New cycles

Last year, Southeast Asia-focused private equity funds collected and spent record sums for the region.

The overall amounts of capital pointing at the region are still small, but they are increasing: a respective $2.2 billion and $2.9 billion was raised and invested in 2013, according to the Emerging Markets Private Equity Association. That was roughly 17 percent of all emerging markets private equity investment activity – an impressive rise from the 7 percent recorded just two years earlier.

Within this emerging economic region, however, Vietnam has remained relatively off the radar – even firms with a healthy presence across Southeast Asia wouldn’t necessarily venture as far as Ho Chi Minh City for deals.

Some of that may be to do with the country’s various real and perceived risks. For example, Vietnam scored just 31 out of 100 in Transparency International’s Corruption Perceptions Index 2013.

But alluring demographics and changing regulatory landscapes for foreign investment have a number of insiders expecting change.

“The demographic profile of Vietnam holds much potential – it is a very young population with rapidly growing incomes,” says Bert Kwan, head of Southeast Asia for Standard Chartered Private Equity (SCPE).

The Singapore-based firm has invested a total of $125 million in the country over the past three years and expects to continue seeing a “robust pipeline” for deals in Vietnam’s consumer, agriculture and tourism sectors. Already this year it has invested $63 million for a stake in agribusiness company An Giang Plant Protection and paid an undisclosed amount to purchase restaurant operator Golden Gate, which in turn gave Mekong Capital, a Vietnam-focused private equity firm, a return multiple of 9.1x.

Kwan adds that the opening up of the public sector for private investment has shifted opportunities from small-cap to much larger deals. “Right now, the private equity market is perhaps at an inflexion point where we are seeing opportunities to invest larger amounts of equity.”

It’s not just the size of deals, but also target industries that may be changing, says Dennis Nguyen, chairman at New Asia Partners, a private equity firm with offices in Shanghai and Minneapolis.

“January 2015 is a big date [for Vietnam] because that is when a lot of restrictions on many industries, [for example] food and beverage and consumer retail sectors, are lifted because Vietnam is now part of the World Trade Organisation,” says Nguyen.

Chris Freund, the founder of 13-year-old Mekong, which has offices in Ho Chi Minh City and Hanoi and focuses on investing in consumer-driven businesses, believes the bigger impact of WTO assimilation will be on exits: “We’ve been able to navigate any foreign ownership restrictions without any problems [in the past], but I think strategic investors [often] don’t want structured products and just want equity. So [this] might make it easier to do some trade sales,” he says.

Either way, Freund acknowledges, “2015 will be a big year in terms of openness to foreign investment.”

Indeed, his own firm is set to hold a $75 million first close in December on its Fund III, meaning Mekong will have raised half its $150 million target since it began fundraising in May. But Freund is quick to wave away suggestions that LP interest in Vietnam is climbing sharply.

“Investor interest is picking up, but it is still a little bit below the equilibrium level. Investors are becoming more positive, but I’d say still erring on side of caution,” he notes. “The things drawing investors in more is there have been a lot more realised exits that are attractive – I think [the market] has been validated more.”

For instance, among Mekong’s exits this year was a 21.8x return from the partial exit of mobile phone carrier MobileWorld, known locally as TheGioDiDong.

“The helpful thing about Vietnam is that private equity investors have successfully invested and exited. So there is a track record of successful, foreign private equity investors,” agrees one GP source, whose firm clearly expects to be among them.