PE investors excited by Philippines' strong fundamentals - AVCJ Forum

Brian Hong, a partner with CVC Capital Partners, told the AVCJ Philippines Forum that the country appealed for similar reasons to Indonesia before it - a relatively large and young population and rising disposable incomes. Its economic strength was a surprising added bonus.

"Coming out of the global financial crisis the Philippines was probably one of the only countries in the world that could claim to have seen 42 consecutive quarters of positive GDP growth," he said. "The government did not have a spending problem; there is a surplus of foreign currency and the debt to GDP ratio is currently 45%, which is staggering when you consider what the global average is."

This disconnect presented a welcome counterbalance to CVC's exposure to other markets and the GP has made two investments in the country. It bought a 15% interest in Rizal Commercial Banking Corporation in 2011 - and last year sold the bulk of its stake to Cathay Life Insurance - and then took majority control of business process outsourcing firm SPi Global in 2013.

At the other end of the deal spectrum, Sweden-based alternative asset manager Brummer & Partners also entered the Philippines, having been impressed by it stable growth. The firm partnered with a local team to form Navegar, which makes investments of $10-20 million.

"What is remarkable to us was that even though the stock market has 50% foreign participation we had an opportunity to be one of the first movers in the growth capital space, " said Anders Stendebakken, managing director at Brummer.

In the last two-and-a-half years Navegar has seen 186 potential deals and reviewed about half of them. This has resulted in 12 letters of intent signed and three investments completed so far. However, Stendebakken's optimism about deal flow is not shared by all market participants.

"We don't see the volume of investment we would expect given all the positive dynamics in this market. Over the last three years PE investment volume has been less than $1 billion, which is less than half of 1% of GDP - low in an Asian context," said Todd Freeland, director general of the private sector operations department at the Asian Development Bank.

There is general agreement that continued deregulation and reform, including further opening up to foreign investment, would help. The economy is dominated by a small number of large, family-owned corporations and Michael Rodriguez, managing director at Macquarie Infrastructure & Real Assets, questioned whether this dynamic can be a long-term benefit to a bigger and increasingly globalized market.

CVC's Hong noted that if private equity investors, particularly those seeking deals in the $100-200 million range, want to get traction in the Philippines they have little option but to forge partnerships with these local giants. The wait for the market to mature, and wealth to trickle down into the small and medium-size enterprise space will take a lot longer.

"If you wanted to start a private equity platform today you would put the Philippines on your list, but you have to be patient," said ADB's Todd. "It is not a 3-5 year window; it is a 10-25 year window."

For more information on the AVCJ Philippines Forum, please go to www.avcjphilippines.com.

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