector that is from a later stage if it's the right conditions right very specifically the right conditions and right pricing and in the right geographies so there's again that's the part where the bottom up comes in but this helps us frame where to look and yeah Mexico is one of the world's leaders in Aerospace people don't know that fourth producer worldwide very similar case to Brazil except we don't have emad we do design we don't have don't have the brand name we don't have the brand name but did you know that the super Puma helicopters still built in kto did you know that the turbines G's G has two centers worldwide that it designs airplane turbines in the world the US Mexico and me in K so we have a very significant Aerospace cluster in K also in Chihuahua but and it's a high value ad cluster these are not low value at services so people are might be thinking put together some wire harnesses no no no we designed we design the engines which is the highest value ad you can have it's arguably more difficult than a lot of bionics and by the way we also have Garmin and some of the avionics providers in Mexico also same thing with Automotive for automotive for producer worldwide we just don't have a native car brand when we've tried they've all gone bankrupt we're just not good at that but we so those sectors are feeling an immediate impact the car sector has also been impacted by the strong mexican pesel that has not been good for them but still our main client is experiencing an increase in middle class in demand from the middle class which is also what's driving a consumer level core inflation so we they're still seeing increases in their books in demand books and will continue to by the way the US will continue to experience inflation until or at least what we can commonly defined as inflation until you solve the structural supply chain issue and start exporting inflation from China to exporting inflation to Mexico and broader Latin America interesting so let me ask you about Mexico's infrastructure then because you mentioned in your research piece for the cold storage thesis that it's a catch-up trade that it's it's lagging behind and it's going to catch up to what developed markets were but does Mexico have the infrastructure in place already for that to play out or is public investment into roads or ports or or infrastructure necessary so we have historical levels of of investment Imports which is very important there's a whole new initiative the new government is coming in with a new initiative on trains which are very both passenger and cargo trins we you need at least one more railroad line to the US there is a huge issue on electrical generation and transmission the number one issue is probably transmission so I've heard from sector experts down here we've heard that the problem is relatively easy to for solve about5 billion dollar in investment will resolve most of Mexico's transmission issues which is basically getting the transmission lines interconnected generation is harder problem to solve that you know I'd love to see nuclear in the equation and there's some talk of including nuclear which I'm a big fan the reality is that it's going to take time nuclear takes time thermos you know combined cycle plants take a little shorters which means we're probably going to see a lot patchwor you know a hybrid electrical grid with a lot of solar and it will be a patch and the new Administration that's coming in appears to be very open to a very amicable to reopening the energy sector to investment amlo was his whipping Horse He was all about energy the energy in in the public sector's hand that phase seems to have shifted and to have been left behind by by in Mexico by the way the Supreme 45 days ago ruled that amlo's modifications of the energy law and everything he was trying to do essentially increased government control on the elect sector were was unconstitutional so it's all thrown back it's gone we're back to where we were six years ago so you mentioned perspective you mentioned the incoming Administration Mexico does have an election this year so is there anything that investors should keeping an eye out for if they're not following Mexico closely I mean what are your opinions on the coming election this year from your perspective well from my perspective I'm much more concerned about the US election than the Mexican interesting you think that is from from an investment return perspective you think the US election will have a bigger impact on your portfolio companies than Mexico's election yes or no obviously uh Trump is going to be let you know Trump is a racist that doesn't like Mexicans and he's and he's treated us that way in the past but this feces the near Shoring feces does not depend on an individual president MH it's really much much bigger that that's what's interesting about nuring this is not some type of hype and short-term Trend this is a secular long-term fundamental growth uh phenomenon that's backed up by geopolitical imperatives y now what would concern me with regarding the evolution of the near insuring Trend if the US and China decided to make up and become friends again that would be very concerning for this trend that's the downside risk for this trade I see it as a identifyed as a risk I see it as a low probability risk so whichever us Administration comes into Power will have to