The Mexican market agonizes... companies leave and new ones don't come

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Written by Bloomberg Mexico, translated by me.

IPO's across the world are breaking records with more than 500 billion dollars invested. Not a single cent of that money came from Mexico.

It's been 15 months since the last IPO of a Mexican company, and it's a matter of a limited float that barely gets traded. the market is so dead in Mexico City, and bankers are so desperate for business of any sort that they're using their time to produce the opposite of an IPO: in the last year, five companies began the process to get delisted and become private.

"We're at our worst moment", says Mauricio Basilia, a lawyer in Mexico City specialized in financial markets.

In the twenty years he's been working, which include periods at the Mexican Treasury and at the securities regulator, Basilia has witnessed first hand the vast contraction of the Mexican market. He, as most frustrated brokers in Mexico, is quick to mention the factors that atrophy the market. For starters, years of mediocre GDP growth, and low market profitability.

This year's recovery does not make up for structural problems like limited liquidity and the small size of the retail market. Plus, the dominance of foreign financial companies that prefer keeping the businesses they invest in within their books rather than taking advantage of the public markets. There's also the fact that many of the largest corporations are controlled by families that don't want to bring attention to their wealth in a country plagued with violence.

Additionally, 60 % of Mexican companies that have been floated in the last decade have traded below their IPO price, much worse than Brazil or the United States., according to data from Bloomberg.

This all boils down to a market incapable of becoming a wealth generating engine for corporations or investors, which has slowed economic growth and left pensioners with mediocre returns. The result is yet another setback for a country that already suffers from limited savings, poor adoption of formal financial services, and a general scarcity of badly needed foreign investors. This according to Bernardo Gonzales, former chairman of the national banking commission, who now administers a fund associated with pensions in Mexico.

"The lack of a strong and diverse financial market is slowing the country's growth", he continued.

Rivalry with Brazil.

The deficiencies of Mexico are underlined when compared with Brazil, it's regional rival, where financial markets are solid and have accumulated twelve billion dollars in IPOs this year. Mexico has had none, with the exception of two real-estate investment funds totaling 25 million dollars. A decade ago, Mexico tried to get in line with Brazil and other G20 powers, it tried to build markets and become a regional financial center. Now, it's so far behind that it's status as 2nd largest is hard to surpass. One of the important factors chasing Mexico is the lack of competitivity between banks. As much as the Brazilian economy faces challenges, it can reasonably brag of a larger investment bank and brokerage ecosystem.

Mexico is dominated by a small number of global giants that have kept corporate businesses in their books rather than embarking in the riskier proposition of obtaining capital from public markets.

Softbank has invested in a number of Mexican startups as part of their latin american fund

"Banks don't receive any incentives to develop the financial market", says Basilia. "Their incentive is to put assets under administration in their private books."

Brazil's economy is larger and more diverse than Mexico's, where some industries are under the domain of one or two companies. Furthermore, the Brazilian securities regulator created better rules and governance practices during the last decade that brought in international investors, said Udi Margulies, an investment banker that worked for 28 years in Latin America for a number of banks like Bank of Nova Scotia, HSBC, Barclays, and Lehman Brothers. "There's less concentration of corporations and investors, and that makes the Brazilian market more dynamic."

Some of Slim's holdings, like America Movil, Carso, Inbursa, are the largest corporations in Mexico; publicly traded or not

Fleeing the stock market.

One sign of weakness of the Mexican market is the rush with which companies are delisting. Investment bankers now spend most of their time trying to convince companies that their best bet for the future is to delist form public markets, pointing at small cap public companies with a lot of cash and a disappointing return in the stock market.

In September, BBVA helped Grupo Lala repurchase almost all of their shares nearly 37% below their IPO value back in 2013. The company represented many of the reasons why global investors have become skeptical with regards to family companies in Mexico. It raised nearly 1.1 billion dollars through its IPO, with plans to expand into new businesses. But that never happened. Grupo Lala used the money to purchase an american company owned by family members of the controlling stake. It went through three CEOs as investors saw stock prices plummet up to 60% under the IPO value.

Grupo Pochteca, the chemical manufacturer, was the last company to announce it's considering going private. The stock, which originated from a company purchased by Pochteca in 2005, has depreciated 98% from it's historic maximum in 1997. (quick note: Pochteca was recently involved in a scandal over drug trafficking and had some assets frozen by investigators)

The Swiss bank, UBS, recently announced to their mexican employees that it would shut down its brokerage services in Mexico according to people familiarized with the subject. It's not clear if it's limited to Mexico or if it's part of a broader strategy.

The Panorama

A potential way of strengthening markets would involve selling stock in public companies like PEMEX. This helped markets in China and Brazil, but seems improbable in Mexico given the political stance of the president regarding public ownership of those companies.

For the time being, there's little hope for a quick reactivation of the financial markets in Mexico. Globally, IPO's began to welter as investors became more conservative when faced with turbulent markets and too many offers. Last month at least eight companies in Europe froze their plans to go public. In New York, the wellness platform Better Being Co and the investment software company Allvue systems stopped their offers. Novotech health, backed by tpg, recently said it would not seek an IPO in Hong Kong.

Cheap access to foreign investment funds has also limited the local market in Mexico, says Alan Alanis, chief of research at Banco Santander. Some Mexican companies like the used car seller Kavak, and the cryptocurrency exchange Bitso, the payment processor clip and the lender Konfio have gotten funds in order to avoid IPOs, and if they do wish to pursue an IPO, they might go the way of Argentina's Mercado Libre and seek an IPO in the American market. "This is not just Mexico's fault, it's also a consequence of excessive liquidity in the US", says Alanis. "Some companies want to avoid listings in Latin America," he concludes.