Japanese private equity (PE) investor ACA Investments, which has been deepening its play in Vietnam with about four investments so far, is now set to take a bigger bet on the frontier market with its debut $100 million Vietnam-focused vehicle.
“The first close would be sometime in September this year, and final close sometime next year,” ACA Investments Partner Hiroyuki Ono told DEALSTREETASIA in an interaction on Tuesday.
He said the fund would have a tenure of five years, and shared the view that the traditional PE fund structure of a 7-10 year period, could be ‘too long a period for an emerging market such as Vietnam’. The Vietnam vehicle will focus on investments in the retail and logistics space.
The development comes even as Vietnam is attracting massive amounts of private capital from global private equity majors and sovereign wealth funds. Earlier this week, Techcombank, the Vietnamese lender backed by Warburg Pincus, kicked off the nation’s biggest IPO with plans to raise up to $922 million. The lender has received the backing of GIC and Fidelity International as cornerstone investors.
Last month, global PE major Warburg Pincus reached a deal to invest more than $370 million in Techcombank, marking the largest private equity investment in the frontier market.
Techcombank’s IPO record may not last long as Vinhomes JSC, which is in discussion with cornerstone investors including Singapore wealth fund GIC, seeks to raise more than $2 billion this year.
ACA Investments, which set foot in Asia six years ago, has already allocated $40 million in Vietnam and is looking to grow its presence in other markets in Asia.
According to Ono, the firm is targeting to raise about 40 per cent its Vietnam-focused vehicle from Japanese corporates, while other limited partners in this fund would involve sovereign wealth funds and financial investors.
ACA manages funds worth $1.4 billion and focuses on growth stage companies. It also offers investment-related services such as mergers and acquisition advisory. Apart from its strong presence in Japan where it invests in the ICT, healthcare and other strategic spaces, the firm has investment arms like Asian Capital Alliance Pacific in Thailand, ACA China, ACA India Investments and ACA Investment Co. Ltd in South Korea.
It typically does not structure funds like a traditional PE firm in that it raises capital from its investor base on a per deal basis. The new $100-million Vietnam vehicle will mark the first time it is going in for a traditional fund structure in this region.
It plans to make 5-6 investments from the proposed fund in small to mid-cap companies, with ticket sizes ranging between $15 million and $20 million, Ono added.
“We found that Asia could be the next opportunity for us. We also wanted to differentiate ourselves from the other players,” Ono said. However, the firm still considers itself new to the Asian market and is treading in a measured way into markets beyond Vietnam.
Earlier this month, Cat Dong Trade, an ACA portfolio company in Vietnam, sold a 26.9 per cent stake to Japan-based Scroll Corporation for an undisclosed sum. The Vietnamese firm owns e-commerce sites Cungmua.com and Nhommua.com.
As a PE firm, what is your structure? Are your investments from SEA all through a single vehicle, and if so, what is the corpus of this vehicle?
After we invested in our Japanese portfolio, we realized that these Japanese companies were looking into penetrating into Asia but they could not do it without a network. We thought why not move into Singapore and be like a research arm for them so we can distinguish outrselves from the big giants. Once you are in Singapore, you can access other markets in the region.
Ours is not a typical private equity structure but it evolves on a deal by deal basis. Under our management company, we have separate GPs and GP-LP structure for each vehicle. That is why we have been opportunistic and for each country, we have different GPs. For Vietnam, I have four investments with an AUM of $40 million but it is managed under three different vehicles.
How do you raise funds for each of these vehicles?
All our investors are high net worth individuals and family offices. Some of them have a Japan angle.
What is the size of these vehicles?
We negotiate with each deal based on demands from the investors. A Japanese based firm in Singapore doing Vietnam or Malaysia (deals) or any other investment, if you do not have a track record, they may not like to invest in the fund. That is why our next move after one exit is a $100-million Vietnam-focused retail and logistics fund. This time I am trying to get bigger corporations and institutional investors in this region and some corporates who have been showing interest in our strategy.
Will this be a regular PE model?
I will keep it short for five years. Seven to ten years is too long for an emerging market. In my six years in Vietnam, I have seen two cycles already. We always wanted to make sure of exits (first). I am a big believer in trade sales and not an IPO.
We are trying to find growth capital opportunities in Vietnam where we have an ownership and can connect the management to our network to boost revenue. Japanese companies can also bring in their products and the penetration of Japanese products into Vietnam through the platforms can happen.
Are you currently raising funds for the Vietnam vehicle and what is the timeline for first or final close?
First close would be sometime in September this year and final close sometime next year.
You said you have seen two cycles in Vietnam. Do you see yourself coming in as mid-market growth stage investor looking for quicker exits?
I am looking at five years because there are deal flows. Having said that, we have a chance to make bigger investments with a bigger fund, about four to six investments. We are now setting up a local team and getting to know the market.
How competitive is the mid-market space in Vietnam currently?
