Navegar talks mid-market opportunities in the Philippines

Managing partner of Makati City-based firm Navegar, Honorio Poblador, sees a $15 million investment sweet spot.

Navegar, a Philippines-focused private equity fund, was created in July 2013 with a key goal: to provide growth capital to established local businesses by providing financial, operational and strategic guidance.

The firm has begun due diligence on its fourth investment and plans to start marketing its second fund as early as the fourth quarter. The fund will pursue the same strategy as its first vehicle, which has $119.4 million in committed capital, but will probably be larger, managing partner Honorio Poblador told Private Equity International at the Hong Kong Venture Capital and Private Equity Association Asia Private Equity Forum.

The fund is managed by Poblador and Javier Infante in partnership with Swedish alternative asset manager Brummer & Partners, and invests up to PHP 1 billion. Its investments include $18 million into casual dining operator Bistro Group, a 30 percent stake in the Philippines’ largest health maintenance organisation Intellicare and California-based outsource customer care company TaskUs.

Poblador sat down with PEI to talk about the market opportunity.

Q. What’s the appetite for private equity investments in the Philippines?

A. There aren’t many private equity funds doing things in the Philippines, we happen to be the only one dedicated to the Philippines in traditional private equity. There have been funds before but most of them have been on the venture side. Their specialty is taking advantage of the Philippines-Silicon Valley corridor. Some regional funds like Aureus have looked into the Philippines and have made about five investments over the past 10 years.

Q. How competitive is the local market?

A. We play in the small to mid-market space. There’s also been a lot of interest from the buyout funds. There have been buyout funds looking in the Philippines in the last four years with ticket sizes at $100 million. Today, there are large companies that can absorb $100 million; it’s just that there are many alternatives for them.The public markets are very liquid and trading at high multiples, banks are liquid and interest rates are so low, there’s no need for them to take private equity money.

If you look at the past three years, CVC Capital Partners acquired business process outsourcing (BPO) service provider SPi Global for $200 million. Capital International invested about $60 million in media and entertainment giant ABS-CBN. Singapore’s Government Investment Corporation (GIC) has been the most active, with investments in food producer Century Canning Corp, hospital group Metro Pacific and brandy company Emperador.

Q. What are the opportunities for private equity in the Philippines today?

A. There will be opportunities in the larger size companies, but the real opportunity is in the mid-market space. However, you have to be on the ground to find those opportunities. In the Philippines you can do $15 million, that’s the sweet spot. You’re talking about companies that have been there for a while, with proven business model and still have room to grow.

Every week we have investors asking us “what’s happening in the Philippines, can we do anything here?” There’s certainly a lot of interest but a lack of opportunity in larger ticket sizes.

Q. What challenges have you faced as private equity fund in the Philippines?

A. Many of the businesses we are looking at are owned by one family, most often Chinese families. Culturally, they are secretive and it’s very different for them to get an outsider sitting on the board. We do minority investments and try not to overhaul the business, so we are not intrusive in that sense.

In terms of regulation, the only impediment is foreign ownership restrictions. The general rule is if there’s land or some consequence to national security, there are limitations to investing.

Lastly, not many of the businesses in the Philippines know what private equity is. It’s getting better but it makes the sales pitch harder for a private equity fund trying to provide capital especially to less sophisticated business owners. They ask us “Do I have to share all the information? What decisions will you be involved in?” It’s a big concern.

There’s still that concept of debt. People ask us “If we take your money, how much interest do we pay?” We have to tell them, No, we are completely aligned with you. If business goes bad, we lose money too. A lot of our time is spent on building relationships, explaining what private equity is, how it would help the business.

Q. What sectors and industries are you keeping a close eye on?

A. Consumer and services (BPO, healthcare, tourism) and that’s where we will continue to look.

We like the healthcare sector because of the 110 million Filipinos, only 3.5 million have healthcare insurance. Eighty-five percent of medical spending is out-of-pocket, eating up on savings and basic necessities. We think that as gross domestic product per capita increases and as businesses get more sophisticated that market should grow. We think the industry can grow three times; that 3.5 million should be closer to 9 million today.