Derek Gallimore talks with Kieran Martin, Managing Partner and Co-Founder of Index Asia. Founded in 2016, Index Asia is a corporate finance advisory firm for investors interested in tapping the Southeast Asian market. They have offices in the Philippines, Hong Kong, and Vietnam.
The Philippines has great market potential for foreign investors. Yet, it has been under the radar for other industries except in BPO. In this episode, Kieran and Derek will discuss the economic climate in the country and the factors that could attract investors to it.
A briefer in Index Asia and pitching the Philippines to foreign investors
Kieran Martin is a managing partner and co-founder of Index Asia. Index Asia is an independent advisory firm helping foreign institutions invest in Southeast Asia, especially the Philippines. It has offices located in the Philippines, Vietnam, and Hong Kong.
Per Kieran, there are numerous factors in pitching the Philippines to investors:
- Industry-related. Foreign investors usually compare a company in the Philippines to another in a foreign country.
- The country’s characteristics. This includes the country’s population, trends, behavior, market aspects, and the aspects that need improvements such as infrastructure and utilities.
Why foreign investment veer away from the country
Despite the potential of the country to be an emerging market, the country remains to be out of investors’ radar. Keiran points out that this could be due to the “structure of financing in the Philippines.”
Influential families taking control
According to him, it has “a lot [of potential] compared to Indonesia and India.” Yet, it also has a set of families having a stronghold in the country, unlike in Indonesia where several families are competing in the market.
The country, per Keiran, has a “more controlled” market where investors have to work with a family to succeed. The strong control of companies from these big families even makes the Philippines “not prone for small and medium enterprise (SME) investments.”
Loan rates and allocations in the country
A report from the Asian Development Bank (ADB) details the comparison of financial situations within Southeast Asian countries. A part of the report tackles the loan allocation to SMEs in each country.
Compared to its neighboring countries, The Philippines allocate the highest percentage of loans (90%) to big firms. The remaining (10%), meanwhile, is given to SMEs.
The loan value rates in the Philippines are also deemed high, garnering around 60% of cash out of 100% of a property value. For instance, companies with land collateral of $1 million can get up to $600,000 in bank loans.
Big companies, meanwhile, have more freedom in this since they have their own banks.
The Philippine Stock Exchange
Another thing Keiran observes in the country is the Philippines Stock Exchange (PSE). From being one of the best performers in Southeast Asia 20 years ago, it now only represents “half of what is happening in Thailand.”
A well-performing Filipino company going public even poses risks to their business. Keiran explains that going public in the country means business owners have “less maneuver” and should be more careful with their moves.
BPOs as key players in the Philippine market
Keiran agrees that the Philippine economy is a “winner-take-all” situation, making its market enjoyable.
However, the BPO industry is a sole exception to this, since they don’t “follow the [country’s] systemic role.” Compared to other industries, outsourcing has access to reliable foreign clients and a local workforce motivated to enter the industry due to its dynamism.
With a good portion of BPOs being SMEs, it’s natural for them to “face the same hurdles” like other small businesses in the country. However, they have other resources to consider.
In fact, according to Keiran, “a lot of innovation” is happening in the BPO industry, given the examples of TaskUs and Probe Group as VC-funded unicorns. This, he added, might generate more growth opportunities.
The trend of short-term service acquisition
Keiran sees two angles with the short-term acquisitions happening in BPOs.
- “Acquisition is not [something] you can think of in two minutes.” This goes the same with outsourcing since it involves running a company.
- “[Outsourcing] is an innovative market” that comes with uncertainties.
With these factors, clients would possibly hesitate to a certain contract “if innovation in a year from now might solve some of the problems.”
How the upcoming elections could affect investments in the Philippines
Keiran agrees that “some good incentives” have been applied to the economy during Duterte’s term despite his tarnished international publicity. For one, the CREATE law and several other incentives were passed to reduce tax rates and promote competition.
Keiran projects that this is an interesting time for the Philippines. Experts think there “will be a bit of competition” for the presidential position since only a few candidates are vying for it.
On the other hand, most investors “are not yet concerned” with the results of the elections, except for players in the infrastructure industry. Per Keiran, “the impact of the political power is quite strong” for them.
He adds that experts still project numerous deals to come until the end of May. With this, investors have to wait since it might not be signed and get effective before the end of the elections.