Vietnam’s private equity (PE) market is growing at a fast pace. In fact, PE investment has been one of the more significant drivers behind the country’s recent economic growth, says consulting group Grant Thornton.
A young population and a burgeoning middle class are the main reason for the flow of investment, though not all of it is PE. “Few fund managers in Vietnam focus on classical PE, ie a comprehensive plan for adding value, legal agreements with investor protection/rights and board representation,” said Penm Partners, which has invested in unlisted firms like Masan Resources, Asia Chemical Corp, AAA Assurance and EuroWindow.
Others too have shown interest. In fact, there has been improvement, both in terms of investment attractiveness rating and the intention to maintain or even increase investment fund allocation to Vietnam in 2015, says Grant Thornton.
Education, real estate, food and beverage, and retail are the leading sectors which are especially attractive, for PE investors, said the officials of the Grant Thornton.
Regarding investment in these segments, typical deals include – KKR & Co LP (formerly known as Kohlberg Kravis Roberts & Co) and Masan Consumer, which saw the US-based PE firm double its investment by $200 million
The latter deal followed Standard Chartered’s first deal in Vietnam for Mekong Capital-backed restaurant chain Golden Gate.
Also, Mekong Capital is raising $150 million for its fourth fund, potentially the largest among the company’s units. With the new fund, Mekong Capital plans to target slightly larger deals of about $10 million, a step up from target investments of about $5 million before.
The Ho Chi Minh City-based manager largely invests in retail and consumer businesses, but will branch out into health care, especially private clinics and pharmacy retail outlets, according to an official from Mekong Capital.
“With an optimistic view of Vietnam’s economy, we see many investors paying more attention to PE sectors. They are ready to put additional resources in the market with an expectation of better long-term returns,” Grant Thornton said in a report on PE in Vietnam for last year’s fourth quarter.
The majority of respondents in the report chose to increase their allocation of investment funds to Vietnam. Investors believe that market growth will be the most significant driver of value growth.
Private equity investment in Vietnam in 2013 reached almost $500 million, far outstripping the capital committed to companies in the other Asia economies of Bangladesh, Sri Lanka or Myanmar, the Mekong Capital official wrote in another report.
However, it is comparatively less, when placed in the context of the Asia Pacific region, where the value of new PE investment alone has already hit $81 billion.
Why is PE in Vietnam relatively lackluster?
Corruption, government red-tape and the legal system are still the biggest hindrances to PE investors coming to Vietnam.
In addition, deal failures are most usually caused by the difference in value expectation between buyers and sellers, and non-disclosure of material items at an appropriate time. These factors are also common worldwide.
Meanwhile, PE investors do not look merely for financial interest, but also get involved in strategic input, financial planning and governace of an investee company This ensures that their investment is effective in the long term, while transparency is obviously seen as the most critical issue when making deals in Vietnam, where information is not sufficient and difficult to obtain.
Financial planning is also an area that PE investors can provide valuable advice to the portfolio companies. Along with that, corporate governance is of great concern if Vietnamese private firms wish to be more attractive to foreign investors.
This is critical, as many investors expect to stay with the businesses for at least three years and seek a five to 10 times profit as they exit.
Vietnam needs well-managed private companies such as Golden Gate and Mobile World (investees of Mekong Capital). There is a shortage of high-level managers in the local businesses who are reluctant to hire overseas experts, Mekong Capital CEO Chris Freund told local media. He also attributed that it is a fundamental problem that the fund has encountered while investing in a Vietnamese company.
The Vietnamese market is predicted to see an increase in the number of deals this year, mainly due to the recovering economy that will provide opportunities to exit at more favourable values.