LATIN AMERICA-WIDE Trends and Developments Contributed by: Brian Minutti, Alejandro Carreño and Miguel Martínez Herrera, Legal Disruption
In the case of Mexico, the private capital ecosystem has grown rapidly over the last two decades, driven by financial developments, relative macroeconomic stability and the growing participation of domestic and international institutional investors. This growth has been accompanied by greater sophistication in investment structures and the adoption of contrac - tual practices imported from more developed mar - kets, a process that has been driven and articulated by organisations such as the Mexican Private Equity Association, among other actors. However, the institutional implementation process has been incomplete. Many of the private debt structures operating in Mexico replicate models designed for legal and financial systems with greater institutional capacity, without necessarily having the local condi - tions for their proper implementation and execution. Private Debt in Mexico One of the structural factors explaining the expan - sion of private debt in Mexico is the configuration of the banking system itself. Commercial banks operate under a strict prudential framework, supervised by the National Banking and Securities Commission, which prioritises financial stability over credit expansion. This approach has contributed to the soundness of the Mexican banking system, but it has also led to the systematic exclusion of medium-sized companies, projects in the development stage and non-standard legal structures. In this systemic gap, private debt has emerged as a partial substitute for credit, filling spaces that banks cannot or are unwilling to cover. However, the substitution of bank credit with private debt is not neutral from an economic or institutional point of view. Banks, as regulated financial intermedi - aries, internalise certain systemic costs through cap - ital requirements, provisions and risk concentration limits, costs that serve a stabilising function. Private debt, in contrast, externalises much of these costs to market participants themselves, relying on investor sophistication, portfolio diversification and contract strength as sufficient risk mitigation mecha - nisms. This logic may be functional in contexts of eco - nomic growth and financial stability, but it becomes
particularly fragile in stress scenarios, where the cor - relation between risks increases and assumptions of independence from default events cease to be valid. Added to this scenario is a structural excess of pri - vate capital in search of returns. In an environment characterised by compressed yields on traditional assets and volatility in public markets, investors have shown a growing willingness to take on additional risk in exchange for higher returns. Private debt offers an attractive narrative, recurring income, priority of pay - ment over equity, and apparent protection through enhanced guarantees and contractual rights. How - ever, this narrative tends to underestimate the real complexity of credit risk and overestimate the effec - tiveness of contractual protections, particularly in a legal environment where enforcement faces structural obstacles. Challenges of Private Debt A central and often underestimated element of the private debt problem in Mexico is that, even though this market is presented as an alternative to the limi - tations of bank credit, a considerable proportion of Mexican companies lack the institutional capacity necessary to access it on reasonable terms. Unlike more developed markets, where private debt tends to be channelled to companies with consolidated corpo - rate structures, standardised financial processes and a robust compliance culture, in Mexico a significant part of the business fabric operates with limited levels of institutionalisation. This institutional weakness manifests itself, among other things, in the absence of consistently audited financial statements, the fragility of corporate govern - ance systems, the informality of internal processes and the concentration of decision-making in one or a few individuals, factors that together constitute struc - tural barriers to effective access to the private debt market. This lack of institutional capacity has a contradictory effect. On the one hand, companies that manage to access private debt often do so by accepting particu - larly onerous contractual structures, with high rates, extensive guarantees and enhanced control rights for the creditor, precisely as compensation for the bor -
125 CHAMBERS.COM
Powered by FlippingBook