Philippines investors defy systemic risks – AVCJ Forum

They see upside in a rising young consumer class and a number of prospective growth segments, especially technologies related to financial inclusion and business process outsourcing (BPO). Robust GDP growth and manageable national debt levels are also routinely cited as positives.

Disappointment around current investment opportunities, however, is tied to subtler factors such as infrastructure gaps and regulatory issues. Ralph Keitel, a senior investment officer with the IFC, identified foreign exchange as one of the biggest domestic risks, noted that the peso has been among the worst performing currencies in the ASEAN region in recent years.

"You can't really hedge emerging market currencies but you can invest in sectors where you create an internal hedge such as the BPO," Keitel said. "If you have a business that charges its overseas clients in US dollars whereas its cost base is in pesos, then actually, the stronger US dollar will work in your favor. We like GPs that understand this dynamic."

Alasdair Thomson, a co-founder of local GP Sierra Madre, said that due to a hesitancy among institutional players about how to access the boom, his firm still receives most of its funding from development financial institutions, along with some European family offices. At the deal level, he cited founder-investor communication as the biggest risk factor.

"If you can capitalize a company properly and get the right management structures, you can release the energy of the entrepreneur – that's not our worry," Thomson said. "Our worry is if you fall out with your entrepreneur, where somehow what you thought they were is not what they are, or we're not what they thought we were in the relationship."

Nevertheless, there are stories of successful entries into the country. Chris Teoh, an executive director at regionally focused TAEL Partners, confirmed that his firm recently achieved its first exit in the Philippines despite only being active in the country for two years. He emphasized due diligence in navigating the nuances of local partnerships.

"A lot of times, it's not just the entrepreneur himself, but also the shareholders of the company, which are important," Teoh said. "The second thing is to have very close conversations, whether it's with the investee company or the business community, because this is how you actually get an understanding of the complexities of relationships in the Philippines."

At the large end of the spectrum, KKR recently made its first foray into the Philippines by backing a $175 million round for a financial technology unit of PLDT. Lito Villanueva, a managing director at PLDT, noted that KKR and its fellow investor Tencent Holdings would increase their commitment to $225 million by the end of the year. 

"From an industry perspective, the biggest risk in the Philippines for the private equity industry is a lack of deal flow and ability to put money to work," Sierra Madre's Thomson added. "We need to find more opportunities and more entrepreneurs – and everybody in this room has to help in developing that flow."

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