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Foreign PE funds making a difference

Released at: 14:06, 21/09/2018

Foreign PE funds making a difference

Photo: Mekong Capital

VET gathered opinions from foreign investors about Vietnam's private equity (PE) market.

by Minh Do

Mr. Chris Freund, CEO of Mekong Capital

Vietnam’s private equity market has been stable for many years. There are some private equity funds like Mekong Capital that have funds dedicated to Vietnam and some regional / global private equity funds like TPG who are making private equity investments here too. It has been this way for more than ten years. I haven’t noticed any significant changes in the last ten years. Private equity funds invest in most countries around the world. The amount of private equity investment isn’t particularly sensitive to macroeconomic trends. Investors in private equity funds must commit their capital to those funds for ten plus years, so private equity capital is long-term by nature.

Every year the performance of our investee companies gets better and better. We utilize a value creation framework called Vision Driven Investing and we keep getting more effective at how we apply it. Vision Driven Investing has 14 components to it and works really well when our investee companies fully apply it. MobileWorld (MWG) is a good example of a company that applied most aspects of Vision Driven Investing. The hardest part is building a strong culture and management team, but when companies successfully do that the improvement in performance is huge.

I don’t think there are any significant regulatory obstacles to private equity investment in Vietnam. The biggest obstacle might be certain limitations on foreign investment by sector, which probably does limit the inflow of foreign capital and expertise into those sectors.

Generally, the challenges in most companies are internal, not external. Most sectors in Vietnam are not very competitive and the markets are still very fragmented, so the company with the strongest management team and culture in its sector will normally be able to grow a lot. Most companies in Vietnam aren’t really building a strong management team, so that is a big opportunity for investors like us. Only a few sectors, like personal care products, are truly competitive, due to the presence of Unilever and P&G.

We only invest in consumer-driven sectors like retail, restaurants, FMCG, pharmaceuticals, education, and health services, and service providers to those. All of our best investments have been in these sectors, for example MWG, Golden Gate, PNJ, Masan Consumer, Traphaco, ICP, and VAS. We have a lot of experience and expertise in these sectors. We don’t invest in renewable energy because we don’t have expertise in that area. We found that when we invest in sectors that we don’t understand well, we tend to make bad investments. But when we invest in a sector that we know well, we tend to be very successful.

Ms. Nguyen Hanh Vinh, CEO of Creador Vietnam

Our investments to date in Vietnam remain with MWG, which has showed significant growth in its operations and business model for its new business segment, Bach Hoa Xanh. This is testament to our solid belief in the country’s potential for growth.

Creador is a private equity firm focusing on partnering with passionate entrepreneurs to grow world-class businesses. Hence, our major criteria are a quality management team; the company’s strategy, vision, and execution capabilities; transparency and integrity; strong growth and profitability (ROE); and reasonable valuation.

Creador’s singular purpose is to create superior and sustainable value for our partners through the following commitments: focused value creation, long-term perspective, strategic counsel, and full alignment, leveraging our regional experience, deep market knowledge, and operational expertise.

We also have local offices in countries where we have investments. We believe this brings significant added value that magnifies our long-term commitment and collaboration with our portfolio companies.

Finally, we believe in promoting entrepreneurship, so 80 per cent + of our deals are minority, where we provide growth capital to entrepreneurs to help them grow their business. We do not need to have control when we invest.

If we take a step back and have a look at the listed market, just three years ago Vietnam had only ten $1 billion listed companies, while daily trading volume was around $100 million. Today, the number of listed companies valued over $1 billion as well as the daily trading volume have tripled. Vietnam also attracted significant amounts of private equity investment in 2017, as part of the booming trend seen in Southeast Asia region, where total PE investment nearly tripled to $23.5 billion, according to Nikkei.

This shows the significant development in the country’s financial system, accelerated by strong prospects in growth and macro stability. Private Vietnamese companies are starting from a low base, but with recent enhanced corporate governance, better integration into global trade platforms via various free trade agreements with major countries in the world, and progress in the government’s efforts to enhance Vietnam’s business climate, we see strong momentum in the medium and long term.  

Just as in any other emerging market, these issues expose high operational risks and challenges for foreign investors as well as domestic investors. Regarding intrinsic issues, companies should upgrade management standards and enhance reporting transparency for long-term sustainability.

We also would like to encourage the government to relax foreign shareholding caps in sectors such as financial services, so that new growth capital from foreign investors can be infused in the market to grow the industry and the country. Vietnam has a sizable population with rising per capita income. As the country is moving towards a larger middle-class, this provides an interesting angle for further development in these sectors.

Mr. Hiroyuki Ono, Partner at ACA Investments Pte Ltd

ACA has been exploring investment opportunities since 2012 and began investing in 2014. We have invested in four companies from previous funds and opened an office in Vietnam in July. As Vietnam’s economy evolves, we are seeing more opportunities and challenges in the market. We hope to face these challenges together and we especially find that partnerships with Japanese strategic investors support portfolio companies in overcoming such challenges.

We consider investment when companies fit the following criteria: management team, a match with our investment theme (Japan - Vietnam partnerships), company stage (expansion stage), financial capability, and a feasible exit.

ACA focuses on proper corporate governance in order for the portfolio company to be prepared for future partnerships with foreign investors. We have seen many Japanese strategic investors spend much time understanding the market but then hesitate to enter due to uncertainties over corruption and a lack of transparency. Having a financial investor like us enables Japanese strategic investors to come in the next round or acquire shares from us, knowing that the PE fund has done its work.

Larger PE firms investing in the market shows that there are bigger deals and foreign investors have more exposure in Vietnam, which is a good sign for building a healthy M&A market.

ACA tries to fully understand investment regulations and processes, and we take careful steps to understand them in order to secure a concrete exit strategy. These issues tend to become restrictions on exit options. Our next fund will focus on retail and logistics, where we see significant growth and a greater contribution to Vietnam’s economy. We hope to invest in these sectors and support the rise of companies.

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