The Mexican Investment Corporations Law (Ley de Sociedades de Inversión) has created four different types of funds:
- fixed income funds;
- variable income equity funds;
- special purpose funds; and
- venture capital equity funds.
This brief summary will describe the main guidelines that apply to venture capital funds.
Negotiations are taking place between asset managers and the regulatory authorities to liberalize these rules, but it is unclear which specific rules will be liberalized, or the proposed date on which these new provisions will become effective.
The Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores - the CNVB) is the regulatory body that sets out the operating and regulatory environment for these funds. General Regulation 12-28 issued by the CNBV on May 27 1998 is the main regulation that applies to these types of funds.
Under Reg 12-28, each venture capital fund must state in its prospectus the investment parameters or guidelines that will govern the use of the proceeds received from the public. The framework within which such investments can operate has the following rules for funds:
- up to 49% of its total assets can be invested in equity or debt instruments of a single Promoted Enterprise (Empresa Promovida, as this term is specifically defined in the regulation), of which it may own up to all minus one, of the equity shares or certificates of the enterprise, but limited on the debt instruments as provided for within the immediately following guidelines;
- up to 25% of its total assets can be invested in the debt instruments of any enterprise of which it already owns any equity participation;
- up to 20% of its total assets can be invested in debt and equity instruments, in the aggregate, on enterprises that were previously promoted by the fund pursuant to a previous investment or promotion agreement; and
- cannot invest in registered securities other than as stated in (c) above.
Unused funds can be invested in fixed income or variable income securities, or can be used as collateral to obtain a guarantee for a specific purpose or to participate on a public bid.
Venture capital funds are precluded from any investment in a corporate entity that is controlled directly or indirectly by the shareholders of its managing entity, or by the directors or members of the investment committee of the fund itself.
Investment in a promoted enterprise is subject to and conditional on the preparation of the financial and technical feasibility studies and the approval of a promotion agreement by the shareholders of the enterprise and the board of directors of the fund itself. In addition, the CNBV has the authority to approve an investment that exceeds these parameters if the investment and the nature of the transaction justify this.
Promoted Enterprises are defined by Reg 12-28 as those Mexican corporations whose operations are directly related to the creation of jobs, development and promotion of technology, import substitution, increase of exports, promotion of industrial and tourist projects or any other effort that contributes to the economic and social development of the country. The CNBV has the authority to approve an investment in a corporate entity with a different purpose if it deems that it satisfies these objectives.
Reg 12-28 provides that valuation of the shares issued by the venture capital funds must be based on:
- the actual price of any publicly-traded instrument,
- net-book value for non-public equity instruments,
- non-public debt instruments must be valued at (a) purchase price plus paid interest for all non-defaulted instruments or (b) the lesser of the purchase price, book value or recoverable value as determined by a valuation committee of the fund itself.
As previously mentioned, these are the current guidelines that apply to venture capital funds. They are expected to change significantly in the short term, but it is unclear as to the specific terms and conditions under which they will be liberalized.
Alberto J Morales