Private equity catches foreign investors’ eyes
Private equity catches foreign investors’ eyes
Foreign investors are upbeat about opportunities in Vietnamese private equity, but remain concerned about the small market and low levels of liquidity.
Ample opportunities
As the Vietnamese economy develops and consumerism booms, foreign investors are taking a fresh look at private equity (PE) investments in the country. Mark Mobius, executive chairman of Templeton Emerging Markets Group, said that Vietnam is an emerging story of economic development and integration, which naturally draws in PE investors.
“Vietnam is now a sweet spot for investors, as it is leading the impressive growth of Southeast Asia. The country has a young and growing population, who are potential consumers of the future, and we see the government pushing to equitise large state-owned enterprises (SOEs),” said Mobius at last week’s AVCJ forum on PE ventures.
At the event, which was held for the first time by AVCJ in Ho Chi Minh City, PE funds from Singapore, Hong Kong, South Korea, the US, and Europe expressed their enthusiasm about Vietnam-based PE investments. The most attractive sectors are consumer-related, including consumer goods, retail, healthcare, and logistics.
A study from Grant Thornton Vietnam, published back in March, also revealed that the Vietnamese market is considered the second-largest in terms of potential in Southeast Asia for PE investors. Interestingly, PE investors in Vietnam seem to be attracted to firms that derive their revenue from domestic spending rather than export-focused companies.
Pete Vo, managing director of CVC Capital Partners, said that his fund has been actively looking for Vietnamese PE deals for the past three years. “Vietnamese companies have reached the necessary maturity level for small PE investments from overseas. Stable macroeconomics are another incentive for us to come here,” said Vo. He added that Vietnam is now a priority market for CVC Capital Partners, especially small- and medium-d firms with strong growth potentials.
A way in and out
Due to their long-term nature, PE investments require extensive due diligence. In Vietnam, investors particularly focus on the firm’s leaders and information transparency.
“Entrepreneurship in Vietnam only started in the 1990s, so most of the current CEOs are also the founders who built the company from scratch. Besides growth potential, we look for a strong management team who can move the firm forward and is open to due diligence,” said Dominic Picone, managing director of TPG Capital.
Picone added that this is particularly important when evaluating state-owned enterprises (SOEs). PE investors want to make sure that an equitised SOE has become a private entity and operates its business based on market rules.
Investors also praised the increasing savviness of Vietnamese firms, as they are now willing to hire professional advisers to help with negotiations and due diligence.
Concerning exit strategies, fund managers say there is no “one--fits-all” option. Andy Ho, chief investment officer at VinaCapital, said that an increasingly profitable exit choice for PE investors in Vietnam is secondary sales. He noted a dramatic surge of Japanese, Korean, and Thai buyers, who clamour to purchase fast-growing Vietnamese firms to gain access to the domestic market.
Lingering concerns
Despite their overall optimism about Vietnamese PE deals, investors still pointed out some potential hindrances.
The most significant issue is Vietnam’s small equity market, which makes it difficult for PE investors to exit via initial public offerings. The Vietnamese stock market currently takes up only 40 per cent of the country’s GDP, and liquidity remains low.
“We’d like to see the equities market grow in and liquidity. A more mature market will provide us with a wider range of exit options, and interested buyers have more ways to buy stakes in their favourite company,” said Paul DiGiacomo, managing director at BDA Partners.
It is also noteworthy that 97 per cent of Vietnamese private firms are either small or very small. On one hand, this means that these firms have significant growth potential, but on the other, tiny companies have fewer chances of attracting large investment funds from overseas.
Pete Vo from CVC Capital Partners elaborated that many foreign funds would be happy to pour $100-$250 million into their favourite private firms. In Vietnam, however, most PE deals range from only $5 million to under $100 million, making it hard for large investors to set up a Vietnam-focused PE fund.
Finally, foreign exchange volatilities also affect the strategy of PE investors. Andy Ho from VinaCapital stated that to offset the annual devaluations of the VND, PE investors have to set very high internal rates of return, ranging from 25 to 30 per cent.
“However, the VND has been quite stable for the past eight years, especially in 2016. We believe that the State Bank of Vietnam has been working hard to keep the VND stable, and we look forward to seeing steady rates in the future,” Picone from TPG Capital said.
