Covid-19 calms Vietnam’s feeding frenzy

Pandemic travel bans have reduced competition for the country’s domestic firms after a period of intense spending by regional and global players.

Vietnam’s private equity firms have been afforded some respite from a global feeding frenzy as the pandemic hinders international travel.

South-East Asia PE has been on a tear in recent years. Deal count, including venture capital, climbed 34 percent to 520 last year, according to S&P Global Market Intelligence. Buyers have invested $50.3 billion since the beginning of 2017, double the $25.4 billion deployed in the preceding four years.

Vietnam’s growth has been especially pronounced. PE and VC firms deployed $1.8 billion across 139 deals in the country between 2017 and 2019, well above the $1.1 billion invested across 71 transactions in the preceding three years.

KKR, which as of November was in market with Asia’s largest-ever PE fund, is among those that have identified the country as a priority. A KKR-led consortium including Singapore’s Temasek acquired a minority stake in Vietnamese real estate developer Vinhomes for $650 million in June.

SoftBank’s Vision Fund made its first Vietnamese investment last year, teaming up with Singaporean sovereign wealth fund GIC to invest $300 million into digital payments business VNLIFE. Warburg Pincus has also been active: the US-headquartered firm backed three deals there in 2018 alone.

“Most of the deal numbers [in South-East Asia] would be done by regional funds and one of the key things you find when you’re investing in smaller funds is that above a certain point the big guys fly in, and that point can be very low depending on the country,” says Sam Robinson, managing partner of North East Private Equity Asia, a Singapore-based family office investing on behalf of the Danish family behind the Pandora jewellery brand.

NEPEA has backed two Vietnam-focused PE funds, says Robinson. “Vietnam is extremely competitive: investment paces and exits are all still a challenge in the small-to-mid-size, so it’s not booming in a way the numbers would suggest,” he adds.

Besides deals that were already underway as the pandemic unfolded, the competitive dynamic has become, to some extent, muted. Vietnam closed its borders to overseas travellers in March, limiting the number of investors that can perform on-site due diligence.

“There’s a few transactions … that [local] PE or VC [firms] actually have been looking at in the past, that they would not be able to do because the founder was asking for a high valuation or because there’s a lot of competition,” says Huong Trinh, a Ho Chi Minh-based managing director at investment banking advisory BDA Partners. “Regional funds [have] got more value-add, they have more angles to play around with the business, that’s why they can afford the higher valuation. But of course, now they cannot come in, they cannot make decisions quick, so domestic PE is in a very good position to acquire the company that they wished to acquire before, at a lower valuation.”

Priced to sell

Vietnam has been comparatively less impacted by covid-19. As of early November, it had just over 1,200 confirmed cases and the Vietnam Ho Chi Minh Stock Index was down about 3 percent for the year, versus more than 20 percent for the MSCI ASEAN, which represents large and mid-caps across Singapore, Indonesia, Malaysia, the Philippines and Thailand. The International Monetary Fund has projected GDP growth of 1.6 percent for Vietnam this year, versus a 6 percent decline for Singapore and Malaysia.

Nevertheless, the pandemic has created opportunities linked to dislocation, with local firms able to act more quickly for companies needing liquidity, Trinh says. “So the founder says, ‘OK, I need money, I don’t like you that much, the valuation [is] not very high, but I need [the capital], so I give you a small ticket size so that it can protect my concern,’” she adds.

However, the potential for lower valuations can be a double-edged sword. Chad Ovel, partner at Vietnamese PE firm Mekong Capital and chairman of the American Chamber of Commerce in Vietnam-Ho Chi Minh City, says two-thirds of entrepreneurs are unsure about growth in 2020: “They are the same ones who are hesitant to onboard capital now because they also don’t think they would get the valuation they want for their business at this time.”

Mekong is seeking up to $250 million for its fourth flagship fund, more than double the $112 million it collected for Mekong Enterprise III, PEI reported last year. The firm has made 35 investments since 2001 and is expected to sign two deals before year-end.

“The other third I classified as seeing this as an amazing opportunity; those are the same entrepreneurs who don’t have any attachment to today’s valuation,” Ovel says, declining to comment on fundraising. “They’re so committed to the future, they’re so clear that now’s an opportunity to take share that they’re not attached to getting a valuation that they would have gotten last year. They’re relating to what can I have in the future, five or 10 years from now and they’re willing to sacrifice some valuation at this time.”

Ovel says Mekong participated in competitive processes in the second half of 2019 and first two months of 2020 where the firm knew the company and its founders well, but “the valuations were far beyond what we would pay”.

“There are [now] hardly any competitive processes – you could say there were none.”

Trade war tailwinds

Vietnam’s appeal is driven in part by the US-China trade war, which has prompted numerous international businesses – including Apple and Samsung – to diversify or move manufacturing processes and supply chains from China to Vietnam, or capture opportunities relating to this influx.

Foreign direct investment in Vietnam in 2019 rose 7 percent to $38.2 billion last year, of which 65 percent went towards manufacturing and processing, according to Vietnam’s Ministry of Planning and Investment.

“Vietnam has been a popular destination for factories before because a Chinese worker costs more than the Vietnamese, so you can see in our portfolio factories moving to Vietnam, rather than China,” Robinson says.

These investments could lead to opportunities within Vietnam’s already burgeoning domestic consumption sectors: with increased manufacturing and strategic investment comes jobs, which in turn have the potential to generate wealth among Vietnam’s working class.

“In another five years’ time the Vietnamese might be richer, and then the factories will be looking to move somewhere else,” Robinson says.

“I wouldn’t say we’re trying to capture the specific trade war, but rather the enrichment of less wealthy populations. I feel quite positive about Vietnam generally and that’s more because of the demographics.”