deal with the situation with China and they only really have one option what we discussed they may like to use the term Alli sharing but that's not solve their problem there's only one real uh solution Trump coming in will add hiccups to it but won't change the fundamental Trend now the US election is going to be very contentious there might even be violence in the US first time I've never thought it was possible but I think there could be violence much as you would see in a Latin American election I mean the US election is looking a lot like a Brazilian election right yeah it's crazy to see it really is it's hard to believe but I tend to agree with I think it's going to be at least in my lifetime the most contentious election by far so this is the most contentious period in the US history since the Civil War that's not ready at that point I'd say we're something like 1840s US the US needs to take a step back relax and decide what its priorities are and really reflect on the road it's taking but that said Mexico yeah there's a very clear lead for Claudia sham bound I would be incredibly surprised if she doesn't win you the polls are clear I think the big question for investors in the business Community what's going to be the makeup of the Congress whether she's going to have majority control or not the governorships and also whether Mora will continue as a unified party because in reality you're seeing a lot of conflict in that party and historically the Mexican left has bands together in them fragments right so it's very possible that happened with the per where amlo was one of founding members and it ended up being what we call the trius of the and essentially little parties within a party that gives a very similar effect to having multiple parties so the reality is the part is already fragmenting is it going to fragment more and more clearly that's important because that means that power is going to be split amongst a wider group and that's a good thing that's a very good thing it means that the president doesn't have as much power to impose his agenda he has to actually go back to traditional politics and debate and negotiate so so I think the what investors need to watch out is what degree of a fragmentation in Morena will we be seeing how much diversification of the power base in Mexico will happen but otherwise it's very clear the winner again I would put it at something my personal estimate about 90% probability that we're going to see a cloudia Shane bound as president she has a more business friendly attitude the more predictable and she's coming in with experienced team is basically you're graduating the team that ran Mexico City to running the country that's a good thing because it means that they're accustomed to working together and they have experience there is some concerns that Claudia sham bound historically has been convinced leftist so she think about her kind of like a French left basically bringing in the French left president somewhat ideological is that the worry that there's some yeah okay so am was not a leftist people got that wrong he was not a leftist especially people who was extreme absolutely not Amo was a populist so he was a very pragmatic populist by the way Shane bound is uh much more institutional but she's ideologically Center left okay and her team is Center left so you're one of the things you're going to see you know she's a doctor Renewal Energy she's apparently bringing in people close to her to run the energy sector so yes we going to see more renewable energies socially you're probably going to see more more programs that are that are more structured programs for uh so more so more structured social program so I would expect them to actually increase but to be more structured than what amlo put in place which amlo put them in place basically for electoral purposes she's actually going to administrate them and make them effective ah but increase them so I don't don't expect her to yeah don't expect her to reduce the the I am not expecting her to to do that I am expecting her to be a little bit more institutional but ideological how that plays out like you mentioned is a lot to do with the Congress and what happens with those elections precisely Patrick that's why the makeup of Congress is so important interesting so maybe International investors then should be focusing more on the Congressional elections in Mexico than they are on the presidential election yep that's the real game that is good to know I'm sure so let's transition a little I want to ask you then about private equity and mergers and Acquisitions and then let's talk a little more in detail about Tempest so can you just tell me then how has the nearshoring trend affect the private Equity industry in Mexico has it become easier to raise capital for firms have you seen new firms starting to pop up more crossborder m&a how of the last few years played out all of the above but in in different degrees and less than than people believe in U for it's at an early stage what we are seeing is a lot of European American and some Chinese corporates coming in as strategic buyers okay so what's moving is strategic Acquisitions and significantly if you ask Mexican businessmen industrialists they'll tell you they've never had more their books have never been more full they've never had more sales and they're operating at full