Memorandum

Independent Evaluation Department

Independent Evaluation Division 1

Evaluation Approach Paper

Project Performance Evaluation Report of Walden AB Ayala Ventures
Co., Inc., and Walden AB Ayala Management Company, and The
Mutual Fund Company of the Philippines
October 2010

I. Background

1. By the early 1980s, all Philippine mutual funds established in the 1960s and the 1970s
had either closed or become dormant. In 1987, ADB provided a technical assistance grant to
study the feasibility of establishing a mutual fund in the Philippines.1 The feasibility study
recommended the establishment of a group of funds, including those that would invest in local
equities, but it could not be implemented at that time mainly because of unfavorable conditions
in the stock market. The following year, ADB provided another technical assistance grant, this
time to study the venture capital industry in the country.2 The study concluded that the
17 commercial bank affiliated venture capital companies created from 1980 to 1982 under
Presidential Decree 1688 failed to establish themselves as viable venture capital funds.
According to the study, the reasons for this failure were: (i) the ultra-cautious approach adopted
by the parent banks; (ii) the resistance of Philippine businesses to “outside” equity partners;
(iii) the excessively small base of each fund; and (iv) the shortage of experienced management.
Among other things, the study recommended that ADB participate in the proposal by Hambrecht
and Quist (USA) to create a $15 million venture capital fund in the Philippines. In September
1988, ADB approved a $2.5 million equity investment in H&Q Philippine Ventures, Inc.

2. In the 1990s, ADB continued to support the development of the domestic capital markets
of several developing member countries. Support for the Philippines consisted of: (i) three
technical assistance grants totaling $1.3 million in 1991 and 1992 to help develop the corporate
bond and stock markets and strengthen the institutional capability of the stock exchange; and
(ii) a $150 million Capital Market Development Program loan to the Philippine Government in
1995 to support capital market reforms. ADB also approved two capital market-related private
sector projects during this time. In October 1994, ADB approved an equity investment of up to
P75 million (approximately $2.9 million)3 in Walden AB Ayala Ventures Company, Inc.
(WAAVC), a venture capital fund, and up to P500,000 (approximately $19,000) in its
management company, Walden AB Ayala Management Company, Inc. (WAAMC). 4 In April
1996, ADB approved an equity investment of P100 million (approximately $3.85 million)5 in The

1
ADB. June 1987. Monthly Report on Small-Scale Technical Assistance Projects Not Exceeding $75,000 Per
Project: Feasibility Study for Establishing a Mutual Fund, Philippines. Manila.
2
ADB. March 1988. Monthly Report on Small-Scale Technical Assistance Projects Not Exceeding $75,000 Per
Project: Study of the Venture Capital Industry, Philippines. Manila.
3
The exchange rate at the time of approval was P25.93 per dollar.
4
ADB. 1994. Report and Recommendation of the President on Proposed Equity Investments in Walden AB Ayala
Ventures Co., Inc. and Walden AB Ayala Management Co., Inc. Manila.
5
The exchange rate at the time of approval was P25.97 per dollar.
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Mutual Fund Company of the Philippines (MFCP).6 These two projects are the subject of this
approach paper for the preparation of Project Performance Evaluation Reports (PPERs).

II. Project Objectives and Scope

3. The main objective of the Walden AB Ayala Ventures project was to provide long-term
risk capital for small and medium-scale enterprises (SME) in the Philippines. WAAVC was
to invest in unlisted Philippine companies with high growth potential and whose shares could be
offered at a premium to the public within four to six years from the date of investment. Eligible
investments for WAAVC were to include: (i) export-oriented industries in which the Philippines
has clear competitive advantage, such as electronics, footwear, furniture, garments, processed
food, toys; (ii) service industries such as computer programming, telecommunications, and
tourism support; and (iii) others such as privatization of Government assets. It was expected
that the Fund would have an investment portfolio of about 10 to 15 enterprises. The Fund was
expected to have total commitments of P460 million at final closing. The fund was expected to
have a life of ten years from initial closing with a possible extension of up to two years to
facilitate orderly exit and distribution.

