Markets

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

A fast-growing economy with a vibrant young workforce, the Philippines has all the right metrics to be an investment hot spot. But it's not an easy place for foreigners to find opportunities -- and that's not because of President Rodrigo Duterte, whose drug war and anti-U.S. invective caused an exodus of funds last year.

As M&A lawyers and bankers crowded into the AVCJ Private Equity & Venture Forum in Manila this week, the topic that dominated discussions was the difficulty of identifying investment targets.

Over the past five years, there were only 81 cross-border private equity and venture capital transactions, totaling just over $6 billion. Meanwhile, neighboring Indonesia is flourishing, with more than $4 billion of deals so far this year alone.

Not So Hot
Unlike Indonesia, Philippines isn't getting big cross-border private equity and venture capital investments
Source: Bloomberg

That's because the Philippines is dominated by family-controlled groups that have become aggressive acquirers as they seek to remain relevant in an environment of technological change. Since 2012, the five largest conglomerates spent almost $17 billion buying companies.

Keep It in the Family
Conglomerates in the Philippines have been aggressive with acquisitions
Source: Bloomberg

They're picking up the juiciest morsels. Ayala Corp., a real estate giant, bought a 43 percent stake in February in the operator of Zalora Philippines, an e-commerce firm backed by Alibaba Group Holding Ltd. SM Investments Corp., which like Ayala has made billions from commercial property, got into logistics this year via a 34.5 percent interest in 2GO Group Inc., the country's largest supply chain operator.

Even as the benchmark gauge hit a record this week, the equity market has stagnated. Five years ago, there were 251 stocks trading on the Philippines Stock Exchange; that's increased only marginally, to 268. The same companies that dominated investors' portfolios then still rule the roost.

The common factor among market heavyweights is the presence of the Philippines' richest families. Seven conglomerate companies make up more than half the market capitalization of the benchmark Philippines Stock Exchange PSEi Index. They contributed over 60 percent of the gauge's 25 percent return in local currency terms this year.

No Choice
Conglomerates dominate the Philippine Stock Exchange PSEi Index
Source: Bloomberg
Note: BDO Unibank is a subsidiary of SM Investments.

One way for the Philippines to broaden the range of investments would be to open up the market for real estate investment trusts. Development of REITs has been stymied by stringent listing rules imposed by the Aquino administration, including a requirement for 67 percent of shares to be floated by the third year. As a result, the Philippines has no listed REITs, compared with more than two dozen in Singapore.

Conference participants and senior stock exchange managers are hopeful that the Duterte government will change the rules, though this won't be happening anytime soon. The priority is tax reform, which has helped to pull stocks back into a bull market and turned investment inflows positive again.

Needless to say, the owners of all those parking lots and hospitals that are the cash-cow staples of REITs are the same family-controlled groups. And it's hardly necessary to add who the main beneficiaries of the tax reform will be: conglomerate-owned retailers.

So how can foreigners make money in the Philippines? As ever, the answer seems to be: Get to know the right people.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net