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Private Equity in the Philippines – The Time Has Come Martin Lichauco Managing Director Fortman Cline Capital Markets Asia Finance Summit April 21, 2015 Makati Diamond Residences Private & Confidential Table of Contents 1 The Fast Growing Asian Economy 2 The Philippine Economy Today 3 Private Equity Opportunity in the Philippines 4 Fortman Cline Capital Markets 2 The Fast Growing Asian Economy Private & Confidential Asia-10: Key Drivers of Economic Growth • Asia is both a phenomena and a paradox with vast human and natural resources, home to more than half of the world’s population. • What is new: Globalization is a real revolution. Historically inert, Asia’s rural areas are now being transformed by urbanization, modernization, interconnectedness and technology. • Asia is shaping the world as the fastest growing region. From 1980 to 2010, Asia’s GDP grew from 40% of U.S. GDP to 80%. By 2016, Asian GDP will exceed that of the U.S. • Rebalancing economic power to Asia is supported by ample liquidity, strong fundamentals and growing consumer power spurred by wealth creation. Source: NSO, NSCB, DOT 4 Private & Confidential Asia-10 Consumer Sector: The Right Sector at the Right Time Why the Consumer sector? • Asia is now large enough to drive its own growth led by consumer driven countries such as China, India, Indonesia, Korea and other Asian nations. • Real consumption throughout Asia is sustained by per capita income and population growth. • Asian consumption has grown 25% year on year compared to an average growth of 1% in U.S., Japan and European countries. • Consumption will grow to 80% that of U.S. GDP by 2020. Why Invest now? • Capital flows will continue to flow into Asia as investors see where the growth is. • Buyer’s market – Reasonable valuations, supported by fundamentals and quantitative analysis, with increasing number of assets coming to the market. Source: World Bank, DBS Group, August 2014 5 The Philippine Economy Today Private & Confidential Why Philippines? – Country Overview Attractive Demographics and Resources Population: Pop. Growth: Main Cities: % Under 24yo: Urban Pop: Literacy Rate: Languages: 108 mn population 1.8 % p.a. Manila (11.5m), Davao (1.4m), Cebu (0.9m) 53% of population 49% 95% English and Filipino (8 major dialects) Japan China Taiwan Hong Kong GDP per Capita: USD 2,765 - 67mn middle income population (P60-250k annual income) - Middle class income grew over 8% CAGR over last 5 years. Thailand Vietnam Overseas Workforce: 10.5 million overseas workers globally remitting over USD20bn in remittances annually. - 2014 set an all-time high at USD 26.93bn in remittances BPO Sector: Largest number of offshore call center agents in the world, with 1mn workers employed in BPO sector and IT sector, pegged to reach $25bn revenues in 2016 and $55bn by 2020. Malaysia Singapore Natural Resources: Copper, gold, nickel, iron, cobalt and silver. - USD840bn estimated total mineral deposits Indonesia Tourist Arrivals: 4.8mn in 2014. - Over 8% p.a. growth in tourists for the last 5 years Source: NSO, NSCB, DOT, World Bank 7 Philippines Private & Confidential Why Philippines? – Strong Macro-Fundamentals Strong & Favorable Investment Outlook Robust GDP growth over last decade Philippines received its first ever Investment Grade rating this year by credit rating agencies. Its credit rating was upgraded to BBB- by Fitch last March 2013 and by S&P last May 2013. Real GDP Growth 7.6% 8.0% 7.2% 6.6% 7.0% 6.6% S&P sees the country as having the capability to withstand unfavorable developments in the global economy. 6.1% 6.0% 5.2% 5.0% 4.8% 4.2% Philippines is seen as one of Goldman Sachs’ “Next Eleven” economies and Citi’s eleven “Global Growth Generators”. 3.9% 4.0% Projected by HSBC to be the 16th largest economy by 2050, up 27 spots, driven by strong fundamentals and favorable demographics. 3.0% 2.0% 1.1% Continuously improving fiscal position with diminished chances of a sovereign debt crisis and less money being used to repay debt Source: CNBC 1.