Envy the Dragon
Why, counterintuitively, PE is easier for Vietnam than Philippines
ACCORDING to the World Bank, Vietnam’s nominal GDP in 2012 (at official exchange rates) amounted to USD 142 trillion, or less than 60% of the Philippines’ nominal GDP of USD 250 trillion for that same year.
And yet: whereas there exists a Vietnam-focused private equity manager called Dragon Capital, which next year shall be two decades old and which reportedly manages over USD 1 billion worth of assets,… in stark contrast, we are hard-pressed to think of any professional PE managers of comparable size and length of experience that are devoted solely to opportunities in Philippines.
What explains this PE vacuum in Philippines?
Many find it richly ironic that a country with a long, uninterrupted tradition of private-sector commercial activity cannot muster a professional PE industry of any significance. Meanwhile, another country which has been controlled by a communist party for nearly four decades (since Reunification, at least) boasts of a lively and expanding PE sector. Fans of the now-chic “Beijing Consensus” (particularly the tenet about state-led capitalism) must be tickled pink(-o) at the thought.
Indeed, the Vietnamese PE industry got a jump start precisely from the privatization wave of state-owned enterprises during the 1990s (even though a good portion of that nation’s economy remains state-controlled or “state-linked” to this day). In contrast, there has been no grand opening-up of the Philippines to the capital markets, hence no “big bang”-related bonanza. (ASEAN’s big bang du jour is Myanmar, by the way.)
Second, the bulk of the PE capital in Vietnam (at least in early years of Dragon Capital and its fellows) was necessarily sourced externally, in view of that country’s egalitarian economy, and low household income and household wealth levels. Vietnam’s situation almost begged a role for foreign providers of risk capital to play. Deploying large chunks of capital into Vietnam was (and remains) a highly efficient affair. In Vietnam, it helped immensely if you were a large foreign institutional investor, and it helped even more if you managed to cultivate cozy relations with the appropriate state apparatus.
On the other hand, the current structure of the Philippine economy is the result of a radically different development path. It is certainly true that crony capitalism is a factor that has waxed and waned at different times; and some industries were marked by government regulation and/or monopolies, franchises, or concessions. However, the private sector in Philippines has had greater elbow room (compared to Vietnam’s private sector) to hone its chops against a backdrop of naked market forces. As in any competitive ecosystem, the survivors built upon their successes, grew bigger, and learned to invest and reinvest in businesses in which they had developed experience and competitive advantages.
Given the Philippines’ periodic economic and financial crises (which one could think of as akin to mass-extinction events like mega-asteroid strikes) occurring once or even twice per decade, banks and shareholders learned the harsh lesson that flight to quality works. This, in turn, further steered the flow of capital toward the few winners, so that today the business landscape is dominated by conglomerates, many of which are family-owned.
Because practically each of the giant Philippines conglomerates has its own cash cow(s) and in most cases its own bank as well, there typically is little need to solicit foreign PE funding. Whenever we do hear of the odd PE transaction in Philippines, it frequently tends to involve large transactions purely between local conglomerates or sales of minority stakes by prominent local firms to foreign PE funds. (The February 2013 sale of SPI Global was atypical in a couple of ways: it was a real whopper, at a reported USD 300 million; and it involved transfer of majority control from a local giant, namely, PLDT, to a foreign PE fund managed by CVC. Could this be the start of a new trend?)
To be sure, there is an ample supply of private enterprises in Philippines that can benefit from equity injections, but many of these are too tiny and not sufficiently professionalized for professional PE firms to get involved with. Between these mom-and-pop enterprises and the giant conglomerates, there appears to be a void, a “missing middle”. So, where are all the mid-sized firms hiding? Is there truly a shortage of mid-cap PE opportunities in so large, vibrant and briskly-growing an economy? It beggars belief.
Most regional PE managers (mainly those operating out of Hong Kong and Singapore) took the Philippines off their radar screens a long time ago, because they’ve been unable to find enough deals of any meaningful size to justify their continued attention.
A PE manager operating in Philippines has the advantage of knowing where to look for these, and how to coax them into the light of day. Being locals, we have glimpsed the gold, and it is certainly there for the taking (we trust you’ll appreciate that we’d like to maintain the privacy of our deal pipeline). Mind you: lifting the ore out of the bedrock (let alone refining the precious metal) demands the ability and willingness to invest the time in building up relationships and trust, because mid-sized businesses in Philippines are justifiably paranoid about getting crushed underfoot by the large conglomerates and the public sector.
Enough chitchat, then. USD 1 billion in assets under management won’t spontaneously create itself, so it’s back to work for us. While we look to the Vietnamese dragon for inspiration, we recognize that the PE landscape in Philippines calls for an entirely different model – one which requires rolling up the sleeves and getting dirt under the fingernails. But that’s alright. We like good, honest labor.
The opinions expressed herein are the writer’s own, and are not necessarily official positions of Angeon Advisors Ltd. Neither the writer nor Angeon makes any representations or warranties as to the accuracy or reliability of the materials contained herein.
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Angeon Advisors is an independent alternatives manager specializing in private equity and venture capital growth themes in the Philippines and other markets in Asia. Angeon also provides financial advisory services to very select clients.