4. The main objective of the MFCP project was to develop the country’s mutual fund
industry, which is deemed as one of the most effective tools for domestic resource
mobilization. The project also aimed at providing small savers an alternative form of savings
and an opportunity to invest in equities and fixed income instrument. MFCP originally had an
authorized capital of P200 million but this was being increased to P1.2 billion at the time the
investments from ADB and other institutional investors were being arranged. MFCP was
structured as an open-end growth and income fund that would invest only in the Philippines.
The fund was to invest at least 40% of its net assets in equity securities of Philippine
companies, most of which should be listed on the stock exchange. The balance would be
invested in government securities and fixed income securities of Philippine companies. Since
MFCP was an open-end fund, investors were able to redeem their shares at any time. Founding
shareholders like ADB, however, had a two-year lock in period before they could exit the Fund.

III. Objectives and Scope of Proposed PPER

5. 1. Evaluation Objective. The main objective of the independent evaluation mission

(IEM) is to derive lessons from the projects, which can then be used to assist in the design and
implementation of future ADB private sector operations in the region, particularly investments in
mutual funds, venture capital funds, and similar projects. The evaluation findings are also
expected to provide inputs to the planned Special Evaluation Study on Development Outcomes
of Private Sector Operations.

6. The output of the evaluation mission will be to produce PPERs for (i) Walden AB Ayala
Ventures Co., Inc. & Walden AB Ayala Management Company and (ii) The Mutual Fund
Company of the Philippines.

7. Evaluation Scope. The IEM will assess the projects against the evaluation criteria of
development impacts and outcomes, ADB profitability, ADB work quality, and ADB additionality
in accordance with the Guidelines for Preparing Project Performance Evaluation Reports on
Nonsovereign Operations.
6
ADB. 1996. Report and Recommendation of the President on a Proposed Equity Investment in The Mutual Fund
Company of the Philippines, Inc. Manila.
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8. Specifically, the evaluation will focus on the following major areas:

(i) Contributions to Capital Market Development. The PPERs will assess

whether the projects contributed to the development of the country’s capital
market as envisaged in the area of long term risk capital to SMEs and mutual
fund industry development. In particular, the PPER will try to determine whether
these funds had positive demonstration effects and contributed to the expansion
of the venture capital and mutual fund industries. The PPER for MFCP will try to
assess the relative development of the mutual fund industry in the Philippines to
the overall mutual fund industry development in the region. The mission will use
the operating department, the fund manager, the fund investee companies and
the appropriate regulatory agencies (as accessible) as information sources for
the study;

(ii) Development of Investee Companies. The PPER for WAAVC will assess the
extent of the fund’s assistance and value addition to the investee companies in
improving their operations and profitability, promoting good corporate
governance, and adopting environmental, social, health, and safety good practice
standards.

(iii) Performance of the Funds. The PPERs will examine the factors contributing to
the underperformance of the two funds in absolute terms and in comparison with
similar funds in the region. This will include scrutiny of: (a) the project’s design
and structure; (b) the political, economic and regulatory environment; and (c) the
performance of the management companies of the two funds;

(iv) ADB’s Catalytic Role and Additionality. During the processing of the two
projects, some ADB staff and directors expressed their views that ADB’s equity
investments in the funds were not warranted. The PPER will assess whether
ADB played a catalytic role in the two projects and whether ADB demonstrated
value addition to the funds.

9. The IEM will include the following activities: (i) desk review of all relevant project
documents; (ii) gathering and review of secondary data including relevant reports on the
Philippine economy, the Philippine capital markets, and the venture capital and mutual fund
industry trends in the Philippines and other DMCs; (iii) discussions with project staff from the
operating department; (iv) discussions with officials of relevant government offices; (v) meetings
with the management companies of both funds; (vi) meetings with management and staff of
some of the investee companies of WAAVC; (vii) recalculate the financial and economic rates of
return of the projects and sub-projects; and (viii) draft and finalize the PPERs for the two
projects