The private equity (PE) investment ecosystem in the Philippines remained nascent in 2017 but the number of companies worth investing continued to grow, says Alasdair Thomson, a partner and co-founder of the PE firm Sierra Madre Philippines.
This was also the view shared by another executive from a different PE firm, who declined to be named, during a recent interaction with DEALSTREETASIA.
Thomson gave insights as to how the local industry can bridge the business gap, and why Sierra Madre remains positive about the local market which they consider to be ‘underserved by global and regional PE funds, local banks, and large strategic players’.
Founded in 2016 by a group of seasoned PE investors – Danny Lizares, Martin Lorenzo and Thomson – Sierra Madre is a locally sponsored, locally focused PE group that had completed raising the first part of its $120 million growth fund in April, when it brought in $50 million for its Sierra Madre Philippines I LP Fund.
The PE firm has expertise working with companies in multiple sectors, such as retail, consumer goods and services, business service, transportation and logistics, leisure, education, and healthcare.
What can you say about the current PE industry in the Philippines?
Thomson (Sierra Madre): Locally, the PE industry remains nascent and under-penetrated as a development option for entrepreneurs and as an asset class for local institutions.
Unnamed PE executive: PE is a much newer asset class in the Philippines relative to other markets. Companies who have been approached by Philippine PE investors require more education about having an investor relative to those from other markets. While companies from other countries have learned to see PE as an “interim step” to a capital markets activity (e.g., an IPO), in the Philippines companies still expect PE funds to bring strategic value before deciding to have them as an investor.
How do you think the gap can be addressed?
Thomson (Sierra Madre): An extended period of education and familiarization is needed to lift the industry to levels seen elsewhere, and that will take time and patience from those of us on the ground.
The best thing we can do here is to demonstrate the benefits of our investment model to both constituencies by continuing to make great deals and support rapid growth in the companies in which we invest.
Unnamed PE executive: There are many local companies with the scale and growth trajectory to attract PE investors. However, many of them are uninvestable due to a lack of tax compliance and governance structures. PE investors working with companies here need to get comfortable with these risks and convince their partners to work with them on getting to proper compliance.
So how viable do you think is PE investing in the Philippines?
Thomson (Sierra Madre): When you look at the fundamentals, the market is highly attractive with a growing pool of attractive companies that can benefit from a value-added investment partner.
For institutional investors, we have proven that the returns can be compelling and more than compensate for the liquidity position relative to public markets.
What do you think of the exit potential?
Thomson (Sierra Madre): The Philippines is a highly attractive story in the region with compelling long term prospects and is increasingly featuring on investor radar. Local trade and conglomerate buyers are liquid and seeking ways to grow. So for the right businesses, there are good options for a fund to exit either through trade sale or through recapitalization with regional or local funding.
Exiting well is the toughest part of PE and it doesn’t happen by chance. So working with our partners to shape a business and improve its fundamentals to make it as attractive as possible to the widest range of potential future investors is a core discipline. We need to bear in mind the aspirations of our entrepreneur partners as we do that.
We’ve shown over many years that we can exit our investments successfully, having done so through various routes including trade sales, recapitalizations and IPO.
Unnamed PE executive: There are many exit options available in today’s market. Funds, strategic investors remain interested in investing in the Philippines, but there is a lack of sizeable investable opportunities in the market today. PE funds with a local portfolio of companies attract a range of foreign partners that can take over their exits, since a PE investor almost acts like a “seal of approval” demonstrating that the company follows proper accounting, tax, compliance, etc.