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Deal-makers give Philippines a fresh look

An Italianni's restaurant in Manila operated by the Bistro Group, a company controlled by private equity fund Navegar

MANILA -- Private equity funds have traditionally shown little interest in the Philippines. But the country's recent strong economic performance and favorable demographic trends are putting it on their radar.

     In November, Hong Kong-based ADM Capital and an affiliate of Baring Private Equity Asia announced they would lead a $150 million financing package for the construction of five high-end office buildings next to Clark International Airport, northwest of Manila. The deal ranks as one of the largest bets on Philippine property by foreign investors in recent years.

     U.S.-based private equity firms Carlyle Group, TPG Capital and Lone Star Funds were among the reported bidders earlier this year when the government made an abortive attempt to auction a 73.9% stake in United Coconut Planters Bank. Officials plan to restart the sale process next year, following the resolution of litigation over the government's ownership stake. KKR & Co., another big U.S. based private equity group, stepped gingerly into the Philippine market in July by providing advisory services to a local vaccine company.

     The Philippine economy is the big draw, with growth averaging 6.2% between 2010 and 2014. A government focused on fighting corruption, a growing population of 92 million with an expanding middle class, and a recently established investment-grade credit rating are helping, too.

     "Foreign funds are knocking on our doors, looking for deals more often than ever, with guys flying in from regional bases like Hong Kong and Singapore," said Martin Lichauco, who until recently was the head of the private equity group at Fortman Cline Capital Markets, a boutique advisory company that works with midsize businesses seeking capital. Large deals remain rare. One of the few to close was CVC Capital Partners' $300 million purchase in April 2013 of an 80% stake in SPI Global Holdings, an outsourcing services unit of Philippine Long Distance Telephone.

     The scarcity of major deals relates to a preference among the Philippines' business elite to trade assets with each other. "There are just not that many big companies," said a senior executive with another boutique advisory in Manila. "When deals get done, they have a tendency to be more club deals. Filipinos are more likely to deal with other Filipinos than international investors."

Starting small

Leading the way into smaller deals are local affiliates of foreign fund managers that have seen potential here. Brummer & Partners, a Stockholm-based asset manager, in 2013 backed the launch of Navegar, a private equity fund focused exclusively on the Philippines. The 5 billion peso ($105.6 million) fund has attracted investment from a number wealthy European families, German development bank DEG and its Dutch counterpart FMO, which alone has invested $32.1 million with Navegar, according to its website.

     Navegar completed its third investment in June, putting $15 million into TaskUs, a U.S.-headquartered outsourcing company with its operating base in the Philippines. Bryce Maddock, the company's chief executive and co-founder, said the funding would be used to open new offices and upgrade technology. At the time, he said TaskUs was profitable and was on track to generate $35 million in revenue this year.

     Navegar committed a combined $40 million into its first two investments -- a majority stake in Bistro Group, which operates around 50 casual restaurants under various brands, and an undisclosed stake in Intellicare, the country's largest health maintenance organization, with close to 1 million members. The fund aims to be fully invested within two years. "It's not that I found something nobody else found," said Patrick Brummer, chairman of Brummer & Partners. "It's just overlooked. Nobody is here offering $15 million to $20 million dollars, and I very much wanted to be the first guy to do it." He cites the country's recent stable economic growth as a key attraction.

     Abraaj Group, a Dubai-based private equity firm, has through its local office invested in six Philippine deals over the past decade. It initially focused on $3 million to $7 million deals, but it has been exiting those investments. It sold off its stake in casual restaurant operator Pancake House last year. Earlier, it unloaded its holdings in Daniel Mercado Medical Center and, through an initial public offering, Cirtek Holdings, a semiconductor company. It also invested $7 million in HBC, a cosmetics store chain.

     With a new $250 million Southeast Asian fund, Abraaj has bumped up its targeted Philippine deal size to $15 million. "This reflects the growth of [small and midsize enterprises] in scale and size and allows us to deploy funds at a faster rate," said Danny Lizares, managing director.

     Deals of this size also attract considerable interest from local businessmen, private equity fund managers say. "There are more than a handful of families that can afford a $20 million investment," said Honorio Poblador IV, a managing partner at Navegar. 

     His pitch is to argue that private equity investors can make better partners for local entrepreneurs needing capital. "There is an assurance of confidentiality, no fear of competing interests," he said. "And an institutional investor helps attract good talent to run the business and gives the impression of having good corporate governance, which helps if the company wants to access capital markets."

"Unpredictable" place

Aside from competition for deals, observers say some foreign private equity funds are put off by the high valuations demanded by Philippine business owners, legal restrictions on foreign ownership in certain sectors, an unpredictable regulatory environment and legal system, and a small stock market.

     "Regulations often change. Implementation can be unpredictable," said Benjamin Carale, a corporate finance specialist with law firm Latham & Watkins in Hong Kong. "You want to have a deep marketplace. The Philippines is still getting there. It does not mean you can't exit via an IPO, it's just not as easy."

     Some global funds may find their way into the Philippines through pioneers like Navegar and Abraaj. Poblador said there has been a "steady stream of conversations" with foreign private equity funds wanting to invest in the Philippines together with a partner on the ground.

     By drawing global stock market investors away from emerging markets like the Philippines, the move by the U.S. Federal Reserve to begin normalizing interest rates may also spur more deals, said Abraaj's Lizares. "The minute interest rates pick up and equity valuations adjust as fund managers switch their asset allocations, then that would signal the resurgence of private equity investments."

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