View to Vietnam
Vietnam is Asia’s second-fastest growing economy, but venture capitalists have been slow to move in. There are signs however that this is changing, among them a recent $100m initiative from a US corporate venturer. Ricky Morton reports.

Vietnam is among the least considered destinations when it comes to Asian private equity and venture capital investment. While countries such as South Korea, India and China are hailed as the region’s rising economic stars, Vietnam with its small but rapidly growing economy is still seen as one of Asia’s less fashionable countries and is struggling to attract venture capital in any meaningful quantities. However, a largescale initiative from IDG Ventures, the venture capital arm of US media and technology company International Data Group (IDG), could be a key step towards a change in the right direction.

IDG, already a leading IT publisher in Vietnam, has announced plans to invest $100m between now and 2010 to expand its operations in the country, including a sizeable amount dedicated to venture capital investment. IDG has moved into nknown territory before. In 1992, the company set up Pacific Technology Venture Fund-China (now IDGVC), the first IT vehicle of its kind in the country, which went on to invest in excess of $100m in internet, information services, software, telecommunications, networking technology and biotechnology companies. So what’s compelled the company to launch a similar project in Vietnam? “We see a large increase in local entrepreneurs with innovative ideas that deserve funding,” says Le Thanh Tam, managing director of IDG Vietnam. “The growth of these companies will be supported by the tens of thousands of well-trained IT professionals who are graduating each year from leading universities.” IDG is hoping to invest in businesses specialising in outsourcing of software development, IT call centre support, wireless communications development, and microelectronics.

IDG isn’t alone in trying to kick-start venture capital investment in Vietnam, but rebuilding the platform that existed before the Asian crisis is taking time. At the peak of the Asian boom of the mid-1990s, at least eight venture capital investment vehicles, including funds from Templeton, Lazard and Lloyds, were vying for a piece of the action in an economy that was enjoying seven per cent annual GDP growth in the 1990s. The boom didn’t last and the decade ended in considerable economic pain. Today the country’s annual GDP remains comparatively low at $35bn, a mere $450 per capita. But the knock-on effects of the downturn are subsiding, and Vietnam, which has a population of 78m, has bounced back to emerge as Asia’s secondfastest growing economy behind China, with GDP growth back at the seven per cent mark in 2001.

Vietnam officially remains a communist country, but Nong Duc Manh, who became leader of the Communist Party last year, has been heralded by the international community as a reformist. The country’s economic performance has also earned praise from the International Monetary Fund, which commended the government for its “recent bold decisions to liberalise trade” and its “sound macroeconomic management.”

And the venture capitalists are slowly returning to the fray. “There is more money coming in, but it is still considerably less than in the pre-crisis days,” says Chris Freund, managing director at Mekong Capital, which alongside Dragon Capital is one of only two firms currently focusing specifically on Vietnam.

Mekong launched its first Vietnam fund in April 2002 and has received commitments to date of just under $20m. The firm is looking to make investments mainly in labour intensive and export-oriented industries such as furniture, plastics, garments, footwear and machinery, while also tracking opportunities in network/ systems integration and software outsourcing. Mekong has looked at 35 opportunities and is close to making its first investment, although the transaction process can be fairly lengthy. “A comprehensive appraisal of an investee company can take up to eight months,” says Freund. “Most companies do not have auditable accounts and it can be a lengthy process to go through the books.” As a result only four deals have been completed in Vietnam this year, with a total value of $9m.

Ultimately, Vietnam remains what Freund describes as a ‘premature market’. “Businesses are underdeveloped and too small to attract most private equity investors. A lot of our work is carried out at a management consultancy level rather than as a pure financial backer.” Despite the difficulties inherent in investing in a new market, part of the attraction is the ability to invest in Vietnam from a low capital base, with the average investment requiring a modest $600,000 including legal fees and financial appraisals.

Many barriers still confront the prospective foreign investor and reform will not happen overnight. But first movers have a good to chance to build a franchise now and benefit from the steady growth that the country is expecting over the next decade.


Two PE groups pursue Chohung Bank
The private equity-backed consortia have submitted offers for the part-privatisation of Korea’s Chohung Bank, the country’s longest-established bank. The government is planning to offload a stake of up to 81 per cent in the bank, which has a total value of $1.2bn.

