Q&A: Navegar's Honorio Poblador

Q: How did you organize the final close for Fund II?

A: We were all set up at Peninsula Manila for our AGM [annual general meeting] in January, which was also supposed to serve as the final due diligence trip for a few investors, when the Taal volcano erupted. Only one party from out of the country managed to sneak in before the airports were closed – most of them were stranded in Singapore. So we did the AGM and the diligence sessions via teleconference. The Asian Development Bank was able to come because they’re based in the Philippines. Thankfully, we had already held a first close in June 2019, and a process was in place so that most investors who committed to the fund later had already done some diligence.

Q: Navegar is the first private equity firm in the Philippines to raise a second fund. What is the significance of this milestone for the local market?

A: We see it as part of a natural evolution the industry must go through. Our first fund in 2013 was already a big step because there were all these questions about the Philippines. Can you raise the money? Can you find companies to invest in? Will business owners accept outside capital? Can you build value? Can you exit? That kind of doubt can only be addressed over time and with concrete examples, and we were able to do all of that with Fund I. It is important for companies to have an alternative to debt to fund their growth and it’s healthy for them to have different sources of equity capital. Sometimes with investment from the big corporates, founders lose their independence and control. Now, they have more options. 

Q: How has appetite for the Philippines evolved?

A: For LPs, there’s still a long way to go. In the process of marketing the second fund, it was clear that the Philippines is not a mainstream story and not one that many LPs have started thinking about. But it has been on the radar of many regional and global PE firms for the past 5-6 years. The biggest thing holding it back is where there’s a sustainable number of sizeable investment opportunities, which means they can cover the market on a fly-in, fly-out basis.  Hopefully, they might start coming more often because there will be more to look at. They’re seeing a PE fund on the ground can build their pipelines. Apart from scale, we establish the transparency, corporate governance and financial discipline that make it easier for regional PE firms to evaluate transactions and get comfortable with targets. That’s always been part of our thesis.

Q: How has your LP mix changed?

A: Most of our LPs from the first fund came back to support us, except for a few individual investors. Fund I was predominantly DFIs [development finance institutions], and we added a few more in Fund II. There are also been a few more institutions, including a pension fund and three family offices, one based in New York and two from Singapore. Each had been analyzing Southeast Asia for a few years and realized that the most efficient way to play the region, from a PE perspective, was country by country. One of them we met in 2016, but we weren’t fundraising at the time. So, they waited for this fund, and the time in between just made them more comfortable with the country thesis.

Q: What’s your view on the impact of COVID-19 locally?

A: Domestic consumption makes up about 70% of GDP, and the combination of lost income and a reduction in consumer confidence means that spending will shrink. More companies are going to see their markets under pressure, and that may lead to even more unemployment. Not only will domestic consumption shrink, but there will be a re-allocation of spending. For example, people will start trading down from restaurants to cooking at home. What people buy will change, and I think it will probably stay that way for a while. The government must do its part in fighting the disease and help individuals who have lost their incomes.

Q: Does that mean years, rather than months?

A: The most optimistic view is there will be a vaccine in six months, but it will probably be another six months before the economy fully re-opens and companies are able to climb back to pre-COVID levels. One year of slow business is difficult to stomach for any company. So, the situation will favor those with no debt and strong balance sheets. Those that can ride out the storm should come out stronger because a lot of their competition will fall by the wayside. What that means for valuations will depend on the sector and specific situation, but our strategy is still to look for good companies and be willing to pay a fair price. We are not interested in turnaround situations and distressed assets.

Q: How has the investment environment changed?

A: Companies have grown in size in recent years, which means there have been, and will be, more opportunities to deploy larger amounts of capital. Traditionally, the domestic banks have been aggressive in lending to fuel growth, but with companies experiencing more than a full quarter of decreased business, the banks could start to hold back credit. So, the selling point for equity to provide liquidity or strengthen the balance sheet is stronger than that of debt today. Meanwhile, conglomerates are focusing more on their core businesses and may not be as active. Hopefully, that means more opportunities for us.

Q: How does it compare to previous macro shocks?

A: From 2000, there hasn’t been a single year of negative growth in the Philippines. We were impacted by the Asian financial crisis in 1997, but because the Philippines is not an export-led economy, we didn’t suffer as much as Thailand, Indonesia or Singapore. In addition, the silver lining to the Asian crisis was that Philippine corporates became allergic to debt, especially, foreign-denominated debt. Even during the 2008 and 2010 crises, the combination of low debt and a domestic driven economy meant the impact wasn’t too severe. The dislocation today will be much greater because it is striking domestic consumption. There is also so much more to lose now. Businesses have been built up over the last 20 years, the local markets have become bigger, and there’s more invested. When you lose a portion of all that, it’s more painful.

Q: Where are you seeing opportunities?

A: One of the things still going for the Philippines is services exports. There’s a large business process outsourcing [BPO] industry here that is still growing. It may face some increased costs and reduced margins brought about by social distancing rules as BPO companies need more space for office workers. But I think the industry, which generates close to $30 billion and represents close to 10% of GDP, is still healthy. Historically, BPO companies have benefited from periods of slower growth in the West. There is a lot of pressure on companies to cut costs, so they end up sending more labor to the Philippines, where it's cheaper.

Q: How are other sectors holding up?

A: OFW [overseas Filipino worker] remittances, which is also about 10% of GDP, is a major driver of consumption in the Philippines. We’re hearing about the repatriation of workers, which means support for consumer spending from remittances is going to suffer in 2020. E-commerce is a bright spot, however, especially with the shift in consumer behavior. Historically, e-commerce penetration in the Philippines has been very low in an absolute and relative sense – less than 2% of GDP. COVID-19 has accelerated the shift online because many people have not been able to leave their homes.

Q: What trends are you observing in e-commerce?

A: Adoption by the Filipino consumer of credit cards and e-wallets used to be slow, and internet connections needed to speed up. In addition, because the Philippines is a country with a lot of islands, last-mile delivery has also been a challenge. However, in the past few years, a lot of companies and financial investors have been investing in payments, logistics, and improving bandwidth available to consumers. E-commerce penetration is still low, but it’s increasing rapidly.

Q: Will Fund II modify its strategy for the current environment?

A: We remain focused on domestic consumption and BPO. For Fund I, we deployed an average of $20 million per investment. For Fund II, check sizes will be a little larger. We want to have the same number of portfolio companies, 6-7, but we’ll be deploying a larger amount of capital.

Q: Does that mean more control deals?

A: We’ll remain flexible about control. As long as we have minority protection rights in place and representation on the board and its committees, we are comfortable with minority positions. Control to us is more about having the ability to influence our destiny in terms of adding value to the company and monetizing our investment. We want to be able to deploy our genius bar, which is a team of experienced operating professionals in different disciplines that we can either second to portfolio companies or lend on an ad-hoc basis to do projects. Four of the six portfolio company CFOs in Fund I came from the genius bar. We’ll see more of that.  

Q: What has been the progress of the new fund to date?

A: We have already made two investments, both of which were completed in the midst of the quarantine measures. We invested in Cloudstaff, a BPO company, and Great Deals an e-commerce enabler. We feel fortunate to have been able to invest in these companies as the current period has been very good for the businesses. For example, the number of transactions at Great Deals has exploded. Apart from a brief period when the quarantine rules were unclear resulting in a backlog that we are still having to work through, everything is looking positive.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Southeast Asia
• Fundraising
• Growth
• GPs
• Philippines
• Navegar