Vietnam's time to shine?

Vietnam’s macroeconomic woes have so far discouraged private equity investment, but renewed activity suggests firms are reassessing the opportunity. By Clare Burrows

Vietnam has been the big news in Southeast Asia so far in 2013. Kohlberg Kravis Roberts’ $200 million investment in Masan Consumer – which takes its total investment in the company to $359 million, having bought a 10 percent stake in 2011 – was the largest ever deal in the country.

The bulk of opportunities, though, lie in Vietnam’s SME sector – like seafood processing business Godaco, which Navis Capital Partners recently acquired for around $35 million. This was its second Vietnam deal in three months, according to Navis partner David Ireland.

“We’ve been looking at Vietnam for many years, but it never really worked for us,” he explains (the firm’s only other investment there was made in 2008). “We just never felt comfortable with the [double-digit EBITDA] valuations. And getting control was very difficult.”

Vietnam has received very little private equity investment in recent years: according to Mergermarket data, only $184 million was invested in Vietnam between 2010 and 2012 (and this included KKR’s Masan deal).

That’s largely due to a volatile currency, opaque government, an uncertain regulatory situation, and a dearth of exit options. “The stock market is not very active and Vietnamese companies don’t have a track record of listing overseas. Firms only rely on strategics [to exit] and don’t get the options to do IPOs,” says Han Seng Low, executive director at United Overseas Bank in Singapore.

But with an estimated growth rate of nearly 6 percent in 2013 and a population of 90 million people (including an expanding middle class), Vietnam remains firmly on the radar screen for emerging market investors.

“The dong has [recently] stabilised a fair bit and the stock market is beginning to appreciate [so] we are beginning to be more concentrated on Vietnam,” Low explains. “Today, I’d be more inclined to look at Vietnam than Indonesia because there is a lot of [competing] money in Indonesia.”

Soaring interest rates – which peaked at 18 percent in 2011 – have helped private equity, says Ireland. “Banks were the main source of funding for a long time, but then interest rates went up very high. Even [now the] interest rates have dropped, banks still aren’t lending as the property market overheated. So credit is just not readily available for businesses.”

Moreover, the government has taken steps toward easing the regulatory burden. For example, the approval process for setting up a retail outlet in Vietnam took up to 15 months until 2011, according to Fred Burke, managing partner of Baker & McKenzie Vietnam. Now the government has streamlined the process, meaning firms can get approvals within three months.

Control remains a key issue for investors, according to Ian Roberts, co-founder of Blackpeak Group, a risk consulting firm. “Some firms will take a majority position [and] control that way, or they will put in one of the key employees – in many cases the finance executive – and they will perhaps have power over the chief executive. You have to do that in Vietnam; you’d be foolish not to,” he says.

For LPs, it’s now all about finding the right manager. “The challenge for us now is to find the right manager that can convince us they have the strategy, team and performance track record for us to pick them,” says Low.