What makes the Philippines an attractive investment for PEs and VCs

According to the GIIN’s (Global Impact Investing Network) latest report on impact investing in the Southeast Asia, the Philippines is Southeast Asia’s second-largest impact investing market in terms of both the amount of impact capital disbursed and number of impact deals completed between 2007 and 2017.

The inquirer.net organizes the report description of impact investors as needing to meet three criteria: 1) they have the intention to create positive social or environmental impact created through their investments;

2) they expect some financial return;

3) they are committed to measuring the social and environmental impact created through their investments.

The social enterprise landscape of Philippines

The GIIN describes the evolving nature of the social enterprise landscape which over the years has transformed from investing in cooperatives and community-based models to including more asset-light, tech-enabled and inclusive business models.  Several impact focused incubators and accelerators also serve the market.

Between 2007 and 2017, at least 23 private impact investors (PIIs, which include fund managers, family offices, foundations, banks, pension funds, plus other investors that channel private capital into impact investments) deployed over $107.2  million into 54 deals here in the country, according to Inquqirer.net.  Added to this were the six development finance institutions (DFIs—government-backed financial institutions that provide private sector with monetary support for investments promoting development) which cumulatively deployed over $2.3 billion in impact capital through 43 deals in the same time period.

These figures have established Philippines as the second largest market for impact investments in the region, next to Indonesia.

Over a ten-year period, investment has been diversified to include sectors of workforce development, energy, and agriculture. The GIIN reports that the number and size of PII impact deals in the Philippines have recently increased, and PIIs have further diversified to include equity investments in addition to debt capital. While PII activity has increased over time, the role of DFIs has remained consistent since 2007, with investments in two core sectors: energy and financial services.

Investors and investment areas

Numbering 23 in total, the PIIs are divided into 19 fund managers, three family offices/foundations and one impact-focused high-net worth individual. The majority of the deals were of an average size of USD 1 million and were made with companies (microfinance institutions, SMEs and fintech companies) under the financial services sector (54 per cent), 86 per cent of which were deals as debt.

Other investment areas include workforce development at 15 per cent of the total.  Average deal size was USD1.0 million and all were equity deals.  Investment in agriculture at 13 per cent of the total PII investments were a mix of debt and equity deals with deals averaging USD 0.5 million.  The energy sector saw investment at 11 per cent of the total with 85 per cent of these deals as equity with average deal size of USD 10.5 million, amounting to a USD 63 million, the majority of which went into large-scale deals to develop geothermal and solar energy capacities.

Supportive factors in the Philippines’ impact investing ecosystem

inquirer.net lists the following drivers:

  • Business support, particularly the growing startup ecosystem;
  • Improving innovation and research and development, as the country gained seven places year-on-year on the Global Innovation Index, landing 73rd place last year;
  • Increasing consumption of local goods and services, which drives the country’s gross domestic product growth; and
  • Encouraging government policies, such as attractive fiscal incentives for investors, tax holidays and credits, relaxed restrictions on foreign ownership, favorable regulations for small and medium-sized enterprises and increasingly formal recognition of social enterprises as agents of positive change.

Challenging factors in the Philippines’ impact investing ecosystem:

inquirer.net lists the following drivers:

  • Lack of access to human capital due to cost and limited availability of mentors, which hinders growth of social enterprises and business support providers;
  • GIIN cites Lack of access to human capital hinders the growth of both social enterprises and business support providers in the Philippines. More than 20% of social enterprises in the Philippines consider access to human capital a key barrier to growth.
  • High tax rates, which disincentivizes investments;
  • Lack of globally competitive infrastructure;
  • “Nascent” entrepreneurial culture, which growth is being hindered by the low availability of risk-tolerant capital, plus a “historical lack of cultural support for entrepreneurial activity.”;
  • Underdeveloped public infrastructure;
  • Fragmented island geography which inhibits scalability

Gender Lens Investing (GLI)

Philippines is a leader among the Association of Southeast Nations (ASEAN) in terms of gender equality.

Forty-four percent of social enterprises in the Philippines are led by women. The Philippines was also ranked fourth of 80 countries in terms of the proportion of female managers.

GLI has started to gain traction, with at least three fund managers scouting the country for investment opportunities that positively impact women.  According to the report, as of 2017, only one PII had deployed capital amounting to $12.5 million into 20 deals using an explicit gender lens.  The GIIN anticipates that more investors will likely deploy capital soon as several gender-based investment opportunities are currently being scouted.

The GIIN report cites unintentional benefit for girls and women through capital deployed for a number of other impact investments.

Although not deliberately focused on benefitting women or girls, certain investments have had a gender-based default, highlighting the potential pipeline for gender lens investors. For instance, although DFIs don’t typically have an explicit gender-related impact mandate, a significant volume of DFI capital in the Philippines has been channeled toward investments that inherently benefit women and girls by providing them access to finance. The GIIN reports that in most cases, these investments are made based on perceived market opportunity, with specific impact on women being coincidental. Similarly, many investments have been made in women-owned or -led businesses without the investor’s explicit, gender-based intent. Post-investment impact measurement has provided evidence for significant impact on women, and many investors who do not identify as GLIs still report such impact.

According to the OECD report, Economic Outlook for Southeast Asia, China and India 2019, over the next years through 2023, the Philippines is estimated to grow annually by 6.6%, equaling the rate in 2012-16.

The GIIN report says that given the economy’s expected growth trajectory and the government’s commitment to meeting the UN Sustainable Development Goals (SDGs), the Philippines will likely see increased interest from global and regional impact investors.

Inquirer.net sites macroeconomic stability, recent government investments in infrastructure, a conducive regulatory environment, an increase in local consumption and growing recognition of social enterprises as drivers of development.  Other contributing factors include the young workforce, high literacy rate, stable currency and benign look for inflation, all add to the country’s appeal as an investment destination.

 

 

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