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Briefing: Vietnam investment

Changing dynamics in Asia are boosting private equity investment in Vietnam – perhaps more gradually this time around.

Within Vietnam’s long and narrow contours, the landscape rises sharply, climbing from sea level to 3,000-metre mountain peaks. The investment topography has been similarly varied in recent years – but current indicators show capital inflows reaching new heights. 

Private equity investment to July this year rose to $585 million, already exceeding the full year totals for the last four years, according to data from Private Equity International and Dealogic. In fact, deal value looks on track to top the $750 million record set during the boom year of 2007. 

Macro indicators also look positive. Inflation has dropped to around 6 percent from a 2011 high of 20 percent. Interest rates have also fallen to single digits, benefitting local companies. Local shop PENM Partners has a portfolio company that recently refinanced a $50 million loan from a 24 percent interest rate to 7.5 percent, says Hans Christian Jacobsen, managing partner (he believes the lower interest rates could also help restart construction projects).

David Do, managing director of VI Group, adds that investors have moved beyond their previous macroeconomic concerns. “I don’t want to be a cheerleader, but I would say definitely there is more interest in Vietnam than one to two years ago.”


Notably, global firms have been leading transactions in 2013 – including first-timers in the country such as Warburg Pincus, which was the lead investor in a $200 million stake purchase in Vingroup, the retail property business of Vietnam’s largest private real estate company. 

Kohlberg Kravis Roberts, Vietnam’s largest private equity investor, holds a $360 million stake in Masan Consumer – which includes a $200 million top-up investment this year (in itself a vote of confidence). In addition, Navis Capital Partners, the veteran Southeast Asia-specialist firm, has completed two local transactions and is opening an office in Ho Chi Minh City this year, according to the firm.


Estimated population under 35 years old

IMF GDP growth forecast 2013

Largest Vietnam fund ever raised 
(VI Group

Vietnam-only funds raised since 2002

Vietnam-only funds in market

One driver of Vietnam interest has been investors’ efforts to diversify out of China. The PRC has been losing some allure just as multi-billion dollar global funds are being raised for Asia, such as KKR’s record $6 billion fund that closed in July (Affinity Equity Partners and TPG are also raising $3.5 billion vehicles). China’s annual GDP growth continues to slow (Hony Capital recently said China could stabilise at 6 percent) and the prolonged regulatory freeze on IPOs has stymied investments and exits.

LPs are asking for more exposure in Southeast Asia, according to several sources. And while Indonesia has generally been seen as the sub-region’s most attractive market, few global firms (with the exception of CVC) have managed to complete deals there. Valuations are high: Thomson Reuters data shows Indonesia’s average price-to-earnings ratio was 17.5x for the first seven months of 2013, the highest in the region.

“[Indonesia] valuations could tank quickly if anything goes wrong with the macroeconomy – [and] investors would then be struggling to make up for those down-ratings,” says Thomas Lanyi, executive director of CDH Investments in Singapore.

In Vietnam, valuations have been low since the market plunged a few years ago. The average P/E ratio ranges from 9x-12x, compared to 20x-40x in 2007, says Avinash Satwalekar, chief executive of a joint fund between Franklin Templeton and Vietcombank. “Valuations are key in terms of why Vietnam now looks attractive.” 

And investors have done more than just look. Deal values have been on the rise in Vietnam in the last few years – while deal values in Indonesia have been sliding.


Of course, a degree of investor caution is to be expected. Vietnam’s last ascent came in 2007, after it joined the World Trade Organisation. “That was when the world discovered Vietnam,” recalls Bill Stoops, chief investment officer at Dragon Capital.

Investors touted it as the “next China” and capital poured in, fuelling real estate and stock market speculation. The excitement created a rush to deploy capital, resulting in a market crash around 2008 that left investors holding overvalued assets. Vietnam was shunned as a market for years afterwards. 

The new round of capital coming in, however, promises to be less dramatic and more constructive, sources believe. A key reason is that Vietnam is now seen as an integral part of a larger strategy, rather than a hot market in and of itself.

Ho Chi Minh City

CDH, for example, was one of several investors who together acquired a 20 percent stake in mobile phone retailer Mobile World this year for a total of $110 million, buying the shares from Mekong Capital. CDH found business mode similarities with its China investment in a large cellphone chain operator, says Max Hui, CDH managing director based in Singapore.

“Entrepreneurs in Vietnam are now going through the lessons entrepreneurs in China learned over the last 10 years,” Hui said. “There is a great deal of similarity in mentality and business culture between Vietnam and China.”

VinaCapital, a local firm that invests in the private sector through its own publicly-listed vehicles, sees Vietnam as a component of a regional strategy. It intends to raise an ASEAN private equity fund together with Thailand’s Finansa and Indonesian private equity shop Batavia Prosperindo, according to Andy An Ho, VinaCapital’s managing director. The fund will target around $500 million and has a mandate to invest in up to 10 Southeast Asian countries.

A pending trade agreement also integrates Vietnam into a collective. The Transpacific Partnership Trade (TPP) agreement, referred to as the NAFTA of the Pacific Rim, is a sweeping and aggressive commercial pact that aims to bring together the US, Europe, Japan and several Asian countries, including Vietnam. It proposes (inter alia) to cut export tariffs to zero for members. Significantly, China is not invited (at least not initially).

