The Philippines remains a small market for private equity (PE) investing and it could take time for local entrepreneurs to adopt a mindset of creating and selling businesses, according to Alasdair Thomson, partner and co-founder of PE firm Sierra Madre.
“The pool of investment capital here is quite small and the Philippines did not have a tradition or history in private equity investing,” Thomson said in an interaction with DealStreetAsia.
Sierra Madre is among the pioneers in PE investing in the Philippines, having raised its first fund – Sierra Madre Philippines I LP Fund – in 2017 at over $50 million. It is a locally sponsored, locally-focused PE investor that makes growth investments of over $5 million in small and medium-size firms that have a track record of performance.
Another notable local-focused PE firm is Navegar, which made an initial close of its new fund at $87.1 million in July.
About a quarter of Sierra Madre’s first fund has been deployed and the firm continues to scout for deals with a target deployment of 40 to 50 per cent by the first quarter of 2020, Thomson said. He admits that raising a country-specific fund for the Philippines was not an easy task.
“Most entrepreneurs (in the Philippines) don’t think of their business as their asset. They think of it as a cash flow generator and something that they can pass on to their family. It’s quite rare to meet people here who build a business thinking that it is going to be something valuable and, at some point in time, they might sell,” Thomson pointed out.
In other markets, entrepreneurs have a concept that they will build and then sell their businesses for profit. In the Philippines, they don’t think about selling their businesses so they are not mentally prepared to do that, Thomson added.
Sierra Madre, however, remains optimistic that the PE market in the Philippines will grow, considering that raw deal flow is already where the firm expected it to be. The firm sees 100 to 120 raw deals per year, which Thomson said is already promising considering that the Philippines is a new PE market.
He said PE markets take 10 to 15 years to gestate and grow at a minimum because each market has to build an ecosystem of people who understand and embrace PE.
“People need to be patient with everything because right now its a small market, with average check size somewhere between $8 – 15 million. But if the Philippine economy keeps growing, two things will happen: the companies we are investing into will get bigger and the check sizes to invest will also get bigger,” Thomson added.
Sierra Madre said the Philippines presents a highly attractive emerging market opportunity driven by strong, secular macro trends: political and economic reforms, attractive demographics, growing middle-class, and rapid urbanisation.
The firm has already invested in two companies that operate in logistics and semiconductor spaces, through its first fund, and is looking at further opportunities in travel, consumer, and retail sectors. Financial services, healthcare, and business services are also sectors that Sierra Madre might consider investing in.
“We are opportunistic so we look at all sectors but we just have to look at what drives the Philippine economy. That’s where you‘re going to get opportunities,” Thomson said. Other members of the Sierra Madre senior team are seasoned PE space investors Danny Lizares and Martin Lorenzo.
Thomson was a partner at Morgan Stanley Capital Partners and senior principal at Apax Partners in Europe. Lorenzo was the former chief executive of Pancake House and managing director of Del Monte Pacific, while Lizares was the former managing director of the Abraaj Group, and partner of Aureos Capital.
He said the partners are running the firm to the same standard as Apax or Morgan Stanley in terms of integrity and investor relations, although at a smaller scale. All the process on how to source, track, and report deals is being institutionalised as the partners have the ambition of running Sierra Madre as a “first-world, blue-chip company”.
However, Thomson said the firm remains committed to staying local, with no plans of expanding in markets outside the Philippines for now. He also hinted at Sierra Madre’s intention to raise more funds.
“There’s too much to be done in the Philippines and we all think there is a very very exciting opportunity here.”
Is Sierra Madre ready to jump on the venture investing bandwagon, as what other Asian PE players, including KKR and TPG, are already doing? Thomson said venture investing is a different investment model and the Philippines still does not have the right ecosystem yet.
“If you are going to be a VC investor here, you are setting yourself up to fund that business through several rounds. That’s not really how most VC markets work,” he stressed.
Thomson, however, does not see any reason why the Philippines could not or should not produce unicorns similar to GoJek and Grab. To achieve this, though, the government needs to come up with major incentives for startups and upgrade the country’s telecom systems, he said.