capacity for private Equity what we're seeing is increased interest in the sector now we're coming from an incredibly low base Mexico was a dirty word for investing just five years ago even three years ago and people want to understand the story we're getting for example the articles that you mention we're getting a lot of traction on our first article got 1 million views on when it was referenced in fors people are want to understand it but they get they still need to get through a lot of hurdles because Mexico is not institutional grade they have to rethink retool their investment policies and they have to get over some long-term held biases yeah I find that in a lot of Latin American countries that cultural perceptions stick with investors you know Columbia is still Pablo Escobar Mexico still gets associated with the cartels it's even though it has nothing to do with modern day investing or the markets but it is what it is it is what it is the best thing advice I could give to International investors is come to Mexico City and monter for a week just come down come down right now Mexico City is safer than New York yeah work around and it's not people will tell you it's not just kesa Roma walk around Mexico City and if you're a foodie you'll find worldclass restaurants if you like history you know it's amazing how well Mexico outperforms tourism wise too if compared to the rest of Latin America I mean it's like 20 21 million International tourist a year so yeah there's definitely cultural exchange so if any country in Latin America has the ability to break the stigma I would bet on Mexico first I'm a big believer in Latin America big part of my career has been spent on developing private Equity Venture Capital ecosystems in Latin America so big believer in the future of latam it has ific issues but the world we are right now in a very complicated world with very complicated investment decisions and in within that framework Mexico Latin America is the least dirty shirt what's the analogy so when you're on a trip and you stayed an extra day or two and suddenly you have a big meeting suddenly you're invited unexpectedly and you're out of clean clothes so what shirt do you put on the least dirty one you don't you're out of clean ones so right now now that's the situation with Mexico so Mexico has warts you know it's not perfect definitely not perfect but what are your Alternatives Europe is at War and not only at War it's losing the war that's not a good place to be and it lost access to cheap Russian gas and to regain it it pretty much has to reach a very unfavorable peace with the Russians it also has an inverted population pyamid that is very scary demographics the demographics in L time are a huge story that don't get talked about even when you look at at China compared to Mexico over the next decade the demographics favor Mexico absolutely these people are underestimating the impact and the risks associated with inverted population PS yep and it's not that the demographics are great in Latin America it's like you said it's the least dirty shirt right they're still below replacement birth rates in most countries but less so and it's and it's younger than the alternatives yeah when people talk about climate change I basically tell them what this is not an issue we need to deal with right now because it's already solved even if we assume that the science is 100% resolved I don't think it is but let's say it is let's assume it is we are going to have half as many humans in 80 years as we have today it's just because the population perid we already so this is almost inevitable how we're going to pay pensions how are we going to take care of this aging population I don't know the impact it has on our economic system is a deeply deflationary impact how are we going to Res resolve that within our economies how is massive deflation in the future going to be dealt with I don't have the answer to that very complex issues yeah looking yeah so I tend to agree with everything you just said I think it is the least dir I think one of the thing that's most interesting too is Latin America might be the most under region out of all the majors if you put South America or Latin America's economy and combine it it's the third largest by GDP in the world but I think maybe per investment analyst or per fund however you want to measure it I think it might be the most underf followed and underinvested well let's start with the basics Patrick we call it Lam we have this enormous region that's very different yep that we just group it together because it doesn't matter because no one really follows Ecuador so they just kind of throw it in there with the Indian region and yeah I agree you know I tend to believe that Latin America is really five regions but if you want to put it in regions but the more importantly is that you get the name on the head we just group it together as something that is not worth following and that's because you know investors follow success stories and they're really focused on near-term they're shortterm oriented and they're oriented on success stories and Latin America has not delivered them historically in the near term so until those returns are become self-evident they're not going to dedicate the resources to following the region which makes it more attractive if you want to be early though your IR might be hit by