???? Investing in the Philippines

Welcome to?Alts Sunday Edition???

Hope you enjoyed last week’s issue on?tipping economics.

Our goal here at Alts is to bring you unique investing opportunities. Stuff outside the mainstream. Under-explored assets, companies, and markets.

It's a big wide world out there. There is so much emphasis on the US (and for good reason — America has the most interesting companies and the most dynamic economy in the world.) But the fact is opportunities lie all over the place. And some of the most under-discussed opportunities are in investing in other?countries.

It's interesting how few newsletters focus on international investing opportunities. I'm inspired by Stew Glynn ?and the fine folks at TEN13 , who in 25 issues of their excellent?Outliers?newsletter are spotlighting on startups (especially fintech startups) across Asia, The Middle East, and Africa.

Caleb Maru ?from? Proximity Ventures ?is another inspiration. His Tech Safari ?newsletter is the go-to source for all things African tech. A lot happening over there, and Caleb is all over it. ????

So this week, we're kicking off an international investing landscape series, starting with?the Philippines ????

Why the Philippines?

Ordinarily I wouldn't start with this country. Nations like India and Brazil have bigger markets, and places like Israel & Romania punch way above their weight.

But as it so happens, I'm in the Philippines this week. I'm here visiting one of our employees in Baguio City, and attending a good friend's wedding ceremony in Cebu. While here, I got a firsthand look at how the country operates, and had the pleasure of chatting with? Vicente Nakpil-Roxas ?and? Russ M. , two interesting and well-connected Philippine startup investors.

Let's go ??

Demographics

When you think of the world's most populous countries, it's easy to forget about the Philippines.

China, India, Brazil, Russia, Nigeria, America, and maybe Indonesia. These are the household names that come to mind.

Meanwhile, the Philippines sits there quietly in the South China sea, sneakily the #13 most populated country in the world. A massive?109 million people?spread across a stunning archipelago of 7,600 gorgeous islands.

The Philippines has a young population. The median age is just?25.7?years old (compared to America's 38), but it's less urbanized than you'd expect.?Manila is massive?and densely populated, but only?47%?of the country's population is urban (compared to 80% in the US)

Oh, and some cities aren't sure exactly how many people live there. But we'll get to that later.

With a?rich history of ties to the US?since 1951, English is one of two official languages taught in schools, and it's the?only Christian nation in Asia. This prevalence of English gives the Philippines a huge advantage in international labor markets.

But what's fascinating to me is that, despite 1.5m new Filipino babies each year, the country has?negative outward migration.

This is due to an enormous & important program called the?OFW.

Economy

The Philippine economy is disgustingly simple: it's all based on?exporting labor.

The nation is a net exporter of people through the OFW, or?Overseas Filipino Worker program. Each day, over?6,000 Filipinos leave home?to temporarily work in countries like Saudi Arabia, UAE, Singapore, and Qatar (← no surprises there).

You cannot understand the Philippines without understanding OFWs. There are currently?1.8 million?OFWs overseas, working hard to pay for their children's education, buy a home, start a business, and to save for retirement.

These workers send home an astonishing?$43 billion dollars per year?back to their families, and these remittance payments power the entire service economy.

This isn't a country of mega-corps or a middle class with purchasing power. Wages are frustratingly low,?96%?of businesses are MSMEs (micro, small and medium enterprises) and just?4%?of businesses are enterprise corporations.

And there is some astonishing inequality. For example,?87%?of the GDP is accounted for by just?19?wealthy families who own all the major industries (mall & manufacturing owners, condo developers, etc.) This has?revived calls for a wealth tax.

In terms of innovation, the Philippines are?struggling to keep up with other countries. But President Marcos' recent?CREATE Act?is essentially a 7-20 year tax holiday for both domestic and foreign investors, with added benefits for foreign investors.

Top companies and industries

The?Philippine Stock Exchange?is a relatively young stock exchange, established in 1992 (in part by?Dr. Sixto Roxtas, the father of Vinci Roxas, who helped with this issue). It's currently the fourth largest in Southeast Asia.

There are 275 companies listed on the exchange. You probably wouldn't recognize most of them, but one exception might be?Jollibee Foods Corporation. This is the largest fast food chain in the Philippines, and they've recently gone international, expanding to 34 countries including the US, UK, and Australia (albeit with a totally different menu)

Labor force

One of the first things you notice when you walk into shops here is?how many people are behind the counter —?many standing around doing nothing.

All this extra labor would be a huge burden for companies in America, but not in the Philippines. The Philippine Peso is hovering among its?lowest levels ever, and BPO (Business Process Outsourcing, i.e.,?call centers) are growing?8-10%?annually.

1.2 million?Filipinos work in call centers, and most of the office space in downtown Manila is leased by them. Thanks to a well-educated, English-speaking population, the nation owns an estimated?10-15%?of the global BPO market.

Real estate & tourism

Real Estate is the country's largest industry.

OFWs used to be the biggest market for condos, but that was before Chinese investors swooped in. Now, 80% of new condos are bought by the Chinese, who scoop them up by the dozen. And tons of office space is occupied by offshore gaming operators known as?POGOs.

Gambling operations are illegal in China, so investors set up these offshore operations in the Philippines (servers, labor, and operations) and then service the gamblers in China. Pretty wild.

The largest builders in the country are?Ayala, which seemed to own every shopping center I went into, and?SM, famous for its?Supermalls.

Megaworld?is the country's largest hotel chain. Tourism was slammed by covid, tanking from 12% of the nation's economy to?5.2%?today, about half of what BPO operations bring in.

While most tourists come from the US, I've noticed a?disproportionate number of Koreans?here.