There are a few around such as Mekong Capital, VinaCapital and others. Our ticket size is $15 million to $20 million and it can go up to $30 million.
How do you see valuations in Vietnam?
Depends. Currently, for certain fast-growing areas like e-commerce and retail, valuations are getting much higher than before. It is also because other players have made startups understand how to raise valuation.
We have been lucky with our past four investments. We have a decent level of valuations to justify whatever we are paying. For us, it will be important to have better terms with our next fund.
Are you also looking at other markets in SEA or only Vietnam?
We decided to focus on only Vietnam. It is better to get success in one country. The reason we picked Vietnam is that the size, demography and others are similar to Japan in the 1970s. Japanese products work well in Vietnam.
As ACA, we are seeing other markets with managers who have either venture capital or structured finance mindset. Like Malaysia and Thailand was VC initiative and Singapore deal was more PE and pre-IPO.
Vietnam is also in a cycle where there is a listing bubble, so that is ruled out. How do you see that and do you see secondaries and trade sales as the exit options?
Listing is now more about privatisation of the SOEs and the government playing a role. What we are also hearing is that there is more privatisation coming in. For a healthy IPO process, there should be more institutional investors and people have to show more interest in this market.
Secondaries are a highly realistic option. We will also look at trade sale as an exit option.
Do you see yourself putting some $5-10 million in some smaller privatisation deals in Vietnam?
Privatisation is something we will stay away from. If I am really getting on the privatisation bandwagon, we would need a local team.
What about co-investments in Vietnam?
One co-investment in Vietnam we are doing is a real estate property development with EXS Capital. We could consider other co-investments.
With so much dry powder available with GPs and LPs looking at Vietnam, how is the deal flow?
It is about the quality of the deals. Vietnam has a long list of deals and it has been like that for a while.
So, we originate deals and three out of four deals that we have done were on an exclusive basis. One deal that we did we competed with six to seven private equity players.
We are using the fund structure as a tool and how we try to do that is 40 per cent of our investors are Japanese corporates, 30 per cent sovereign wealth and others and remaining will be financial investors. I have seen that for Scroll, we looked at the right partner for 12 to 18 months and we looked at how a partner could help our portfolio companies.
For the rest of Asean, are you sector agnostic or like Vietnam, you would focus on retail and logistics?
For other markets, we still need to investigate. For me, it is better to get to know a country first. For pan-Asian funds, they say we will look at Asean but each country is different and unless you have one country and a local person in each, you cannot have a pan-Asia fund. We are a Japan-based investor, I cannot say that I know each country really well. From now, the more niche strategy will be better for fundraising.
Minority stake has been a problem area as a lot of these companies are family-controlled/owned. So without a path to exit or control, most investors don’t want to do minority deals?
I see a similarity with Japan being hesitant in the market with US or Europe or hedge funds. People are hesitant because suddenly you have a new investor and they say they have a proposal for cost cutting or something. Now Japan is getting used to it and in the Asian context now I see the relationship during investing. So, we take three to four months before investing not only for due diligence but also to develop a relationship and see how they react.
In terms of negotiations, it is not easy and we have to see in difficult times how they react. As a fund manager we have our own focus and being the management they know what they want and typically there is a gap there. So how we do it is that (we tell the firms) that all others bring in money but if you also want a Japan angle we can help with that but then we need support for corporate governance and to fix compliance issues.
Is a path to exits also a condition you look at before you make an investment?
Internally yes. In our investment committee, we always try to have an exit path with the multiples and others. We can always talk about the budget and the growth direction before we start the investment process.
What are the IRRs that you are targeting for the fund and since currency risk is also important in Vietnam, do you do USD denominated funds?
We do USD denominated fund but we have to invest in VND. We are a professional hedging company.
We are looking at about 30-35 per cent IRR. That will give us about 3x to 3.5x in five years. On the USD and VND currencies, the appreciation is better. Growth is picking up and we hope that it remains at the current level for at least three years.
Are you looking at distressed assets? Also, would you only look at being an investor or do some value add as well like putting in people?
For the first question, the distressed assets are for now difficult to assess. We have been here six years but we are still new unless we have feet on the ground. If we were doing distressed, we would have to catch the opportunity at the right time and have a local team. We are still too early for that but we have an operational team in Vietnam in our next move, so we can look for those opportunities at the right moment.
For the second question, in a lot of cases, I am on the board of most of the investments. Although I am not on the ground, we would be helping the company in the right direction in terms of IPO, M&As and other support. The team that we are going to set up n Vietnam will be working for me but more like portfolio management. So, they will be operations.
In terms of deal quality in Vietnam, how do you rate it?
Over time, it is getting better. Now they are getting more flexible, knowing the market standards.
Now that public markets are getting better, are you also looking at investing into public equities like many other PEs?
For this fund ($100 million Vietnam fund), we will put 10 per cent to 15 per cent (in public markets). We can cap it at 15 per cent.