the fact that you're too early right it's OB whether being early is being late but the right now that the issue is that they're not following it because there's one there's not the lack of success stories and the second one is because most of the transactions are private so there's no product to sell anal get paid for selling research on investable assets if you can't invest in the asset there's no incentive to buy to prepare research for the asset I write equity research I'm publicly traded Latin American stocks and if I only covered the adrs I'd be out of companies in a year I would have covered them all there's maybe 30 Brazilian companies and yeah you hit the nail on the head there's there's no there's not really a monetary benefit to covering it I mean in Brazil there's an industry you know there's an Equity Fund industry but they don't have that much under management and you don't get paid that well to do it completely and you have relatively low floats and Rel relatively low volumes and in at least in the case of Mexico most of the float is being held by a forest so Mexican Pension funds and they buy and don't trade so they're not big consumers of research I mean that's one of the reasons I wanted to start doing this podcast and interviewing someone like you cuz I'm always so interested when smart guys that do Investments choose to focus their career on Latin America cuz you could have very easily when you were 25 whatever finished your NBA 30 gone to New York City ended up covering Nvidia or general electric and made a lot more money monthly coming in right but you take the long bet on South America and yeah I think it's going to pay off in the long term I'm sure it has but I also think it's more worthwhile it's more exciting much more exciting and the challenges are much more interesting so always have dealt with difficult zip codes and I think that makes you a better investor you know certain estas from bbtg when silen Valley Bank went bankrupt he made a very accurate observation any midweight Mex Latin American Investment Banking analyst would have told you that this bank was incredibly facing incredible risk because of the the scality term mismatch between its deposit and its uh it liabilities and asset liability sorry the the asset liability mismatch was so enormous yeah because we've experienced that we watch that we we are accustomed to volatility lot of this is something new for a lot of geographies and know we'll start and we are going to be converging in volatilities between the US and Latin America and Emerging Markets especially when we get over the big Tech bubble right the Magnificent S I mean these are flat the analogy to the do bubble is it's crazy yeah it's I I don't know what to do with it can it double again probably but I I don't know you're dealing with something that's irrational so anything can happen yeah I think it's I think it's more it's more meaningful too you have more of an impact when you're the only analyst covering a company you're the only person that's going to do a private Equity investment in a region you can really see the impacts whereas who cares if you're the 40th analyst covering you know Lululemon or or Target you know the world doesn't need another one of those I was an anchor investor for first institution investor for a Brazil Tower company that company now has I believe 1,400 sites in Brazil that mostly in rural areas in four areas of the country so it helps actually is helping change people's lives so when you deal in Emerging Markets you have actual ESG you are actually helping people yeah that's something that doesn't really get through to a lot so yeah I much rather be way dealing with interesting challenges than trying to Hype Nvidia and the latest scam coin right so let's talk a little more then about Tempest you mentioned one of your investments in the tower company but let's talk then about that was Brazil that was when I was in CF when I running so let's when I used to do Latin American private so now are you exclusively focused on Mexico now do you still look outside in The Wider region very selectively right now we're we the thing is the near Shoring opportunities sounds like you have enough sounds like you have enough much on right now but we used to absolutely cover Brazil colia we even that certain deals in Middle East and um particularly advisory in Middle East and Europe tell me a little more about the investment criteria then you mentioned Middle Market so how do you define Middle Market specific Industries Are there specific deal structures Equity only do you do Mezzanine Financing as well tell me what what your filter looks like well basic basically so we do two things we do single deals and then we're also do minority interest in uh in smaller companies so for for single deals we're look we look for companies between 50 to $150 million Equity tickets up 50 to $150 million control very traditional sectors we like to Define it as cheap cash flows with potential of growth right we're we're value oriented you know even though we do have a little bit of vcd and you know I ran Mexico's largest VC fund at one point very successful in a few unicorns I hate the term but a few unicorns and you can do value in inventure capital by the way we following our methodology and the way we think through it we apply that even to early stage but it's the framework