Over the past 12 months, despite complicated global market and political conditions, the private equity market in Mexico has remained active in relation to buyouts. Macroeconomic conditions have proved to be resilient in a volatile environment, including keeping a stable currency despite rising inflation. As of 31 December 2022, Transaction Track Record (TTR), an online platform tracking transactions in Latin America, reported an aggregate of 35 private equity buyouts with an aggregate value of USD1,542 million dollars, compared to 33 transactions with an aggregate value of USD1,610 million dollars in 2021 and 22 transactions with an aggregate value of USD1,137 million in 2020.

Data from the Mexican Association of Private Equity (Asociación Mexicana De Capital Privado, AC) (AMEXCAP) shows that despite the global pandemic, fundraising increased in recent years (USD743 million in 2019, USD2,403 million in 2020, USD1,589 million in 2021 and USD1,465 million in 2022).

There are restrictions on local pension funds to invest in privately-held companies, so most fundraising is done through public trusts that issue Certificates of Capital Development (Certificados de Capital de Desarrollo) (CKDs) or project investment certificates (certificados de proyectos de inversión) (CERPIs)), in which local pension funds are the main investors. Their investment strategy is varied and depends largely on the sponsor managing the CKD or CERPI, but there has been a tendency toward focussing on the real estate, infrastructure and energy sectors.

There has been a trend among local pension fund managers (Administradoras de Fondos para el Retiro) (AFORES) to create CERPIs that are funded entirely by the relevant AFORE, to use as a platform to directly invest in privately held companies. This is greatly driven by practical reasons as local pension funds are subject to local restrictions, requiring them to deploy at least 10% of their investment in Mexico and by creating their own proprietary trusts, AFORES can control the investment process and compliance with regulatory restrictions.

In terms of total fundraising, data from AMEXCAP shows the largest sectors have been real estate and infrastructure and energy, representing 63.30% in 2020, 63.25% in 2021 and 63.12% in 2022.

Based on information provided by AMEXCAP, most of the investment in Mexico involved global funds investing in start-ups. The emerging company and venture capital market has been burgeoning over the last past five years, with many start-ups scaling up and moving into growth stage, which private equity firms have stepped in to fund.

During 2022, 66% of private equity deals in Mexico involved some sort of a cross-border aspect to them, facilitating foreign investment into the country. One of the largest transactions in 2022 was Apollo Global Management's USD1,500 million private investment in public equity (PIPE) in airline Grupo Aeromexico amid its Chapter 11 procedure.

In 2022, exits by private equity firms of their investments have been relatively slow.

Southern Cross Group exited its investment in Planigrupo, one of Mexico's largest developers and managers of shopping malls, through a tender offer in the public markets, launched by Grupo Mexico.

The industry was also affected by a material tax reform in 2020. The Decree amending, adding and repealing certain provisions of the Income Tax Law, the Value Added Tax Law, the Law of Special Tax on Production and Services and the Federal Fiscal Code, published on 9 December 2019, in the Federal Official Gazette, which became effective on 1 January 2020 (2020 Decree), changed tax planning for sellers and private equity funds.

In particular, from 2021, foreign transparent legal arrangements (which were commonly used to structure private equity investments into Mexico (that is, Canadian Limited Partnerships)) will be treated as opaque entities for Mexican tax purposes. The effect is that the 2020 Decree hampered the possibility of using these types of vehicles to rely on their transparent treatment. As a result of administrative guidance, in certain instances and to the extent certain requirements are met (including reporting requirements for certain general partners (GPs) and limited partners (LPs)), foreign legal arrangements used in a private equity investment can still be treated as transparent. However, despite the administrative guidance, it still unclear whether the transparent treatment will be available in some circumstances (that is, multi-tier structures).

In addition, the 2020 Decree introduced a general anti-avoidance rule and new reporting requirements for taxpayers and advisors. The changes made to the tax laws as a result of the 2020 Decree remain in effect to date and are not expected to be modified.

Tax incentives were also granted for the fiscal years 2019, 2020 and 2021 through a presidential decree that allowed certain sponsors and founders to benefit from a preferential capital gains tax rate on IPOs. While the benefits of the decree will be available until 31 December 2025, IPOs remain scarce in current market conditions.

