Inside Indochina

Start with the bad news.

Vietnam has a slew of macroeconomic problems that the government is trying to sort out. Among them: a depreciating currency, close to 20 percent inflation, commercial lending rates reaching as high as 27 percent, a more than 20 percent stock market decline, plunging property prices and risks in the banking sector.

In fact, weak macroeconomics replaced corruption as the most important obstacle to private equity investment in Vietnam, according to a November survey by Grant Thornton.

Macroeconomics was chosen by 84 percent of the respondents as a hindrance to investment in Vietnam, according to the report. “More than 50 percent believe it is a substantial problem.”

Vietnam’s benchmark stock index was Asia’s worst performer in 2011, dropping 28 percent. That’s not good for IPOs but maybe better news for valuations. Public equity valuations tend to be the benchmark used for valuing private equity businesses, explained Andy Ho, chief executive of VinaCapital, which manages $1.7 billion in investments in 160 companies and projects in Vietnam.

As public equity comes down, private equity follows, but with a lag time of perhaps half a year, he says.

“Private entrepreneurs take time to realise the value has come down,” he says. Last year, valuations of public companies fell 20-30 percent from the previous year, Ho says. “This year, entrepreneurs will soon realise that they must accept a lower valuation in order to raise money.”

Last year, some encouraging signs became evident. A vote of confidence came in April when Kohlberg Kravis Roberts made Vietnam’s largest private equity investment to date, a $159 million stake in Masan Consumer, a food producer.

Also in 2011, eight Vietnam-targeted funds were launched. The largest was Saigon Asset Management growth capital fund targeting $300 million, according to data provider PE Connect, a sister company.

On the exit side, IPOs have been declining. But a trade sale trend could be emerging.

Last year, VinaCapital sold its stake in Hanoi Liquor (Halico) to Diageo, the UK-based spirit manufacturer. It also sold its investment in Hoan My, Vietnam’s largest private hospital system, to Singapore-based Fortis Healthcare.

Ho says multinationals, chiefly Asian, are increasingly entering Vietnam and acquiring large stakes from private equity shops or doing M&A instead of growing organically in the country.

“That effectively becomes an exit and we see this continuing into 2012,” he says.

Han Seng Low, who oversees United Overseas Bank’s alternative investment fund-of-funds advisory business, says he continues to watch Vietnam. But several factors must converge before his firm takes the next step.

The economy must demonstrate longterm potential (and now it is closer to low than high). Second, the private equity environment must make sense – reasonable deal flow and valuations, controlling stakes allowed and minority investor rights protected. Third, finding a manager who makes investors confident that he can operate effectively in Vietnam.

“When those factors come together, we’ll invest,” Low says.

In talk about private equity in Vietnam, Cambodia and Laos are typically mentioned as possible frontier markets even though they have far less market sophistication than Vietnam.

VinaCapital wants to enter Cambodia and Laos through the expansion of its Vietnam portfolio companies, a move that could bring Vietnam government support, Ho says.

Likewise, Saigon Asset Management’s $300 million fund, Dragon Capital’s $250 million fund and Mekong Capital $150 million fund, all launched in 2011, also target Cambodia and Laos.

Both countries opened stock exchanges in 2011. Three state-owned enterprises are preparing listings in Cambodia and two SOEs are trading in Laos.

These will take years to develop, but Vietnam began in the same way.