International and local private equity funds are betting on Vietnam’s high growth and young talent, and are pouring more money into the country’s companies.
The majority of private equity funds present in Vietnam used to buy listed stocks. But lately, there has been a new wave of PE funding, which in turn is boosting the country’s growth rate, currently at a five-year high of 6.7 per cent, according to Grant Thorton’s latest PE report.
The recovery of the economy has provided further investment opportunities for PE firms. Those positive possibilities can be seen in improved consumers’ and investors’ confidence, which will potentially lead to more capital inflows.
The report forecasts domestic PE funds to be a major force in competing for deals. In 2014, whilst all large scale transactions had foreign buyers, approximately 65 per cent number of transactions were conducted by domestic funds and enterprises.
VinaCapital, the fund management company with a heavy focus on real estate, has helped IDP become a top 5 manufacturer of dairy products in Vietnam; and Quang Ngai Sugar gain 85 per cent market share in Vietnam bottled soymilk market.
Historically, in VinaCapital’s private equity portfolio, larger deals have provided higher returns. Its top 10 exits (in a total of 35 exited investments) account for 30 per cent of invested capital but represent 54 per cent of the total exit proceeds.
Mekong Capital, a Vietnam-focused private equity firm, came to the fore with a nine-fold return from restaurant chain operator Golden Gate Group‘s divestment and 22x return on partial exit from Mobile World.
Saigon Asset Management has said PE multiples were potentially much higher than in listed equity or real estate.
The report said that investors will not slow down even if the exit market was not strong, because investors are looking to buy-in now. On average, investors are able to make exits at 5-10x after taxes and amortization.
Vietnam’s attractiveness lies in the fact that it has a cheaper workforce than China, and is a member of the Trans-Pacific Partnership trade bloc. It also has beneficial trade deals with the European Union, which have given a fillip to the economy. The government has also put in place incentives to attract investors away from neighbouring countries.
Vietnam’s population has a median age of just 30, and most of them are tech-savvy, with good computer programming skills. This supply of high quality talent and favourable investment environment led South Korean giant Samsung Electronics to make Vietnam its production hub, while other electronics majors such as LG, Panasonic and Toshiba have expanded their research and development units.
The number of investable companies has not been sufficient compared to the potential of Vietnam PE market. VinaCapital said it screened over 200 transactions every year, but only a few ever proceeded to the due diligence phase and around 10 finally got funded.
Denmark-incorporated Maj Investment launched LD Invest Vietnam K/S in 2009, marking its first international foray. The unit fund has fully invested $75 million in six Vietnamese businesses in various sectors, from agriculture to education.
Japanese PE firm Dream Incubator launched a $50 million DI Asian Industrial Fund, and has also launched its second vehicle for the Southeast Asian region, with majority funding earmarked for Vietnam. Its latest disclosed investment is in BPO firm Le & Associates to hold a 34 per cent stake.
The retail and food and beverage (F&B) sectors are predicted to be the biggest drivers for private equity investment in Vietnam, largely thanks to the overall economic growth and specific opportunities of each industry, according to Grant Thornton.
For the retail sector, global agencies see Vietnam as one of the most promising consumer markets in Asia, and the attractiveness of the sector was ranked 28 globally. However, the retail market is still in the early stages — modern trade channels account for only 20 per cent, relatively low compared to other regional countries.
“The large population with growing middle class, together with the a growing urbanisation that will cause changes in shopping habits, will provide solid support to facilitate faster growth rates, expected at CAGR of 13 per cent in 2015-2018,” it explained.
With such attraction, Vietnam has witnessed a fierce competition among both large international and domestic investors such as Thailand’s Berli Jucker and Central Group, Japan’s AEON, and local developer Vingroup.
Together with a growing number of food retail channels, the F&B sector is promising to grow rapidly to meet the strong demand of consumers, caused by the increase in disposable income levels, changes in lifestyles, and the habit of drinking and eating out particularly in major cities.