As with other markets, the Mexican private equity and venture capital industries are different mainly in the period of the investment cycle in which they participate. The emerging company and venture capital market, as an industry, is more nascent in Mexico, and while it is still developing, it has been very active during the past five years. Many start-ups have scaled up and moved into a growth stage, where private equity firms step in to fund the late-stage rounds. Private equity has been used more by institutional investors, given the risk profile of the companies they typically invest in, while venture capital funds have traditionally relied more on family offices and international investors seeking a higher risk profile. Only recently have institutional pension funds begun to look at venture capital, as they seek to diversify their portfolios.

There are no particular tax incentives geared towards the venture capital industry specifically, so all funds get the same treatment. A key difference that can regularly be seen on private equity and venture capital transactions is that venture capital tends to be documented more simply, often through the use of SAFE instruments (see Question 14) or with purchase agreements that are significantly more streamlined than those used by private equity funds making investments in later growth-stage companies. Venture capital, as an innovative and disruptive industry, tends to focus con very high growth companies, typically with some technological aspect to them, whether in the financial services, education, real estate, healthcare or other sectors.

Local private equity funds rely essentially on LP commitments by pension mutual fund management companies (Sociedad de Inversión Especializada en Fondos para el Retiro) (SIEFORES), as well as by other institutional investors and family offices. These funds are typically denominated in pesos. Family offices are increasingly active investing in foreign private equity funds as a way of diversifying currency and market risk.

Mexican tax provisions include tax incentives for:

Under the incentives, both vehicles qualify as fiscally transparent (that is, there is no vehicle-level taxation), which makes them attractive to investors, particularly institutional investors (for example, Mexican pension funds).

FIBRA E. This regime is directed at the Mexican energy and infrastructure industries, particularly for brownfield projects.

FICAP. This regime is directed at Mexican unlisted companies, regardless of the activities that they perform or the industry in which they are involved.

FIBRA E. To qualify for the FIBRA E tax regime, all of the following conditions must be met:

FICAP. To qualify for the FICAP regime:

Local funds are structured through trusts known as fideicomisos. In the case of CKDs and CERPIs, which are trusts designed to raise funds from SIEFORES, the certificates issued by the trust must be publicly offered in Mexico and listed on a local stock exchange (Mexican pension funds cannot directly invest or hold securities that are not publicly traded).

Another vehicle that was commonly used before the recent tax changes was a non-Mexican limited partnership. These funds, designed to invest in Mexico, were typically set up as LPs, usually organised in Canada given and were treated as transparent for Mexican tax purposes. However, due to legislative changes there has been a shift towards other vehicles.

Effective from 1 January 2021, any foreign legal arrangement will generally be treated as an opaque entity for Mexican tax purposes. However, through the application of certain safe harbours established in secondary regulation, certain foreign legal arrangements can be treated as transparent with respect to certain items of income (interest, dividends, capital gains and rental income from real estate), to the extent that certain reporting requirements are met. In practice, given the limited scope of the administrative guidance, many foreign funds investing in Mexico decided to shift from these foreign legal arrangements and convert the fund into a Mexican limited partnership (asociación en participación) or a Mexican trust (fideicomiso), which have the certainty of being treated as transparent for tax purposes.

As AFORES are creating proprietary CERPI trusts exclusively receiving investment from SIEFORES (and, therefore, complying with restrictions relating to SIEFORES investing on publicly traded securities) (see Question 3), project investment funds are expected to be structured as private fideicomisos in the future.

Mexican trusts are fiscally transparent. Tax is not levied at the level of the fund, but at the level of the investors (if any).

Mexican partnerships (asociaciones en participación) are generally regarded as transparent for Mexican tax purposes, provided they do not conduct entrepreneurial activities in Mexico.

Before the tax reform, foreign legal arrangements (such as Canadian LPs) were generally treated as fiscally transparent and any income derived by the foreign legal arrangement was taxed at the level of the investor.

However, under the 2020 Mexican tax reform, from 1 January 2021, foreign legal arrangements are subject to tax as if they were corporate bodies, so income derived through those arrangements is no longer attributable to its members (see Question 33). However, there is a tax incentive for foreign legal arrangements that manage private equity investments in Mexico, under which they can continue to be regarded as fiscally transparent exclusively for the portion of income obtained as interest, dividends, capital gains (for example, from the sale of shares or real estate), and income from real estate leasing, provided that certain requirements are met (for example, informative filings are made before the Mexican tax authorities).