Entrepreneurs in Vietnam are now going through the lessons entrepreneurs in China learned over the last 10 years. There is a great deal of similarity in mentality and business culture between Vietnam and China

Max Hui, CDH managing director

If the agreement concludes as expected this year, “you’ll see an accelerated shift of manufacturing from China to Vietnam”, says Chris Freund, managing partner of Mekong Capital. Japan, which has a large manufacturing presence in the PRC and imports for domestic sale, is also discussing membership. “If Japan gets in, it will be a bonanza for Vietnam,” he adds.


Vietnam has only a few pure-play private equity firms, Mekong Capital, PENM Partners (a recent spinout from Denmark-based BankInvest) and VI Group among them. Other long-established players, such as Dragon Capital and VinaCapital, invest in various asset classes mainly through publicly-raised capital.

Correspondingly, fundraising amounts have been small. Only $1 billion has been raised for Vietnam since 2002, according to PEI’s Research & Analytics division. Four Vietnam-only funds currently in market are targeting $550 million. 

The modest fund sizes reveal one difficulty of investing: deals tend to be small. The recent outsized transactions from Warburg and KKR are rare. 

“Firms that come to us before they really looked at the market say that their sweet spot is $20 million-$50 million,” says Milton Lawson, managing lawyer for Freshfields Bruckhaus Deringer’s Vietnam practice. “That’s everyone’s sweet spot and there are very few of those deals here.”

The more common transactions in the $1 million-$5 million enterprise value range can be difficult to exit. Sources say they tend to have insufficient capital to build a management team and scaling up becomes a problem.

Nonetheless, firms have been making exits, largely through trade sales. “We’re seeing a lot more strategics from Southeast Asia – Thailand, the Philippines, Indonesia – starting to buy here,” says Do, from VI Group. “Strategics want to come in and buy a nice neat package with financial reporting and the management team in place. That’s the core of what we do.”

Mekong Capital, which has been operating in Vietnam since 2001, has done 26 deals across two funds (it’s currently raising Fund III) and has exited 11 of those positions, Freund says. He expects more divestments this year. 

Vietnam’s knockout exit was achieved by IDG Vietnam Ventures in 2010 when it sold online gaming firm VinaGame to Chinese internet giant Tencent, yielding a multiple “better than 50x”, says James Vuong, IDG’s vice president for investment and technology.

Sectors attracting the most interest are fast-moving consumer goods, healthcare and education, sources say. Domestic consumption is particularly attractive; by some estimates, 65 percent of Vietnam’s 90 million population is under age 35. 

“Everyone wants to do consumer deals,” says Do, from VI Group. “They are very easy to explain and strategics love buying into those.” 

Mekong hired the former CEO of US electronics retailer Best Buy to help transform Mobile World. The partial exit in March to a group of investors brought Mekong an 11x return.

Chris Freund, managing partner, Mekong Capital

Vietnam hasn’t had a buyout yet, but the market is nonetheless maturing. Private equity is enquiring about more sophisticated deal structuring, according to Dao Nguyen, managing partner for Vietnam at Allen & Overy in Ho Chi Minh City. “Clients are looking at LBOs and structures never considered in Vietnam before. It’s evidence of a more sophisticated market.”

Another sign of maturation is a renewed emphasis on value creation. Freund believes his team has added measurable value in a majority of investments. But that was a result of learning from past mistakes. He recalls in 2004 when Mekong hired Six Sigma ‘black belts’ to work on value creation in portfolio companies. Their efforts didn’t translate to shareholder value because companies implemented in piecemeal ways. “We tried some things that didn’t always work out,” he admits.

Mekong has since learned how to influence cultural change in companies (see boxout, p. 27) and has brought in more external consultants. In the Mobile World deal mentioned above, Mekong hired the former CEO of US electronics retailer Best Buy to help transform the company. The partial exit in March to a group of investors brought Mekong an 11x return, Freund says.


Other challenges, however, are limiting Vietnam’s potential. Several sources point to the country’s acute management shortage. Private business didn’t start in Vietnam until the mid-1990s, before which there was only central planning and manufacturing. So there is a shallow pool of experienced managers.

We do a lot of roll-up-the-sleeves work

David Do, managing director, VI Group

“There is no easy fix,” says Do. “We do a lot of roll-up-the-sleeves work.” VI Group tries to do control deals and encourages portfolio companies to find synergies to work together, share practices and infrastructure, he adds.

Vietnam’s patchy history with structural reforms also continues to drag on the investment climate. Big promises of privatisation were broken – state-owned enterprises in which governance rights can be hard to obtain continue to dominate the economy.

“The lion’s share of business is still state-owned,” says PENM’s Jacobsen. “Why does the state need to produce boots and garden furniture? No one is discussing it.” 

Several sources also mention the current banking sector crisis, with a build-up of non-performing loans potentially threatening to undermine the economy (the State Bank of Vietnam plans to set up a vehicle to buy up the bad debt). 

To really spark opportunities, Vietnam needs a firm government commitment to a market economy. This includes selling off the state sector’s assets – as well as maintaining political stability and addressing corruption at the highest level.

“These are very fundamental things,” Jacobsen says. “Without them, Vietnam won’t be lifted to the same league as China or Malaysia.”

Pushing through those reforms will be the country’s next – and probably most strenuous – uphill task.