The two bidders include a consortium led by South Korea’s Shinhan Financial Group, which has teamed up with US private equity firm Warburg Pincus and BNP Paribas of France to bid for a 51 per cent stake. Also seeking a majority interest is a group led by US investment fund Cerberus Partners, Korea First Bank, controlled by US fund Newbridge Capital, and Japan’s Shinsei Bank. Dutch bank ABN Amro has also made an offer for a ten per cent stake.

The government is expected to announce a preferred bidder before the end of 2002, although the sale process could be complicated by presidential elections, due to take place on December 19.

If completed before yearend, the deal will reaffirm Korea’s status as the most attractive country for private equity investment in Asia. Preliminary figures for 2002 published by the Asia Venture Capital Journal show that over $2.5bn has been committed to the country so far this year, more than double the amount allocated to nearest rival Japan. Korea has benefited from a raft of large buyouts, leading to an average deal size in excess of $100m, way ahead of Japan (total investment $1.3bn – average deal size $32m), Australia ($1.1bn – $16.6m) and India ($957 – $20m).

Lone Star to acquire Japanese First Credit
Dallas-based private equity firm Lone Star has been given the go-ahead by a Japanese court to proceed with the acquisition of collapsed Japanese mortgage lender First Credit.

The prospective terms of the deal have not been disclosed, but according to a source close to the firm, Lone Star’s total investment would be expected to top ¥100 billion ($816 million). Lone Star will make the equity component of the deal from its Fund IV, supported by debt financing.

Lone Star beat out rivals Lehman Brothers, Credit Suisse First Boston, Cargill, JP Morgan among others in a competitive bidding process. First Credit’s court administrators told the Tokyo Stock Exchange they had agreed to select Lone Star as the main sponsor for First Credit’s rehabilitation, giving Lone Star first refusal on making an acquisition.

“The company is in bankruptcy. Lone Star was awarded the sponsorship, and will purchase the company subject to the plan being approved by the court and creditors,” the US firm said in a statement.

First Credit was forced into bankruptcy in March by Shinsei Bank, which had lent approximately ¥126bn to the company, about half its total debts of ¥252.2bn. Shinsei, which itself collapsed in October 1998, was acquired in February 2000 by a consortium called New LTCB Partners CV, led by New York-based private equity firm Ripplewood. The bank, then called Long-Term Credit Bank of Japan, was renamed Shinsei after the acquisition, marking the first foreign takeover of a Japanese bank.

Lone Star has been an active investor in Asia already. In June 2001, the firm completed a $480m acquisition of a 45-story office tower from Hyundai Development in South Korea’s largest ever real estate deal. The firm has also been an active buyer of Japanese financial assets since 1997, investing more than Y300bn. In January 2001, the firm outbid WL Ross and acquired the failed Tokyo Sowa Bank (since renamed Tokyo Star Bank) for approximately $340m.

3i leads $36m round to Infiniti
Singapore-based semiconductor manufacturer Infiniti Solutions has secured $36m in venture capital financing, bucking a trend for investment in the sector. Also investing was EDB Investments, the investment arm of the Singapore Economic Development Board.

Infiniti is attempting to become a global player for world-class semiconductor test and assembly and aims to achieve over US$60m in sales by 2003. As well as assisting Infiniti with its organic expansion, the capital will be used to acquire Viko Technology, the second largest independent semiconductor prototype testing company in the US.

Chris Boulton, a 3i director in South East Asia, said: “We are not afraid of recessions and it is our experience that it is a good time to invest. A lot of media and technology companies have experienced shakeouts but stronger management teams do tend to emerge at these times.”

AIG takes Indian coffee stake
The private equity arm of US insurer American International Group has paid $15m for a 25 per cent interest in Amalgamated Bean Coffee Trading (ABC), an Indian coffee shop operator based in Bangalore. Two representatives of AIG, which has previously invested in infrastructure and telecoms in India, will join Amalgamated’s board.

ABC operates 54 Coffee Day outlets across India, making it the largest local coffee retailer in a market that has seen the emergence in recent years of global brands such as Baristas and Starbucks. It will use the investment to double its number of stores over the next twelve months.