No changes are expected to this treatment in the foreseeable future.

In some instances, private equity structures involve foreign legal arrangements, which in principle are not treated as fiscally transparent, unless certain requirements are met. Given the limited scope of fact patterns in which transparency is available, replacing the legal arrangements with a Mexican trust or a Mexican limited partnership (asociación en participación) is a common alternative that should allow access to transparent treatment.

The duration of local funds depends on the asset class in which the fund invests. For example, local funds investing in private equity and real estate typically have a ten-year life, whereas funds investing in alternative assets with longer maturities (such as energy and infrastructure) can have durations of 15 to 20 years. Recently, the Mexican market has seen a trend towards incorporating convertibility features into local funds that will allow them to convert into perpetual vehicles once their investments have stabilised and matured, subject to investor approval.

The most common investment objectives of local funds are private equity, real estate, energy and infrastructure, and credit opportunity. The returns sought may vary among funds with different objectives, but generally range between 13% and 16% for Mexican peso denominated funds, with the preferred return set between 10% and 12%, and between 10% and 12% for US dollar denominated funds, with the preferred return set at around 8%.

A local licence is not required to establish and manage a private equity fund in Mexico. Raising CKDs and CERPIs requires a local public offering of securities, and therefore the approval of the CNBV to carry out the offering. Conducting a public offering process is complex and requires significant time and expense. In addition, it is very important to take into consideration the nature of investors, given that certain institutional investors (such as SIEFORES) have investment limitations that must always be taken into account. In certain instances, these restrictions affect the way in which the fund is structured.

Private equity funds in Mexico are not regulated as investment companies. However, CKDs and CERPIs are subject to public company disclosure reporting and other requirements (see Question 9).

Foreign fund managers raising capital in the Mexican market must do so privately in a targeted way without undertaking any general solicitation that would constitute a public offering in Mexico.

Not applicable.

As noted above, Mexican pension funds can only invest in publicly traded securities. Mexican CERPIs can only be raised through a restricted public offering in Mexico. This consists of a public offering of securities which can only be marketed to institutional investors and qualified investors, and the securities can only be acquired by those investors. Although CKDs do not have such a regulatory restriction, recent CKDs incorporate this feature voluntarily to facilitate the capital raising process.

In addition, most CKDs and CERPIs contain transfer restrictions, under which an existing investor cannot transfer its interests in the vehicle without the consent of the sponsor. Failure to obtain consent before the transfer can give rise to a loss of all corporate rights relating to the transferred interests.

Funds that are created through limited partnerships (asociaciones en participación) or private Mexican trusts (fideicomisos) are not bound by any investment restrictions, other than those set out in the organisational documents of the fund itself. Each investor must be mindful of its own limitations and restrictions on carrying out an investment in these local funds.

There are no statutory maximum or minimum investments periods in CKDs or CERPIs. Investment periods can be contractually determined by the sponsor in the corresponding fund documents. In addition, there are no maximum or minimum amounts of transfers or investments in those local funds, although CKDs and CERPIs are subject to a statutory requirement under which investors must pre-fund 20% of their total commitment amount on the date the fund is created (that is, on the date the fund carries out the required public offering of its interests in Mexico).

Several CERPIs have recently been structured in such a way that such pre-funding was not required as of the public offering date. Typically, preferred return calculations do not accrue on these amounts until the CKD or CERPI disburses the amounts to make an investment.

The relationship between investor and fund is typically governed by a trust agreement. In some cases, particularly in the case of CKDs and CERPIs, there is a management agreement.

As far as protections are concerned, trust agreements usually establish:

CNBV issued regulations containing the minimum corporate governance requirements applicable to CKDs and CERPIs. The trust agreement governing these vehicles must comply with these requirements. For CKDs, the corporate governance requirements resemble those of Mexican public companies, where investors have ample opportunity to participate in large investment decisions or decisions affecting the general governance structure of the CKD:

The corporate governance of a CERPI resembles the structure of global private equity funds, where investors have limited participation in investment decisions and can only vote in major structural decisions (for example, changes in investment guidelines or manager removal) or transactions where there is a conflict of interest).

