As part of our Q&A series with investment experts on the ground, Managing Editor Gavin Serkin probes the outlook for business in the Philippines under its new President. This week’s Expert Q&A is with Alasdair Thomson of Sierra Madre, which is creating the country’s second private equity investment firm.
Serkin: Some call him ‘Duterte Harry’, others call him ‘The Punisher.’ He’s very strong on law and order, and he’s made some very provocative statements about how he would cut down crime. What’s your opinion for the future of the Philippines under Rodrigo Duterte?
Thomson: Well I think for investors probably the single biggest worry about these elections was that there wouldn’t be a clear outcome. In those circumstances, the Philippines has tended to end up with a lot of rallies in the streets, use of the court system to try to impeach people, and clearly that sort of uncertainty is not a great investment environment. So the one good thing that’s come out of the election is there’s a very clear mandate for a winner.
Duterte will take office in June. He’s clearly an unknown quantity, especially at the national level. Through the campaign period, he has made one inflammatory statement after another, on a number of topics. He’s talked about filling Manila Bay with 100,000 dead criminals to feed the fish; the horrific comments about the unfortunate rape victim in Davao jail – none of that is particularly statesmanlike, and I think what we have to do is try to work out whether that is some bizarre form of electioneering or whether that is actually his true character.
Serkin: And do you recognize a pattern here from past elections?
Thomson: You could argue that we’re seeing that with Donald Trump. It’s a way to pander to an audience to get elected, and then you come back somewhere more central than where you started out. Let’s hope that’s the case because clearly this is not a character you want running the country.
Having said that, if you take his track record as the Mayor of Davao, which is a large provincial city – when he took office there, it was a city with developmental problems and civil issues in terms of crime. If you go to Davao now it’s a wonderfully prosperous provincial town. He’s done a lot to deal with that. He’s clearly from a region where he understands the separatist Muslim issue that’s going on in Mindanao.
So, he has got a track record of some success. Let’s hope he can translate that into something that’s appropriate at a national level and a Presidential one.
Historically, politicians tend to be more about who they surround themselves with. From a business perspective, it’s hard to say he’s not pro-business; this is not a Hugo Chavez type character.
Serkin: And what are the key things that you need to see from a business perspective?
Thomson: What does the economy need to continue on its growth path? 6.5–7% growth is really what we would anticipate still as the potential of the country. To achieve that, there needs to be a continued, and probably accelerated, investment in infrastructure.
Serkin: Such as what?
Thomson: Roads, power, telecoms, airports.
Serkin: So what’s a Scotsman like you doing in the Philippines? Why the Philippines?
Thomson: I first went there as a young man in 1991. I came back a very happily married man; I’ve got three kids.
From a growth perspective, the region is tremendous, it’s untapped growth potential – 100 million people; median age is 24; all coming into a constructive period of their lives, that’s what’s really driving growth. So the local economy is very vibrant.
From a personal perspective, it’s a fabulous place to live: lovely people, everybody speaks English to a certain degree, the climate is nice.
Serkin: So back to business, what are you focused on? What are the projects you want to build there?
Thomson: The vast majority of companies in the Philippines are small and medium-size enterprises. They really struggle for financing from the banking industry. If you don’t have collateral, you don’t have access to banking, so within the context of the economy, you’ve got a lot of very vibrant, very high potential companies, which are a bit stymied in terms of access to capital, but also in terms of knowledge about how to grow quickly.
And that’s really what Sierra Madre is set up to do – to provide growth capital to those firms, but more than that, it’s to help them through the teething problems of rapidly growing your business. How do you get governance right? How do you develop a talented management team? How do you provide transparency in your reporting? How do you get your environmental setup, your governance setup? How do you run a business properly, to be scalable?
All of this is where these people need help, in addition to the money, and that’s really what we’re going to bring to the market. Nobody’s really been doing that – there’s one private equity fund that exists in the Philippines. We’re raising ours now, so hopefully we’ll be the second.
Serkin: And how tough is it out there? You’ve got a target of $120 million. What’s it like to look for that in this kind of environment?
Thomson: There are certain types of investors who are knowledgeable about the region, and I think their question has always been ‘how do we get a piece of that story – how do we access that from outside of the Philippines?’ So having the right type of local manager, who’s got depth of networking, a track record of investing in the country, is an interesting option for them.
Clearly the development finance institutes are the type of people who get into that first, because I guess they’re more adventurous, and we’re having very fruitful conversations with a number of those. And then looking further down the road, regional funds of funds, high net worth individuals and family offices – they tend to be the richer farms to plough in terms of fund raising. The large institutions, they’ll come when the market is a bit more mature.
Serkin: So no plans to go back to Scotland just yet?
Thomson: Not just yet! I prefer the weather in the Philippines.