Joaquin Avila, Senior Managing Director & Co-Founder of EMX Capital spoke to LAVCA about spinning out from a globally-recognized firm and finding PE opportunities in Mexico.

LAVCA: Please give us some background on EMX Capital.

Avila: EMX Capital was founded in 2009 as a spin-off from The Carlyle Group with the purpose of identifying and optimizing investment opportunities across industries in Mexico. The EMX team has a solid track and has been successfully investing together for more than seven years.

In 2011 we raised US$115M through a CKD (certificado de capital de desarrollo). In addition, we raised US$34M through an international vehicle. We continue to manage Carlyle Mexico Partners, a US$134M fund, and its portfolio companies. We have invested more than US$132M including US$20 million of co-investments.

LAVCA: How did your experience with Carlyle in Mexico lead you to launch EMX?

Avila: To be a part of The Carlyle Group, one of the most important investors in private equity globally, was an enriching experience. We experienced first-hand the best practices of The Carlyle Group and, as needed, adapted them to the Mexico reality of doing business. The discipline and transparency with LPs have proven to be invaluable. When Carlyle decided that the PE activity in Mexico was small for a big firm like Carlyle, we reached an agreement that enabled us to continue to manage their assets in Mexico. At the same time we launched EMX. The experience and solid track record as the former investment team of Carlyle Mexico Partners helped us to raise our first fund.

LAVCA: How many investment professionals are currently employed at EMX Capital? How did you go about recruiting talent with the experience you need?

Avila: Currently we are a team of six investment professionals. The current structure of the fund allows us to source and execute opportunities as well as monitor the investments. We plan to grow the team as we continue to invest and add companies to our portfolio.

We believe there is significant talent interested in working for a Private Equity firm in Mexico, and we have been able to assemble a great team. We seek individuals with the required operational and financial expertise for the job, with outstanding academic record and preferably with training from a Wall Street firm. We seek people that think outside the box but more importantly individuals that share the values and work ethic of EMX.

LAVCA: For your current fund, how do you differentiate yourself strategically from other funds?

Avila: EMX differentiates from other funds in many ways. We have an opportunistic approach capable of capitalizing Mexico’s potential across industries, especially in companies that target lower/middle class consumers (“bottom of the pyramid”) with a disciplined decision-making process. We strongly believe in partnering with great managers, entrepreneurs and business owners to create value and build platforms for strategic buyers. Additionally we have a conservative approach and have finished the cycle of returning money to our investors in the Carlyle Mexico Partners fund, even with substantial unrealized investments.

LAVCA: What are you hearing from LPs about their willingness to invest in emerging markets private equity and Mexico specifically?

Avila: There is still significant room for growth in the private equity industry in emerging markets, Latin America and especially in Mexico. However, as investors look for opportunities in Latin America outside Brazil, Mexico is garnering attention due to a stable macroeconomic environment and regulatory changes that support private equity. Other emerging markets countries are getting expensive in multiples and are showing signs of economic slowdown.

LAVCA: You’ve raised both a local investment vehicle and an international investment vehicle. How do expectations from your international LPs differ from those of the Mexican Afores?

Avila: Both the Mexican Afores and the international LPs vehicles seek good returns on their investments on what are basically mirror vehicles, taking into account that the CKDs are funded up-front. The Afores have made an important effort to acquire knowledge and expertise regarding the PE industry in a short period of time. Understandably international LPs are more used to the industry practices and standards.

LAVCA: What is your ideal investment size?

Avila: We seek to invest between US$30M and US$40M in each transaction. In general we focus on majority ownership in order to increase our flexibility and responsiveness through the investment process; however, we remain open to minority investments where we can align with a value-added partner.

LAVCA: EMX Capital recently made its first investment. What can you tell us about the deal – how did you source the opportunity, what unique actions are you taking to add value to the company from an operational standpoint, etc?

Avila: Our first investment was in ILSP Global, a leading security service firm with a powerful business model and an outstanding management team. We have been working closely with management in developing strategic initiatives, in attracting new clients and in the institutionalization of the company. This transaction represents our effort and focus on Mexican companies that are taking advantage of unique market conditions. The opportunity was presented to us by a boutique investment bank, and we closed the deal without going to a bidding process.

LAVCA: Mexico is garnering a lot of attention lately as a PE market. Where do you see the most opportunities for PE investing in the country?

Avila: At EMX we continually evaluate trends and opportunities in diverse industry sectors and look for fundamental trends attractive for private equity investments. We believe the mid-market presents a vast investment opportunity and a relatively untapped space for investments between US$10M and US$50M. We believe sectors such as healthcare, education and financial services demonstrate attractive dynamics.

LAVCA: In your opinion, what is the greatest challenge that Mexico faces today in order to see a significant increase in PE investing in the country?

Avila: A number of regulatory and structural reforms in Mexico would help translate macroeconomic stability into economic growth, which would have a direct impact on the private equity industry and increase investing in the country. One of the greatest challenges is to increase the number of private equity transactions and to communicate the industry’s success stories.