so we're looking for companies in very traditional sectors right now Automotive Aerospace uh cold chain telecommunications the value ad Agriculture and Healthcare though Healthcare tends to be Healthcare is beautiful it's just expensive yeah you have to to pay for it that's a sector that's very well covered and some of the sectors that we're seeing that eventually we think there's a room for a luxury play in Mexico further down the line we think that there's going to be increasing demand for construction materials and speciality Metals different ways of playing that without actually going into commodity businesses but hiero service providers and of course manufacturing enabling Services interesting pick and shovels so in this boom where everybody right now is investing in industrial real estate we don't want to invest in industrial real estate we want to invest in the people who are going to serve the factories that are going to be in that industrial real estate Mexicans love real estate kind of like it's kind of like a Hispanic theme you'll see it all across Latin America and Spate people love investing in bricks inos so in uh for the minority interest we're looking for tickets about 10 to 15 million and those can be 30 to 40% interest influential minorities so minorities with governance terms and and rights we always look at having these government right these strong governance rights and oftentimes as structured Equity so a lot of preferreds okay we are willing to they give up upside if it lowers the downside and what about what about debt financing you mentioned that you can now do that but do you do that at the company level or will the firm also lend to portfolio companies so I think it's a sector we were very cautious about because of the governance implications it's hard to execute guarantees and on um execute on collateral in Mexican debt so you have to have a lot of specialized knowledge on how to form segregate and document a collateral and what collateral can be accessed effectively we need more knowledge on that to to feel comfortable operating there yes we have worked on Mees in the past but because we have enough knowledge to be careful right to be and a lot of the private interest and private debt it's driven for the wrong reasons right how so in the US a lot of it is just distress debt disguised as private debt so a lot of it is lending to companies that are already over levered participated by large buyout groups that don't want to write down their Investments so you know they're just not selling them and instead they're putting in some debt that will eventually eat up the company lent keep rolling it over extend and pretend yeah extend and pretend raise a couple new vintages and they'll just pass it off as a very bad vintage meanwhile through you know asset you know nav loans Etc they're providing some cash flow to their investors but overall that's going to be destructive of the value of the fund so it's going to be a very bad vintage and this boom in private debt is to a large degree is coming from that at least that we identify it that way we also don't think it's very healthy some of the interest I mean private debt in the US is asking for 177% returns that's Equity if you're ex there's a negative selection bias there if you accept that you're either a very bad company or you're a company that has a very particular short-term problem that you're going to be repay this debt as soon as you are able to which means that as a fund you have something you have a prepayment risk what's called prepayment risk you're CFA Patrick if you understand the prepayment risk so the negative selection bias in these portfolios long term is bad yeah and more so in Latin America because importing that phenomenon to Mexico in into Latin America where there's a lot of companies that you know Banks didn't lend to them for a reason while knowing them very well you have to have a lot of knowledge of the company to be able to figure out which ones are the ones that are credit worthy and what is the in the correct interest rate that doesn't generate that negative selection bias and I don't know if everybody's doing it correctly I I'm hearing some stories that we're going to end up with a you know in five years we're going to have a lot of workouts and I don't know who's going to work them out because we're defaults right if they don't work out they default in Mexico for example you see a lot more workouts you know you default yeah but because it's so hard to execute on guarantees Etc I mean there is a Mexico is a signatory to insolvency protocol International the insol intern um protocols uh so but it's it's very different from the US so unless you actually find a way to take your litigation to the US you're going to do it under Mexican laws in concurso mercantil it's not that slow but it usually ends up more like a workout than an actual than a traditional us chapter 11 so sometimes they just you know save themselves the time work it out write down the debt and refinance it who's going to do it because there's not a lot of professionals and when you have a fund that's underperforming the professionals tend to leave so now you're going to have a zombie and a zombie that somebody has to manage and I don't know who that person is going to be interesting so I want to be respectful of your time we've gone for an hour but I'd