Over the past years, Vietnam has seen an increasing influx of investments from South Korea, its largest FDI investor and second largest trade partner. Investors from the land of powerful chaebols might also be the first ones to invest outside of the box, by making co-investments with their GP partners.
GS Shop’s $3-million capital infusion into 500 Startups-backed e-commerce company Leflair earlier this year was the first recorded co-investment by a limited partner in Vietnam. GS Shop is one of 500 Startups Vietnam’s LPs.
While we have not seen co-investments in the traditional economic sectors by LPs, which include endowments, family offices, financial institutions and funds of funds backing private equity vehicles, the tech industry in Vietnam can offer maximum synergies as these are mostly big corporates.
“LP investors in Vietnam are quite different from other markets in which funds of funds and financial institutions take most parts. There are many corporate investors and many Korean investors,” said Sean Sunghwa Lee, GS Shop’s head of venture investment.
On the GP side, Korean fund managers have participated in a lot of deals, from early to growth stage. The likes of Nextrans and BonAngels have funded Vietnamese companies in the seed and pre-Series A rounds, while joining the later stage are STIC Investments, SoftBank Korea, Korea Investment Partners and Mirae Asset Venture Investment, among others.
To many Korean corporates, Vietnam is an important market to enter through various options, including LP investment. It is learnt that companies such as Line, Naver, Lotte, Hanwha and KB Financial are looking for opportunities in this growing economy.
The strategic play
Typically, seasoned institutional investors and sovereign wealth funds would make co-investments with the fund managers. That is the trend observed in more developed markets.
These investors typically have “bigger ticket size and bargaining power,” said Fang Ling Khor, executive director of fund services at Intertrust Hong Kong.
Intertrust’s Private Equity Market 2017 report indicated that 74 per cent of private equity professionals expected an increase in co-investments and separate accounts offered by Asian GPs by 2019.
According to Khor, the co-investment vehicle gives the LPs the benefits of higher return expectation, because in most cases, it requires very little or no management fee and carry interest. In addition, it gives them discretion in the investment process as well as greater transparency over the underlying assets compared to blind pool funds.
However, GS Shop’s Lee saw a different story across emerging markets of Southeast Asia.
As a corporate venture capital arm, he opined that investments would be determined based on a strategic goal, which means the portfolio can contribute to GS Shop and its ecosystem, and vice versa.
“We see more value from synergy from direct investments into startups. Financial return is just plus,” he said, adding that fast growing markets like Indonesia will give high returns.
“In Southeast Asia, besides Vietnam, we have not done any co-investment yet, however, you will see many cases soon because co-investment is basically our core strategy to secure good direct investment targets.”
Lee added that GS Shop’s co-investments in South Korea have delivered strong performance as the funded companies were well screened by its GPs.
Eddie Thai, partner of the 500 Startups Vietnam Fund, reckoned his LP’s statement on the value-added loop: “Some of our LPs are indeed interested in co-investment and downstream investment opportunities. I think this is a positive trend overall since it can bring more money and more strategic value to Vietnamese startups. However, I also make sure to create the opportunity only when it would create value for the startup.”
Where is the local money?
Limited partners in Vietnam-based venture capital funds are mostly overseas investors. For 500 Startups Vietnam, the LPs include family offices and corporations from Asia, the US and Europe.
In Vietnam, it is understood that some wealthy individuals from banks such as ABBank and VPBank, and manufacturing companies like KOVA Paint, have invested in small vehicles.
Without naming any individuals, Nguyen Viet Duc from Innovation Capital Management (ICM) asserted that there were corporate resources behind these affluent people.
Explaining why there has not been a significant amount of local money flowing into venture capital, he said it was because domestic companies have not realized the benefits of having their own ecosystem and have not found the right target for their business, therefore they want to focus on management rather than expanding outside investments.
Commitments into ICM’s funds have also been made mostly by overseas investors.
More LP commitments
“Asia is relatively new to co-investments when comparing to other developed markets, as the fact that investors have lesser experience in this area,” said Intertrust’s Khor.
However, she is seeing an increasing trend of co-investment deals in the past few years.
“Asia, in general, is the biggest wealth generating region. Individual, corporate, sovereign funds are all looking to various investment opportunities in alternative assets including the tech sector,” she added.
Lee, too, believes there will be more such transactions: “Direct investment is our primary goal and LP investment is a way of networking and sourcing better deal flows. I think it is same for other LP investors in the region, so that not only corporate investors but also foreign venture capitals participating as LPs will ask fund managers to provide co-investment opportunities.”
While direct activity from LPs might not be a popular investment stream – not just in Vietnam, another co-investment structure, in which different funds participate to support startups, has already existed across Southeast Asia.
For example, the Malaysian government planned to set up a $480 million matching fund to co-invest with the private sector. In 2016, Cradle Fund had raised MYR200 million ($51 million) for a co-investment programme.
In Singapore, funds like SEEDS Capital and SGInnovate have participated in the same partnership programmes. Earlier this year, the Singapore government said will set aside S$100 million ($74 million) for investments in small and medium-sized enterprises (SMEs) under its SME Co-Investment Fund III.
Addressing the lack of LP investments in the region, Lee said: “I assume that is due to a shortage of multi-asset class investors in the region. Multi-asset class investors such as corporates and active family offices might have believed the direct investment in the region to be more difficult than other markets for some reasons, such as political risk, lack of infrastructure, lack of exit market and so on.”
(Additional reporting by Quynh Nguyen)