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Highest projected GDP growth among Asian peers 2013 record high of 7.2% GDP growth, second fastest in Asia behind China China India Indonesia Malaysia Philippines Singapore Thailand Vietnam Q4 2014 GDP accelerated to 6.9%. Driven by communications, construction, manufacturing, real estate, transportation, etc. Although decreased due to government underspending, PH remains second fastest GDP growth in Asia behind China (7.4%) 2010-2020 6.7% 5.7% 4.3% 7.1% 8.4% 3.7% 4.0% 5.7% 2020-2030 5.5% 5.6% 4.3% 5.7% 7.3% 2.1% 3.8% 5.3% Source: HSBC Global Research, January 2012 Source: NSCB, World Bank 8 2030-2040 4.4% 5.5% 4.3% 4.7% 6.6% 2.0% 3.8% 5.1% 2040-2050 4.1% 5.2% 4.5% 3.8% 5.8% 2.1% 4.0% 4.8% Private & Confidential Why Philippines? – Strong Macro-Fundamentals Steadily declining external debt levels Low inflation and interest rate environment YoY Headline Inflation External Debt to GDP 9.0% 8.0% 70.0% 59.7% 8.2% 60.0% 7.7% 50.2% 7.0% 50.0% 6.3% 6.0% 44.5% 37.6% 38.4% 36.9% 40.0% 5.0% 4.7% 4.2% 4.0% 4.1% 3.8% 3.0% 30.0% 3.0% 2.9% 33.7% 31.9% 28.8% 27.3% 20.0% 3.1% 2.0% 10.0% 1.0% 0.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014 External debt to GDP down from 59.7% in 2005 to 27.3% in 2014. 2014 yoy headline Inflation at 4.1%, below government’s target of 4.48%. 2014 budget deficit of P73bn, well below deficit cap of P266bn, due to government’s push for responsible spending. Inflation has been around 4% in the last 5 years. Bangko Sentral ng Pilipinas (central bank) policy rates steady 4% for overnight borrowing and 6% for overnight lending. BSP has kept rates steady since October 2014. Government achieved 0.6% GDP deficit in 2014; target was 2%. This indicates easier management of government’s funding shortfall, reducing borrowing pressure which inflates the country’s debt. 10-year Peso-denominated government bond yields at 4.1% falling at steady average levels. Gross International Reserves at a sustained high of USD80bn as of end-2014, representing over 10x import cover and over 450% short-term external debt cover Source: BSP, World Bank 9 Private Equity Opportunity in the Philippines Private & Confidential In the Philippines – PSE at record high and at a rather rich valuation above 21x PE PSE Index PSE Index 8,000 7,000 PSE Index P/E: 1-year return: 3-year return: 7,815 (04/20/15) 21.2x 29% 148% 20.0x PE 17.5x PE 6,000 15.0x PE 5,000 12.5x PE 4,000 10.0x PE 3,000 2,000 1,000 Source: Bloomberg, April 2015 11 Private & Confidential Private unlisted entities account for over 78% of Philippine economy Philippine GNI Breakdown – Private vs. Listed Philippine GNI vs. Revenues of Listed Equities Php Trillions 16 14 Publicly Listed Entities 13.9 22.0% 12 10 8 6 78.0% 3.1 4 2.1 Private Non-listed Entities / SMEs 2 0 Philippine GNI All Publicly Listed Revenues PSE Index Revenues All publicly-listed companies account for only 22% of Philippine economy (GNI). Public markets provide limited access for investors to participate in broader and fastest growing portion of Philippine economy. PSE index account for 15% of GNI. PE funds can serve as a managed vehicle to access this major economic growth segment. 12 Private & Confidential Consumer related sectors particularly compelling for Private Equity investors 73% of GDP driven by private consumption USD20bn OFW remittances growing 12% p.a. 94 million population growing 2% p.a. Median population age 23yo lowest in ASEAN 8% p.a. growth in middle-class income / increased discretionary spending Target consumer-related sectors: F&B, Retail, FMCG, Business Services, Pharma / Healthcare, Tourism, Education Only ~15% of listed companies have predominant exposure to these sectors 13 Private & Confidential Select Foreign Private Equity Investments in the Philippines • In 2013, CVC Capital Partners paid $300 million for 80% of SPI Global Holdings, the BPO business unit of the Philippine Long Distance Telephone (PLDT) • In 2013, Chandler Corporation, the Singapore-based family office of Richard Chandler made an investment in The Medical City, a leading integrated network of hospitals in the country • In early 2014, GIC Private, Singapore government’s sovereign wealth fund, acquired 14.4 % of the hospital unit of conglomerate Metro Pacific for PHP 3.7 billion ($85million) • In May 2014, GIC Private invested PHP 3.4 billion ($76 million)for 11% of Century Canning • In November 2014, GIC Private agreed to pay PHP17.6 billion ($391 million) for a 9.64% stake in Emperador (EMP), a Philippines-based liquor producer 14 Fortman Cline Capital Markets Private & Confidential About Fortman Cline Capital Markets Founded in 2007, Fortman Cline Capital Markets is a Hong Kong based Investment advisory firm with offices in Manila, Singapore, Jakarta and New York. represents professionals with decades of experience in Global Capital Markets, Investment