Private equity funds typically invest in and acquire common shares in portfolio companies. Common shares offer full voting rights and the ability to appoint board members. In the vast majority of cases, portfolio companies are incorporated as stock corporations, whether as limited liability stock corporations (sociedades anónimas) (SAs) or stock market promotion limited liability corporations (sociedades anónimas promotoras de inversión) (SAPIs). Both types are governed by a set of statutes that include comprehensive shareholder rights and protections, including key person provisions, transfer restrictions and rights, as well as veto rights and registration rights.

Although less prevalent, private equity funds are increasingly using convertible and mezzanine debt. These may take the form of either convertible notes or simple agreements for future equity (SAFEs) (which in Mexico have taken the form of acuerdos básicos de acciones a compra), which are quite common in venture capital structures, as well as through longer-term mezzanine debt with a convertibility feature and equity kicker.

Generally, investments in a portfolio company are subject to contractual rights of first offer, drag-along rights and tag-along provisions affecting transferability. A issue of new shares or equity is typically subject to pre-emptive rights to avoid dilution.

Under Mexican tax law, Mexican-source income received by non-Mexican residents is generally subject to Mexican withholding tax.

Interest payments are considered to have their source in Mexico if the capital is invested in Mexico or the interest is paid by a Mexican resident. In these cases, tax is withheld at a rate ranging from 4.9% to 35% (although there are certain cases in which a tax exemption applies).

Capital gains derived from the transfer of shares are considered to have their source in Mexico if the issuer of the stock is a Mexican resident entity or the book value of the stock is represented, directly or indirectly, in more than 50% of real estate located in Mexico. Mexican-source capital gains are subject to Mexican income tax at 25% on the purchase price or 35% on the capital gains, the latter provided that certain requirements are met. In this case, the 35% net gain alternative should only be available to the extent that a legal representative is appointed and they comply with certain solvency requirements. In addition, private equity funds with equity interests in Mexican-resident entities may be subject to a 10% withholding tax when the entity distributes dividends. Tax rates can be reduced by claiming any applicable tax treaty benefits.

It is common for buyouts of companies to take place through a private auction process, usually managed by independent financial advisors. While there are no specific statutes that govern the way in which auctions need to be implemented, auctions are subject to general Mexican commercial legislation (specifically, by the Código de Comercio and the Código Civil Federal).

The Mexican Securities Market Law (Ley del Mercado de Valores) governs buyouts of publicly listed companies. There are specific rules and procedures that must be followed to implement a tender offer in Mexico. It requires the offeror to prepare an offering memorandum, which must be approved by the CNBV before launch of the tender offer. The tender offer must be open for at least 20 business days and the board of directors of the listed company must express an opinion on the reasonableness of the price offered during the first ten days of the tender offer period. Closing the tender offer may be subject to the conditions set out in the offer memorandum. The offer is bound by a same price rule, subject to certain limited exceptions in the Mexican Securities Market Law.

Although historically scarce due to strong deterrents (such as de-listing formalities and the absence of a squeeze out mechanism) in last couple of years, there has been an increase in public buyouts, including take-private transactions. In the private equity sector, Apollo Global Management invested USD1,500 million in airline Grupo Aeromexico through a PIPE transaction, which was followed by a tender offer by its shareholders to take the company private in the context of the company's Chapter 11 process. Likewise, local fund Southern Cross Grupo tendered and sold a controlling interest in shopping malls company Planigrupo to Grupo Mexico.

In the case of a private buyout, the standard documentation includes:

In the case of a public buyout, the documents include:

Standard terms, both in transactions relating to private and public companies, include:

Indemnity caps usually range from 10% to 50% (except for fundamental indemnity items, which are typically capped at 100% of the purchase price). Deductibles and tipping baskets (or first-dollar threshold) are common and range from 0.5% to 2% of the aggregate considerations. Transactions are usually subject to post-closing purchase price adjustments and, increasingly, earn-outs to bridge the gap between seller and investor valuations are used.

As far as governance is concerned, investors usually require:

Mexican corporate law establishes duties of care, diligence and loyalty on management, including the board of directors and individual directors. These duties generally benefit the shareholders and the company, and in some cases third-party creditors.

In the case of management buyouts (MBOs), directors may be legally found to be conflicted and be forced to recuse themselves from deliberations and voting on matters relating to the MBO.

Management incentive compensation, including stock options, is typically tied to the investors' internal rate of return at the time of exit (see Question 27). A portion of incentive pay-outs to management are usually structured to occur after the investor exits so that the investor can ensure continuity of the management team for a buyer after the investor exits the company.

