Historically it would be fair to say that the Philippines has not proved to be one of the more attractive markets in Asia with few deals completing and few domestic funds of any note. PE activity has been limited to a few large transactions in listed companies, such as CVC Capital Partners’ paying US$115m for a 15 percent stake in Rizal Commercial Banking Corporation.1
The corporate landscape has acted as a barrier to substantial PE investment, with a paucity of potential transactions needing US$50m or more from external investors. The economy is also dominated by large family-controlled conglomerates, which have not generally considered PE capital as they have ready access to capital from bond markets or the stock market. They appear to have an entrepreneurial approach to funding growth businesses in a range of sectors, also restricting the availability of smaller deals to private equity. As founders/patriarchs of these businesses retire and a generation of Western-educated managers takes the helm, the conglomerates will look to expand into markets with higher growth prospects. Resultant restructuring could eventually prompt the sale of non-core operations, however, this is unlikely to generate much deal flow in the near future.
There is not an abundance of small and medium-sized enterprises with turnover of US$25-50m that are the staple of the lower and mid-market PE funds in other territories. Since 2006 no more than ten PE deals have been completed in any given year. However, there may be a gap for those prepared to actively seek out SMEs with ambitious growth strategies and a desire to remain independent. If successfully invested, these companies are likely to find ready exits either selling to the conglomerates, foreign market entrant investors or listing on the local stock exchange, where there is a dedicated board for SMEs.2
The Philippine economy has stayed on a growth path in recent years, despite exports being hit by the weak demand in developed markets and a stronger peso. After slipping to 3.7 percent in 2008 and 1.1 percent in 2009, growth climbed to 7.3 percent in 2010, boosted by a recovery in investment, exports and strong domestic consumption.3
Remittances from overseas workers in 2010 were US$18.76 billion, continuing the growth seen throughout the past decade.4 The Asian Development Bank forecasts growth of 4.7 percent in 2011 and 5.1 percent in 2012.5
President Benigno Aquino ran for election in 2010 on a platform of good governance. An infrastructure development program utilizing private capital has been delayed as the government seeks to eliminate corruption and improve transparency in the bidding process, but ten projects with a value of US$3.1 billion are expected to be launched for bidding in 2012. The initial focus is on road, rail, airport and power, but future projects in agriculture, fisheries, food processing, health, education, water supply, tourism, business parks and commercial complexes are likely to be more attractive for PE investors.6
Successful bidding processes may kickstart foreign direct investment, which fell by almost 50 percent in 2008 and remains well below the US$2.92 billion seen in 2007. The Philippines has a track record in public private partnerships (PPP) with US$45.1 billion of projects signed between 1990 and 2008.7 Past projects have been financed by multilateral development agencies and the private sector, including from the country’s major conglomerates. The next wave could provide opportunities for specialist infrastructure funds and for private equity firms to enter partnerships with local conglomerates to operate the more complex businesses.
1CVC Capital Partners, 15 May 2011
2Philippine Stock Exchange, October 2011
3Asian Development Bank, Philippine Factsheet, December 2010
4Banco Sentral ng Pilipinas, September 2011
5Asian Development Bank, 14 September 2011
6UK Trade & Industry, Foreign & Commonwealth Offi ce, November 2010
7UK Trade & Industry, Foreign & Commonwealth Offi ce, November 2010