Banking and Asset Management. FCCM grows dynamic growth growth oriented middle market companies in the Asia-10 who seek access to the Global Markets. We help our clients identify and pursue strategic alliances, enhance shareholder value and raise capital to meet growth objectives. FCCM is ranked the number one M&A firm in the Philippines with $9.8 Billion in completed transactions since its inception. At FCCM, we are driving synergies between our investment advisory and banking teams; distribution and proprietary co-investments. We are devoted to assisting small to middle market companies that are helping to reshape the consumer, energy and water services throughout Asia. Mergers and Acquisitions We assist companies with strategic asset acquisitions, evaluate potential targets and identify optimal financial and strategic alternatives. We advise in the structuring, financing and growth prospects of proposed acquisition and negotiate optimal outcomes. Effective Syndicate Loan Advisory With over a decade experience in the expansive syndicated loan market, FCCM is exceptionally qualified to advise Asia based clients on how to access the offshore loan market in order to achieve the lowest cost of funding and best terms. Co-Investment Opportunities FCCM is building a community of investors to share in our success. Our model capitalizes on the increasing interest in direct investing from institutions and family offices by offering co-investment opportunities with the launch of FCCM McEnergy Partners. We create alignment by investing with our investors. Divestments Clients contemplating the sale of certain business assets or their company engage FCCM to evaluate and recommend financial and strategic alternatives. 16 Private & Confidential Fortman Cline has been ranked as the top M&A firm in the Philippines by Bloomberg Bloomberg 2009-2014 Rankings – Top Philippine M&A Financial Advisers 17 Private & Confidential The only Philippine firm to make it to the Top 25 M&A Advisors in Southeast Asia Bloomberg 2009-2014 Rankings – Top 25 Southeast Asia M&A Financial Advisors 18 Private & Confidential FCCM’s Co-Investing Partners LP: Themes and Forecasted Opportunities The Global Market is upon us. We are in a world where assets have no borders. The new global options bring new challenges which radically alter the fundamental basis for our investment thinking with new trends and investment themes. Trends • • • • • • • Shifting Global Growth from West to East Structural changes to Consumer driven Economies Demographic windows of growth with rising domestic consumption Energy and infrastructure is central to Asian growth and Development Aging Societies in Japan, Europe and China Increasing demand for resources Innovations in Digital Revolution and Social Media FCCM Opportunities and Strategies Investment Themes • • • • • The rise of China, India, Indonesia and other Asian markets and economies Consumers in China, India, and rest of Asia Food, Beverages, Retailing, Knowledge Drive New Energy Technology and Renewables Demand for healthcare and medical technology • Clean water • Smart phones, smart homes, smart machines 19 • Co-investments in Asian Entrepeneurial Mid-Market Companies • Co-investments in FCCM Consumer deals • Co-investments in FCCM Energy deals • Co-investments in FCCM Healthcare deals • Co-Investments in FCCM Infrastructure deals • Co-investments in FCCM Tech deals Private & Confidential Fund’s Co-Investment Strategy – USD5-10 mm investments in growing, mid-sized companies in focus sectors (around USD25 mm market cap) Proven Business Models and Cash Flows Seek out companies w/ great management, brands and products in respective sectors looking to catapult to next level. Companies w/ proven and growing cash flows lowers performance and exit risk. Higher Growth Potential Higher expected growth for mid-caps over well-established large caps. Focus sector-space can achieve target returns >25% IRR over 3-5 years via IPO or strategic trade exit. Looking to fund next generation Mang Inasals / future Jollibees and SM. Cheaper Valuations in Mid-Cap Market Little investor competition, no established PE fund currently focused on midsized space. More receptive to PE funds due to limited-access to growth funding options. More Opportunities to Add Value Significant opportunities to add value via (1) strategic partners, (2) corporate governance / managerial improvements, and (3) operational efficiencies. 20 Thank you! [email protected]