High-tech hardware

What the Philippines lacks in software development, it makes up for in hardware.

The nation fluctuates between being #1 and #2 in?high-tech hardware exports?(chips, semiconductors, electronic components... You know, all the stuff that western countries foolishly decided to stop making in the 90s.) If you buy a car in Japan, the electronic seatbelt was likely built here. At one point the country was making 80% of all IBM hardware.

Challenges and investing opportunities

Infrastructure

In terms of development, the Philippines is a case of a country "stuck in stasis."

Infrastructure can be shockingly poor in some areas. Developments are short-sighted, causing things to feel clogged, rushed and incoherent. It’s been the story for decades now.

Some of the airports were?originally US Air Force bases, and airport infrastructure is good. But it's tough and expensive for Filipinos to fly between regional cities, and the 6,000+ islands make supply logistics especially difficult.

Only about 40% of the country has access to the Internet — you go out into the rural areas and there's nothing there. But four days ago,?SpaceX announced?that?Starlink?service is now live in the Philippines, which will boost rural Internet. (Although at $50/month, it'll still be out of reach for many in a country where the min. wage is ~$10/day)

Sanitation infrastructure can feel non-existent at times. While in Cebu I was?stunned?at how much garbage there was — even the locals understand how bad the problem has become. Sure enough, the next day I saw this?Visual Capitalist article?showing that the Philippines is the world's largest contributor to plastic ocean waste. Very sad.

President Marcos said his administration is developing the country’s infrastructure by promoting public-private partnerships (or?PPPs, which I talked about in our recent issue on?investing in infrastructure).

Finance, credit, and crowdfunding

Access to credit is brutal. This is a cash economy. No savings, no investment among lower classes. And only?7%?of the population has credit cards.

There's a lot of?informal?credit, but even then just?15-20%?of citizens have bank accounts.

What's holding things back is actually?identity. You can't open a bank account without a government-issued ID, but to get that you need another,?different?government ID. It's a chicken-and-egg scenario that a few startups are trying to solve. More on this in a bit.

Crowdfunding?is a new concept in the Philippines. Last January, the government approved the?first and only equity crowdfunding platform. While existing platforms like Investree and Seedin lent working capital to SMBs who couldn't get bank loans,?RoundOne?is first platform that allows Filipinos to raise money by selling shares in their company.

Since covid, fintech and payments systems have taken off.?PayMaya?and YC-backed?Paymongo?are all-in-one payment solutions starting to pop up across the nation. (Still no tipping here though, don't worry) ??

Food and agriculture

Food security is a huge concern.

The Philippines are?net importers?of food, which is a precarious position to be in given rising inflation. Nearly all food is imported. Incredibly, they even import sugar and rice — two staples of other Southeast Asian countries. And they are currently going through an?onion crisis. Bleak.

Filipinos joke the Dept. of Agriculture should be called the Dept. of?Importation, because all they do is import. Regardless, the average farm size is under 1 hectare, so the department doesn't even have that much manpower to begin with.

The President knows they've under-invested in this area for decades, and has designated himself the "President of Agriculture" to solve the problem, creating a?digital farmer registry?to attain food security.

But the food crisis also presents an opportunity.

A company called?Farm Konek?is making waves as an?accelerator for farmers and fishermen. Originally hacked together using Google Forms and FB Messenger, these guys have just been?awarded a multi-country grant?and are about to scale into Brunei, Indonesia, and Malaysia. ??

Identity

Another company to watch is called?Lifecert.

As I mentioned above, identity is a surprisingly huge problem here. 9 million Filipinos don't even have birth certificates, and it's not even considered a valid form of ID (?!)

To open a bank account or access what limited credit exists, you need to go through the long process of obtaining a?government ID. Line up at City Hall all day long, fill out a bunch of paperwork, and years later, if you're lucky, you'll get your ID. It's remarkable, but many Filipinos don't even bother! The informal cash economy drives everything. They just don't see the point of credit.

Lifecert?is a?baseline identity for individuals. The basic concept is that Filipinos need?something?between their birth and death certificates; a "life certificate." It's a data wallet that allows you access to various services. You pick & choose exactly which entities to share data with. You own your data completely.

This is not a government program, but Lifecert is working with government units to bring it to life.

Closing thoughts

The Philippines are a high-growth, hard-working, educated nation that's well-positioned to compete and thrive in the global economy. It has great historical ties with the US, which are?about to get even stronger.

The country has been held back by decades of?under-investment. But that's all changing now. The President is kicking into high gear, setting up?green lanes?for permits and licenses, and creating massive stimulus and investment incentives.

• As of 20 months ago, foreign companies can own businesses 100%
• Equity crowdfunding is now legal
• From 2021-2023, VC funding doubled to?$500m?per year. (Still crazy low per capita, but hey you gotta start somewhere)
• Ecommerce is growing?90%?YoY (no big deal) and ecommerce distributor?GreatDeals?just raised $30m

Despite global economic headwinds, the Philippines could be the?next big thing in Asia.?Life is getting much better there. The country grew GDP an astonishing?7.2%?in 2022, and early signs point to them?exceeding goals?in 2023.

There's money to be made. But to invest here, you really need boots on the ground. This isn't the kind of place where you can call up a broker and expect something to happen. You need a trusted partner in the country.

If you're serious about investing in the Philippines ($250k+), just reply to this email. I'll connect you with Vinci and Russ. They are on the front lines of Philippine deal flow. If you’re serious about investing here, so are they. ????

Further Reading

• The Department of Trade and Industry put out a great paper on?Philippine Innovation
• Vinci's father,?Dr Sixto Roxas, was instrumental in setting up the Philippines' financial infrastructure. He discusses more in his book,?Bancom Memoirs