Why private equity majors are stepping up focus on Vietnam

Hanoi, Vietnam. Photo: Florian Wehde

Vietnam, with its new breed of entrepreneurs and burgeoning startup ecosystem, is increasingly evincing the interest of private equity (PE) investors.

PE firms invested as much as $1.6 billion in the country in 2018 across 38 deals, a whopping 285 per cent jump from $418 million in 2017, per data available with Grant Thornton. In 2016, the total amount of capital invested by PE firms in the country stood at $266 million.

In terms of volume, the total number of PE deals in 2017 and 2016 stood at 27 and 36, respectively.

Even as PE deal value in the country ranked at third place among ASEAN nations in 2018, after financial hub Singapore, and Indonesia, a majority of investors agree that Vietnam is the most attractive market for investments in Southeast Asia, according to the latest survey conducted by Grant Thorton on the PE landscape in Vietnam.

PE deals in Vietnam and ASEAN-5 countries. Source: Bureau Van Dijk’s Global M&A Review 2018

Southeast Asia as a whole is seen as the most attractive emerging market by limited partners (LPs) for the second time in a row in 2018, given its domestic-driven consumption, fast-growing tech sector and relatively low political risk, said Steven Okun, ASEAN representative of the Emerging Markets Private Equity Association.

Resembling the region’s characteristics, investors are also looking at Vietnam through a spectrum of economic factors.

On the macroeconomic side, the catalysts to invest in Vietnam in 2019 comprise the prosperity of Free Trade Agreements and the expected acceleration of state-owned enterprises privatisation, as well as the continued attractiveness of its demographics.

“By entering into trade treaties, Vietnam is signalling to investors that it is focused on its economy and plans on becoming a global player in the long run. This is a type of assurance that not all emerging markets are able to offer,” said Yee Chung Seck, partner at Baker & McKenzie Vietnam.

Meanwhile, although the local government’s divestment process has not yielded many attractive businesses in the last couple of years, Vietnam is urged to complete nearly 100 privatisation transactions from now until the end of 2020 to catch up with its plan. It also means a pool of new opportunities will be created.

With a growth rate averaging 6.4 per cent over the past three years, being the fastest growing economy in the region, Vietnam is forecast to continue that expansion and can be bigger than the Singapore economy by 2029, according to a DBS country report. At present, Vietnam’s economic size is about $224 billion, about 69 per cent of Singapore.

The appeal of the market also counts on the improvement of the private sector year by year. As opined by David Ireland, Navis Capital’s senior partner, who focuses on investments in Vietnam and Thailand, Vietnam did not have a lot of opportunities in the 2000s, but as the country grew and the business environment was liberalised, the firm was able to make its first investment in 2008. To date, Navis Capital has invested in companies such as denim products manufacturer Saitex International, Hanoi French Hospital, Go Dang Seafood and OPV Pharmaceuticals.

“The economy has achieved more depth and more stability” so it is not as vulnerable to market turmoils as before, Ireland said.

Local fund managers such as Vietnam Investment Group, Mekong Capital and VinaCapital would typically make their investments in the range of $10 million to up to $40 million. For Navis Capital, its sweet spot is the $40-60 million check size. However,  the country has also witnessed large ticket investments from global players, such as Warburg Pincus, among others.

“Vietnam has a much broader based and diversified economy than it did when we first invested six years ago,” said Jeffrey Perlman, head of Southeast Asia at Warburg Pincus.

The drivers of growth in Vietnam stem from growing domestic consumption on the back of an emerging middle class, a substantial boom in manufacturing as production has shifted from higher labour cost markets like China, and really robust growth in tourism.

“Investors are now looking at those drivers in combination with the demographics. Some might look at the demographics and that is enough for them. But the more diversified and stronger base of growth is helping Vietnam sustain itself and getting investors more excited to invest more capital in the country,” said Perlman.

Further, the surge in PE  deals also come in at a time when the exit prospects for investors have improved. According to the Grant Thornton report, most the investors expect their rate of return from 20 per cent to 30 per cent in 2019, up from 15-25 per cent the previous year.

While trade sale and secondary transactions remained the most preferred routes for exits, sentiment towards the stock market bettered too.

“If you asked me six years ago if I thought that our exit for Vincom Retail were going to be via a local IPO, I probably would have said that was a lower probability,” said Perlman.

His firm had invested $300 million in the shopping mall operator through two financing rounds in 2013 and 2015 before converting Vincom Retail’s preferred stocks to ordinary shares and partially exit in 2017 as the $3.5 billion Vietnamese company implemented its IPO.

“It shows how the market can change at various points in time, which is why it’s important to build in extra flexibility,” Perlman added.

Whether it is listing companies on the stock exchange, or selling to local and foreign strategic investors or to other PE firms, it has been an easy environment for exit in Vietnam over the last 10 years, asserted Chris Freund, partner at Mekong Capital.

Foreign appetite

Most investments in Vietnam continued to come from Asian investors, such as South Korea, Japan, Singapore, Hong Kong and China, given the proximity between these jurisdictions and more similarity when it comes to cultural and societal norms compared to other investment destinations, said Baker & McKenzie’s Seck.

“Regional fund managers have an advantage when it comes to coping with the compliance and regulatory environment,” added his colleague Fred Burke. However, he also acknowledged that global firms have done well in this market too, thanks to their huge resources.

Nine-digit figures in each transaction have been poured into big companies such as Masan Group, Vingroup’s subsidiaries, Techcombank and Vinamilk. It is still rare to write checks at several hundreds of US dollars, but Vietnam represents opportunities for scale.

