Despite having a plethora of tech companies in Vietnam, PE interest in the sector remains tepid, with most fund managers ramping up their focus on brick-and-mortar businesses in areas such as real estate, retail and healthcare.
In 2019, as many as six out of 17 PE deals in Vietnam were sealed in the tech sector. In 2020, only two out of 11 investments in 2020 were tech-related, according to data compiled by DealStreetAsia.
So far, this year, half of the four PE transactions have been clocked in technology, but there are still three quarters of the year left for Vietnam to see how the dynamics will evolve.
PE-backed tech deals 2019-21
|Year||Company||Participating PE firms||Funding size|
|2019||Leflair||Belt Road Capital Management||$7M|
|MoMo||Warburg Pincus||Around $100M|
|VNLIFE||GIC, SoftBank Vision Fund||$300M|
|Largest PE deal (non-tech): GIC led $500M funding in VCM Service & Trading|
|2020||Sieu Viet||Affirma Capital||$34M|
|Largest PE deal (non-tech): KKR, Temasek investing $650M in Vinhomes|
|2021||MoMo||Warburg Pincus, Affirma Capital, Macquarie Capital, Kora Management, Tybourne Capital Management||Over $100M|
There is a gap in funding and availability of tech-related investments, industry players say.
“By the time a lot of tech businesses are scaled enough to raise capital from private equity firms, the equity cheques could be beyond the scope of most funds in Vietnam,” BDA Capital Partners managing partner Bert Kwan says. BDA Capital primarily invests in tech-enabled companies and is spending a lot of time on scouting enterprise software deals, according to Kwan.
While most of the PE firms present in the country often write cheques in the range of $20-30 million, Vietnam’s mature tech startups such as payment firms VNPAY and MoMo and logistics company Scommerce have raised hundreds of millions of US dollars, from investors outside of Vietnam.
A majority of investments in Vietnam are typically clocked within seed-to-Series A stage. There was only one Series C deal in Vietnam last year, DealStreetAsia’s SE Asia Deal Review in Q4 2020 showed.
But beyond the lack of a sizeable pipeline, PE investors have a different risk appetite towards tech businesses compared to their VC counterparts.
Risks and awards
“The VC model is predicated on trying to get a few big winners, not necessarily make every deal be successful. They have a very different risk profile,” commented Mekong Capital founding partner Chris Freund.
While VC funds can bet on a home run, most PE firms might be happy with returns of 3-5x per deal. “But they want to get that across the portfolio,” Freund added.
In order to get that success rate, the lesson for Mekong Capital is to find the management teams who are focused on core businesses to achieve their sustainable growth vision.
“The first element when we consider a partnership with an investor is whether the investor has the same vision, corporate culture and core values with our growth strategies. That is critical to a long-term development,” commented financial services company F88 founder Phung Anh Tuan. F88 has the backing of Mekong Capital.
Due to a different structure and level of risk acceptance, Ho Chi Minh City-headquartered asset manager VinaCapital makes PE and VC investments from two vehicles, Vietnam Opportunity Fund and VinaCapital Ventures, respectively.
“PE investment operates in a highly structured and often standardised way. Its whole model is to invest in a company, improve it, and sell it off for a higher price, usually within a 3-to-5-year period,” said VinaCapital Ventures partner Trung Hoang.
Actual deals by PE firms have proven that they do not rule out tech, but they tend to look across more sectors.
The three most attractive sectors in Vietnam predicted for the next year include logistics and transportation, education and renewable energy, according to a Grant Thornton report released last month. Technology and fintech follow at fourth place.
“We’re not committed to trying to get every deal because of the fear of missing out. I don’t think online businesses are going to make the old businesses irrelevant,” added Freund.
His exited investment, retailer Mobile World, saw only around 10% of its sales through online channels. Despite the fierce competition in e-commerce, the company’s electronics retail website has been consistently at the second place in terms of monthly visits since Q4 2019, only after digital marketplace giant Shopee.
Pure online businesses “are missing out on the main market,” Freund said. “Why focus on the smallest part of the market and not on where people actually spend money?”
Mekong Capital exited Mobile World, thereby selling its stake to Malaysia-based Creador in 2018 for a 57x return over an investment period of 10.5 years. The firm’s exit scorecard also includes a 4.5x return from Vietnam Australia International School (which was sold to TPG) and a 9x return from restaurant operator Golden Gate (sold to Affirma Capital, erstwhile Standard Chartered Private Equity).
VinaCapital’s PE arm exited dairy firm IDP for an undisclosed premium last year.
“There are plenty of traditional businesses that are sustainable and profitable, with ample room for growth in Vietnam’s booming economy,” said Hoang.
Not simply financials
But it does not mean Vietnamese technology startups are less backable. Rather, it’s more about the makeup of the PE teams.
Currently, most PE funds in Vietnam do not have a ‘tech focus’ or a mandate to invest in the sector.
Freund acknowledged that Mekong Capital did not invest in the tech space because they did not have the expertise “predicting which technologies will be successful or not”.
Skimming through LinkedIn profiles of PE investment professionals in Vietnam, we understand that many fund managers come from a financial or corporate background instead of having a deep technology experience.
“It’s hard to underwrite when you don’t have the instinct around what new technology can work,” Kwan asserted.
Bert started his private equity career with Lehman Brothers’ late-stage venture capital arm. Prior to BDA Capital Partners, he was a managing director at Northstar Group, where he led the firm’s investments in Vietnam-based online marketplace Tiki, edutech firm Topica and co-working space chain UpGen.
Those cashing in on opportunities
BDA Capital Partners is one of the few PE firms to have a set its focus on tech-enabled businesses in Vietnam, investing from $2 to $20 million. It secured its first investment in Ho Chi Minh City-based pediatric clinic chain Nhi Dong 315 recently.
The firm is intensively looking at enterprise software businesses, with a view that the business model can be profitable very early.
VI Group is also cutting smaller cheques ranging from $3 million to $15 million as it sees promise in potential tech investments. However, investing in traditional companies will continue to remain its core.
While not betting on a pure tech model, a hybrid business is apt for PE funds in Vietnam.
“In a hybrid model, you’re investing at a stage where you can see the impact that technology has on the operating metrics of a business that PE investors tend to be more familiar with,” Kwan said.
A VI Group official told DealStreetAsia in an earlier interview that its tech investments will help support its brick-and-mortar portfolio.
Excelsior Capital Vietnam, which has raised $80 million for its $150 million fund, also sees that as the tech scene in Vietnam develops, tech-related investments will come into play. The PE fund is sector-agnostic and is understood to have so far skipped investing in pure tech companies.
“As many industries undergo transformation, PE investors will need to be “out in front” of this change, judging what an investee company must look like in five years to generate the needed PE return,” managing partner Chinh Hoang says.
Going forward, Kwan is bullish on the development of the tech ecosystem in Vietnam. “If you look at examples of how technology could disrupt the analogs in other countries, and when Vietnamese entrepreneurs are given that developmental path, I would expect that disruption is going to happen even faster than it did in a place like China,” he says.
Vietnam’s Internet economy was valued at $14 billion in 2020 and is expected to grow 29 per cent a year until 2025, according to Google, Temasek and Bain&Co.
“It would be remiss to ignore that growth,” Kwan exclaimed.
While the tech industry in Vietnam is still in its infancy, VinaCapital Ventures’ Hoang believes it will play a major role in accelerating the country’s future economic growth. The “rapidly digitising population (…) will create opportunities for both PE and VC investors.”