also like to ask you about clip if you want to spend five more minutes can I sure sure uh yeah so tell me about clip it was a a portfolio company that that you've exited so can you maybe just walk me through the thesis how you made the investment and then why you chose to exit Okay so this was when I was in Mexico running Mexico Ventures basically we came in clip is the square of Mexico so a card pres transactions Mexico Mexico like most Latin America severely underbanked and completely disproportionately to GDP huge problem on cash and uh card acceptance and and the use and the excessive use of cash so we had this problem we also had these transaction fees that were very very high it was ripe for disruption it was also a sector that had significant barriers of Entry if you're able to achieve critical mass so it checked the boxes on a sector we I wanted to play in then adolo medium some of the best entrepreneurs in the sector in all fintech in Mexico maybe Latin America very focused on product and quality which is something that resonates with us we like businessmen we like entrepreneurs that focus on Excellence on producing excellent products that sort of sell themselves you still have to have the ability to sell but if you have a bad product eventually will catch up with you so clip was focused on excellence in operational excellence so I clicked our second box then the price was ridiculously low compared to International comparables so okay came in I was a board Observer for year and a half then asked to come down and uh become CFO of clip and I was CFO of clip for six months raised their series B General Atlantic came in we were able to raise three times the money at a significant upu round to at the time we could and so resolved all the operational issues kind interm CFO getting everything in line and you know nice and and institutional quality and yeah so after it's left kept my was well rewarded in equity shares and then uh sold them to SoftBank because when SoftBank comes in you sell right so buy GL Resort comes in you sell soft Bank bank bought the whole company they came in and just existing shareholders no no they came in a series C and did a secondary and clip today are they still CP is the leading ftech in the country okay so they're stilling at they're looking at listing and you know I can't go into details on on potential valuations I know they're looking into it let's see when they're ready so I'm curious and that brings up one last question then when a Mexican company looks to list how attractive is the local Mexican Stock Exchange compared to doing an a listing directly in the US like some Latin American companies do less attractive we just have an example so we had TI just list in the US for I believe four A5 billion dollars and valuation skyrocketed uh upon listing so there's real appetite for Mexican equities right now it's somewhat structural this difference is structural it's really about the appetite of uh participants in the local market so basically in Mexico most of private savings are with the Mexican Pension funds the afor system the ifip system that is prevalent throughout Latin America they're buying whole they tend that so there's not a lot of liquidity in the market there's obviously a discount because there's lack of liquidity they uh tend not to intervene that much in governance so there's also a discount on governance that reduces valuations and this Mark that that kind of makes this low volume Market makes it a little bit unattractive for international investors to come in locally right so they just go through adrs and international listings you can delist the Mexican company relisted in the US and get a 2X which is why a lot of companies delisted yeah yeah yeah yeah they start by doing the ADR right so they'll list in Mexico do an ADR and then just D list in Mexico is that the Playbook and if it has low flow mostly held by the family you can't blame them it's basically a cost Capital issue cost of equity in Mexico is higher so if you can if you can raise it at half the price in in the US why not why not y interesting and the shareholders don't care right existing shareholders aren't going to complain they get an immediate write up so I mean I guess it's just Mexico's Stock Exchange that loses right that's correct and it also means that companies that don't have access to us listings it it's a little bit harder for them to raise Capital at a competitive disadvantage domestically being anme in Mexico is a pain that's it's a pain worldwide yeah yeah you're dealing with a lot more yeah headaches but well this was a fascinating conversation thank you again for doing this so where can listeners learn more about Tempest follow your work LinkedIn Twitter Instagram where are you we are on all all of them so you can find uh except Instagram you can find us you can find our website uh wwt tempus capital.com you can register for our newsletter there you can also register and read our most not not all our articles that are posted in behind it's not a pay wallet but it's a member as well so you have to register we have to accept you and you can go in and see it and we're quite googleable so you can also find quite a few of our opinion pieces over time online and I will link all that in the show notes for anyone that wants to find it easily that's listening thanks again Sebastian thank you Patrick