April and May are peak months on the PE/VC industry conference circuit, and I mixed with hundreds of managers and investors at events in Sao Paulo, Mexico City and Washington DC. From hundreds of conversations, a common idea emerged again and again – Mexico is in vogue.

Why is Mexico hot in 2012? The excitement over Latin America has been building for several years now, and global investors have poured into Brazil and Colombia in particular, driving up valuations and competition for deals. Today Mexico is viewed as a contrarian play on the Latin American theme, a market more closely tied to US demand but considerably less crowded and expensive than its neighbors to the south.

But what is the reality behind the global herd mentality driving interest in Mexico’s PE market?

The country’s private equity industry is remarkably small for an OECD country of 112 million people. As a percentage of GDP, PE investment in Mexico represents only 0.02%, as compared to 0.18% in Brazil or 0.57% in the UK.

The universe of PE managers active in Mexico is also remarkably small, with half a dozen domestic firms and another half dozen regional firms with local offices in Mexico City. Adding in real estate and infrastructure investors will grow that number, but today at least, LPs looking to put money to work in the country face very limited choices.

One explanation for the industry’s underdevelopment is that until recently there have not been local sources of capital to finance first time fund managers. Brazilian pension funds started backing domestic PE managers over a decade ago, creating a first generation of managers, many of whom have gone on to raise second and third funds. In Colombia and Peru, a domestic PE industry took root around 2006 when the country’s pension funds backed half a dozen local managers in each market.

In Mexico, regulation allowing pension funds, or Afores, to invest in PE funds only went into effect in late 2009, and requires a cumbersome publicly traded vehicle. But the impact since 2009 has been clear – approximately 20 CKDs have been raised (including PE, RE and infrastructure funds), and regulators are amenable to simplifying the structure to further incentivize fund formation.

The opportunity to tap Afores assets exceeding $100bn has also attracted global funds of funds to Mexico, with both PineBridge Investments and Northgate Capital setting up local fund of fund structures. While the Afores are only investing domestically today, firms that are building relationships with this new class of LPs will be well positioned when Afores are eventually permitted to invest outside of Mexico.

But there is another clear explanation as to why Brazil’s PE industry dwarfs Mexico: in Mexico, a highly concentrated business sector is dominated by a handful of private business groups and state monopolies, creating important barriers to investment in key sectors such as energy, telecommunications and media.

And Mexican business owners, particularly those running large companies, are typically unwilling to give up control or to tap financial investors as a source of capital. This reality puts Mexico in the same camp with Colombia, rather than with Brazil, where there is a more sophisticated appreciation of the value that PE investors bring and generally a more institutionalized approach to business.

But like elsewhere in Latin America, business culture is evolving in Mexico, and the challenges of doing deals are offset by positive underlying trends. Mexican families are looking to consume more products and services, driving opportunities in housing, education, healthcare, fast food, tourism and retailing, to name a few key sectors. At the same time, a stable economy and low interest rates have driven the expansion of consumer credit.

And while large ticket deals are undeniably hard to close (only one deal exceeded $100M in 2011 for example), local managers are buoyant on the mid-market opportunities available in 2012 and beyond.

At the AMEXCAP conference earlier this month, I talked with managers from Nexxus Capital, EMX, Latin Idea, Alta Growth Capital and Gerbera, all of whom shared details on fast growing portfolio companies and attractive exit opportunities. Among the regional firms active in Mexico, Aureos, Graycliff and Linzor closed new deals in 2011 (in fact, Linzor closed two deals, through a new office the Chilean-based firm opened in 2010). Larger players such as Southern Cross and Advent are presumably having a more difficult time locking down bigger deals.

And while excitement is growing in Mexico, valuation multiples are clearly lower than in neighboring markets, there are few competitors, and a relatively underdog mentality helps managers stay highly-focused. While managers were all happy to share information off the record, they are circumspect about talking about deals or new funds in the market until there are successful exits to report. (In 2011, three exits were completed in Mexico).

For institutional investors trying to understand the scope of opportunity for Mexican PE now and in the future, there are a few underlying truths. The country is at the beginning of a long cycle of expansion for PE, where sources of capital, the universe of managers, and the deal pipeline can only grow over time. But today, LPs looking to deploy capital in Mexico will have to choose from a very short list of experienced managers or take a bet on one of the teams that is still looking to realize their first exits.

A final word: hotels in Mexico City put Sao Paulo and Rio to shame. It’s worth a trip to Mexico if only to stay at a true luxury hotel for under $300/night. And I’ll take the Mexico City airport over JFK any day.