Private equity: divestment decisions

 Client: Europe-based private equity firm

Concern

Potential for business-friendly energy reforms to be reversed

In 2014, President Peña Nieto of Mexico signed into law comprehensive energy reforms intended to transform Mexico’s hydrocarbon and electricity sectors. The reforms opened the way for foreign investors to enter a large and relatively underserved market.

On the back of these reforms the client invested heavily in energy infrastructure in Mexico. However, in early 2017 there were growing concerns about presidential front-runner and populist candidate Manuel Lopez Obrador and the possibility that, if elected, he would consider repealing the reforms. Such a development would have dramatic implications on the value of the client’s investment.

Objective

Based on its exposure to political risk, our objective was to help the client’s investment team decide whether to divest before the potential election of Lopez Obrador in July 2018 or remain committed to its original longer-term objectives.

Outcome

Phase I (Measure, Map)

Core risk assessment, stakeholder analysis and scenario planning: This phase empowered the investment team with a baseline understanding of Mexican politics that enabled it to prioritise areas of concern and plan accordingly.

This required outlining the dynamics of the Mexican political system as well as analysing the prospects for the 2018 election. This included identifying and profiling potential presidential opponents to Lopez Obrador, profiling Lopez Obrador and his potential cabinet, and using scenario planning to assess feasible outcomes of the election and ensuing policy initiatives.

Phase II (Map)

Stress testing: This phase provided the client with an objective third-party recommendation about the likelihood and means by which a Lopez Obrador government could repeal energy reforms or pursue other similar initiatives.

This entailed examining possible implications of the scenarios, including how the size of Lopez Obrador’s mandate and the composition of his cabinet might change his approach to energy reform repeals or other related initiatives. This analysis was also incorporated into the VAPOR platform to estimate the extent to which different outcomes could impact expected financial losses due to political risk, particularly expropriation.

Phase III (Monitoring)

Spotlight Custom Monitoring and Daily Brief: This phase was designed to enable the client to regularly assess key signposts, working assumptions, and potential vulnerabilities to the energy sector. In the build-up to the election and following the results, the client monitored developments via monthly expert calls and the Daily Brief platform.