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.
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.