For example, Warburg Pincus has invested in several platforms in the country, including its line-of-equity approach with Lodgis (the hospitality platform with VinaCapital) and logistics platform BW Industrial, as well as providing capital for Vincom Retail over a period of time.

“There’s plenty of opportunities but you have to have the conviction that these can be businesses of scale in the future. That gives you a real ability to do put capital behind them,” Perlman said. “From our perspective, we think we can really replicate the things that we’ve done quite successfully in other markets that may be further ahead like China and India.”

Possible hurdles

Vietnam’s third ranking in deal value after Singapore and Indonesia is understandable, as Singapore is an established economic and financial hub of the region, while Indonesia has the highest GDP per capita in ASEAN. “Vietnam is still at the dawn of the private equity era,” said Grant Thorton Vietnam’s chairman Kenneth Atkinson.

The Grant Thorton report cited that major obstacles to more robust PE investment include inconsistent investment regulations and corruption, and the lack of transparency in information disclosure by targeted companies.

“It takes time for the market to evolve further. In Singapore, for example, companies are known for high governance and there’s a lot of liquidity in the market that encourages more investment. That’s hopefully the next phase for Vietnam,” said Perlman.

While Singapore is quite a different story as its economy is more advanced than other Southeast Asian markets, a lot of investors have laid their eyes on Vietnam from the first place and had a laser focus on the country.

“We’ve been more active in Vietnam than we’ve been in Indonesia while we also cover Indonesia,” said Navis Capital’s David Ireland. “Sometimes valuations can be a little bit too optimistic. And there are challenges around finding companies that have the right track record, as well as regulatory challenges, but I would say it’s a golden period at the moment. Hopefully, Vietnam can maintain it.”

While there are some concerns over valuation and harsher deal competition, as a result of more interest from fund managers, it is the regional and global trends that will balance the valuations. The slowdown of the global economy and sluggish growth of many startup unicorns are warning signals to PE investors, said Grant Thornton’s Atkinson.

Road ahead

Consumer-driven sectors in Vietnam like retail, education and healthcare have been leading PE investments for a while, on the backdrop of the country’s compelling demographics. Even as these sectors continue to remain in focus, new areas of renewable energy, real estate and logistics and technology are projected as sectors leading the way for PE deals.

“100 per cent foreign ownership is allowed in both real estate development and energy production.  Wind and solar energy projects, in particular, are absolutely booming – more active than anything I have seen in my 28 years’ working here,” commented Baker & McKenzie’s Burke.

Renewable energy is also the top sector to watch out for, per the Grant Thornton report. The advisory firm explained that the energy demand would surpass supply in 2020, while the equatorial location and long coastline provide an abundant supply of wind and solar power to exploit.

In addition, investments would be needed to meet the local government’s target of increasing installed solar capacity to 850 MW by 2020 and 12,000 MW by 2030, equivalent to 3.3 per cent of the country’s total electricity production.

Much related to the rising urbanisation in the country, investors have a big bet on real estate and logistics. This, again, has common development patterns across Southeast Asia wherein fund managers can leverage their expertise from other markets.

“Logistics is a big area in which Warburg Pincus has been arguably the single largest investor over the past few years across the region. We are really leveraging that experience with the goal of replicating those opportunities down in Vietnam,” said Perlman.

PE firms like Warburg Pincus and Northstar have also started to invest in the tech sector in Vietnam, paving the way for more capital flow instead of only venture capital money.

Digital transformation

E-commerce, fintech and ed-tech companies have become the first tech startups in Vietnam to attract large funding rounds from PE firms. Such growth capital drove total investment into local startups by three times to $889 million in 2018.

Even as the majority of deals in this space can be categorised as venture funding, the landscape is increasingly changing. The supply of tech firms for PE investors are still abundant.

And as technology innovation defines new meaning for boundaries, it is exciting across the region as a whole. Southeast Asia probably has nearly a thousand early funded businesses that have yet to reach the series B-C stages, and a lot of these other companies will emerge over the next few years, Perlman stated.

Innovation has also touched the traditional PE firms that are not intentionally investing into technology. The prominent example in Vietnam is Mekong Capital, the firm that put ‘Digital Transformation’ as an inevitable element in its Vision Driven Investing (VDI) value creation framework to the portfolio companies.

The firm has been using data analytics to identify which VDI elements are a bottleneck in which investee, or study the correlation of VDI elements in a company’s ultimate financial results.

“Without a proper data analytics, we won’t be able to achieve those goals and do a trend analysis,” said Chris Shayan, the firm’s director of business engineering.

Shayan also revealed that digital transformation has also helped the general partner in fundraising by being transparent and sharing data to the limited partners.

The technology system applied in the firm also works for its investment team, which can, for example, measure the time and patterns to close a deal all the way to the exit, or estimate the total cost and VDI implementation efforts in order to prioritise and score the pipeline deals more accurately.

While all of the current portfolio are companies in the traditional sectors, they have actively adopted digital transformation to fully embraced e-commerce and corporate management and customer care softwares.

Generally, most of PE investors and investee companies in Vietnam are at the very early stage of digital implementation, according to Grant Thorton. Its survey results show that only 13 per cent of the investors and 5 per cent of the investees have successfully implemented digital transformation.

Several challenges still blocking the roads have been pinpointed as  inexperience and insufficient internal skills of private firms, as well as lack of clear vision and resistance to change – which are seen as significant matters to PE investors.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.