Partner at RISA Partners Asia: Vietnamese Companies’ Demand for Flexible Capital Is Set to Grow

Partner at RISA Partners Asia: Vietnamese Companies’ Demand for Flexible Capital Is Set to Grow

According to RISA Partners Asia (“RISA”), as Vietnamese companies grow larger, their financing needs are becoming more complex, creating greater demand for long-term and flexible financing structures beyond traditional bank lending.

Private debt and mezzanine financing, which are already widely used in more developed financial markets, can help address these needs, although both remain relatively new in Vietnam.

Taichi Fukuhara, Fund Management at RISA Partners Asia

Companies need more capital and more types of capital

RISA said Vietnam is entering a new stage of economic development. Strong economic growth is creating significant demand for capital as companies become larger and more ambitious.

In addition to working capital and normal business expansion, companies increasingly need funding for larger investments, new projects and preparation for future capital market transactions. In RISA’s view, the market needs not only more capital, but also a broader range of financing options.

Vietnam’s recent upgrade by FTSE Russell to Secondary Emerging Market status is also an important milestone, RISA said. The upgrade should increase the country’s visibility among international investors and support Vietnam’s efforts to attract more global capital over time. As Vietnamese companies become larger and more professionally managed, access to longer-term and more flexible sources of capital will become increasingly important.

Vietnam’s financial system has traditionally relied heavily on bank lending, and RISA expects banks to continue playing a central role. However, bank loans may not always meet companies’ needs for longer-term capital or more flexible financing structures.

Some companies require longer-term capital, while others may need more flexible financing structures to support strategic investment or their next stage of growth.

As domestic funding channels may not always meet every financing need, Vietnam is gradually developing a more diversified financial system, with greater participation from the stock market, corporate bonds and international capital.

International financing can also provide additional sources of long-term capital, complementing domestic banks for suitable companies and projects, subject to applicable regulations.

This creates room for alternative financing solutions such as private debt and mezzanine financing, which are already widely used in more developed financial markets.

Private debt: Financing structures tailored to each company’s cash flow

In simple terms, RISA explained, private debt is financing provided directly by an investor or investment fund rather than through a traditional bank loan or public bond issuance.

One of its main advantages is flexibility. Private debt investors may be able to structure financing around the specific needs and cash flows of individual companies, while remaining within the applicable legal framework.

Private debt can be suitable for established businesses with stable operations, clear cash flows and sound repayment capacity that require longer-term or more flexible capital.

“We see private debt as a complement or alternative to bank financing, particularly where companies generate sufficient cash flow but face constraints in accessing bank loans, including those arising from changes in banking regulations”, RISA emphasized.

Mezzanine financing fills the gap between debt and equity

Mezzanine financing sits between traditional debt and equity and coexists with both of them.

According to RISA, it can help companies raise additional capital without immediately selling /diluting a significant ownership stake in the business. Also, companies can raise money not only from banks but also from mezzanine investors at the same time, which is commonly called senior-mezzanine structure.

For investors, mezzanine financing typically takes higher risks than senior debt, and investors generally seek higher returns based on such a risk profile. Thus, common structures may include subordinated loans, convertible bonds and other equity-linked instruments.

From RISA’s perspective, mezzanine financing for established companies, including convertible bonds, as well as pre-IPO financing, could become increasingly relevant as Vietnam’s capital market continues to develop.

RISA provides mezzanine financing and equity-debt hybrid solutions in Southeast Asia and has practical experience in structuring and implementing these solutions in multiple markets.

Flexible financing for a range of purposes

Both private debt and mezzanine financing can also serve purposes beyond normal business expansion.

Across Southeast Asia, RISA has accumulated experience in areas such as acquisition financing, management buyouts (MBOs), shareholder restructuring and business succession. Its regional financing strategy also includes equity-debt hybrid instruments designed to fill the gap between pure equity and traditional bank lending.

RISA has provided financing across a wide range of sectors in Vietnam, Singapore, Thailand, Malaysia and Indonesia, including manufacturing, technology, consumer businesses, financing services, healthcare, transportation and infrastructure-related services.

For example, RISA has provided acquisition financing to investors acquiring businesses, financing to management teams completing management buyouts, and capital to family-owned businesses undergoing ownership transitions.

According to RISA, these transactions highlight an important strength of private debt and mezzanine financing: financing can be structured around the specific circumstances of each company rather than following a single standard template as traditional financing.

Naturally, the feasibility and structure of each transaction depend on the legal and regulatory framework of the relevant market.

In fact, RISA has been active in Southeast Asia since 2012, carrying out investment and financing activities across the region. The firm has also established a series of funds focused on investment and financing opportunities in Southeast Asia, including private debt and mezzanine financing.

Especially in Vietnam, RISA has provided financing and investment capital to both listed and privately held companies across a range of sectors, including construction materials, infrastructure-related services, telecommunications, transportation and healthcare.

Flexibility comes with rigorous due diligence

RISA cautioned that private debt and mezzanine financing should not simply be understood as an easier form of borrowing.

Because private debt/mezzanine financing investors may offer more flexible structures and accept greater risk than traditional lenders, the investment assessment process is typically rigorous.

Investors generally examine a company’s business model, cash flow, existing debt, management team, growth plan and ability to repay the financing.

“A company may have an attractive growth story, but growth alone is not enough. There still needs to be a clear and realistic source of repayment,” RISA said.

Vietnam remains a relatively young market for private debt and mezzanine financing, and awareness of these financing solutions among companies and business owners is still developing.

However, as businesses become larger and their financing needs more sophisticated, demand for flexible capital is likely to increase.

For RISA, the opportunity is not simply about providing more debt. More importantly, it is about bringing experience from Japan and across Southeast Asia to help established Vietnamese companies access a broader range of financing solutions suited to their stage of development.

FiLi