Non-compete undertakings are common, but their enforceability is questionable.

Investors usually have the right to appoint board members and members to specific committees (for example, the audit committee). Board and committee resolutions on certain major decisions, including the approval of the business plan and the appointment and removal of key members of the management team, as well as leverage policies and divestment decisions, are subject to super majority approval by the investors.

These protections are included in the shareholders' agreement and the by-laws of the portfolio company.

Leveraged deals in the private equity sector are rare in Mexico and most deals are made with resources raised through capital fundraising.

When they occur (rarely), leveraged buyouts typically include the target company as a guarantor in the establishment of a collateral package that includes the shares of the acquired company.

Not applicable.

Not applicable.

There are no restrictions preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in that company.

As an exception, if the company giving financial assistance is declared insolvent, a court might deem transactions that are gratuitous, which deviate significantly from market terms, or in which the insolvent entity does not receive fair consideration, to constitute a fraudulent conveyance and therefore be void (Insolvency Law (Ley de Concursos Mercantiles)). Therefore, for these types of financings, it is advisable:

The proceeds obtained from the liquidation of the assets of a bankrupt Mexican company are applied by the receiver appointed by the court in the respective bankruptcy proceeding to make payments to creditors in the following order of priority:

(Insolvency Law (Ley de Concursos Mercantiles).)

Regardless of the above, secured creditors' claims are paid on a "super priority" basis up to the amount of the respective collateral. Only the following claims have priority over secured creditors:

Convertibility features, warrants and options can be used to achieve equity appreciation. These are very commonly used in the venture capital sector.

Management incentive compensation, including stock options and phantom stock plans, is typically tied to the investors' internal rate of return at the time of exit. A portion of incentive pay-outs to management are usually structured to occur after the investor exits, so that the investor can ensure continuity of the management team for a buyer after the investor exists the company. Phantom stock bonuses are also used.

Mexican tax law does not provide tax reliefs or incentives to portfolio company managers investing in their company.

For a Mexican company to be able to pay dividends to its investors:

(Commercial Companies Law (Ley General de Sociedades Mercantiles).)

There are no restrictions on interest payments by a company to its shareholders, although transfer pricing rules apply.

Investment agreements usually include substantive representations and warranties by the seller and the portfolio company dealing with compliance with laws and ethical practices (which, in the case of international investors, often includes compliance with the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act).

The shareholders' agreement usually contains specific covenants assumed by the shareholders and the portfolio company to comply with applicable law and to establish anti-bribery policies and procedures (which, in the case of international investors, also frequently includes compliance with the FCPA and the UK Bribery Act).

Portfolio company directors may be criminally liable in the case of bribery and corruption committed by them.

Exits usually involve a sale of the portfolio company to a strategic buyer. Secondary buyouts are less common. Although always contemplated as a possibility, IPO exits are still rare as a percentage of total exits.

Strategic sales or buyouts have the advantage of typically being done at a premium, but with the disadvantage of being subject to indemnity obligations, and often requiring the investor to establish a holdback escrow for several months or years for a percentage of the proceeds, limiting the ability to distribute funds to its LPs.

IPOs have the disadvantage of being subject to lock-up periods, market volatility and offering discounts, but the advantage of essentially eliminating any continuing liability for the investor once it is able to sell its stake in the company.

The following forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company:

The main disadvantage of a sale is the obvious need to provide indemnification or be punished in the valuation for not doing so, and selling on an "as is, where is" basis. The main burden of liquidating a company is maintaining records for five years and going through the burdensome and unpredictable administrative process of extinguishing a company that frequently requires the contribution of new funds to satisfy liabilities (including tax liabilities) as a pre-condition to extinguishing the company. The advantage of a distressed sale is that assets are sold relatively quickly compared to a liquidation process, which can be time-consuming and burdensome.

A tax incentive for corporate bonds, granted through a Presidential Decree (Decree whereby tax incentives are granted to the taxpayers indicated), was published in the Federal Official Gazette on 8 January 2019. This tax incentive eliminates the withholding tax applicable to interest payments if they are:

All of the above conditions must be met. This tax incentive was extended until 31 December 2025, through a decree published in the Federal Official Gazette on 23 December 2021.

In addition, a material reform to Mexican tax legislation came into effect on 1 January 2020, under which the following amendments were made: