Mekong Capital announced last month that the Mekong Enterprise Fund IV had completed an investment of $10 million in the Mutosi Group, a manufacturer and distributor specializing in water purifiers and electrical appliances that meet Japanese standards. It is the Fund’s second investee company, following a deal with the Marou Chocolate Company Limited in March. “We manage PE [private equity] funds focusing on consumer-driven businesses that capture the growth in spending power of Vietnam’s rapidly-growing middle class,” said Mr. Chad Ovel, Partner at Mekong Capital. “We believe other sectors can also be successful, but we’ve chosen to develop a strong core competence in consumer-driven sectors. Thus, we are looking at companies that are among the fastest-growing and market leaders in Vietnam’s consumer-driven sectors such as retail, restaurants, consumer products, and distribution.”

Deals done

Global investment firm KKR recently made an investment in EQuest Education Group, a leading educational services provider in Vietnam, which will be used to facilitate the latter’s expansion in the country. KKR has now completed two deals in Vietnam during the pandemic, with EQuest joining Vinhomes, the country’s largest real estate developer, with which KKR struck a deal last year. Since 2011 it has invested more than $1 billion in leading Vietnamese businesses to support their growth and success, including Masan MEATLife (formerly known as Masan Nutri-Science), an animal feed producer, and Masan Consumer (which it exited in 2016), Vietnam’s largest local-branded packaged food company, both of which are subsidiaries of the Masan Group.

Mr. CK Yan, Director of Private Equity at KKR, said it has large and flexible pools of capital that allow it to invest in a broad range of opportunities in Vietnam. “We think Vietnam features some of the most favorable macro-economic dynamics in the region, with its attractive demographic profile, rapidly-growing middle-class, strong economic growth, and rapid urbanization rate,” he added. “As more urbanized, middle-class consumers seek higher-value goods and services, investors are finding compelling opportunities in the technology, real estate, healthcare, financial services, education, and consumer retail sectors.”

Recent investments in MoMo and the CrownX reflect the appetite of investors for emerging industries that are tech-enabled. Warburg Pincus is upbeat about the huge potential in Vietnam’s fintech (financial technology) market, and MoMo has grown ten-fold since it invested in the e-wallet provider in 2014, which is in parallel with the exponential growth of mobile internet penetration in Vietnam. Although Vietnam is still a cash economy, the fund hopes to support banks to improve financial inclusion for everyone. So far, Warburg Pincus has invested in five companies in Vietnam: Vincom Retail (which it has fully exited), Techcombank, MoMo, BW Industrial, and Lodgis. The fund is also making investments in manufacturing companies relocating from China to Vietnam.

Meanwhile, a consortium led by the Alibaba Group and Baring Private Equity Asia (BPEA) completed a $400 million investment in The CrownX last month. As part of Alibaba’s investment, The CrownX will partner with Lazada to build the company’s digital presence and capabilities and accelerate the offline-to-online market in Vietnam. The strategic partnership will also fast-track the transformation of The CrownX into a one-stop shop to serve consumers’ everyday needs, whether offline or online, through its new “Point of Life” strategy. “We are delighted to be partnering with Masan and Alibaba, and believe this strategic investment has the potential to supercharge The CrownX’s growth in a nascent retail market and create the largest consumer ecosystem in Vietnam,” said Ms. Janice Leow, Managing Director of BPEA. “The CrownX also has tremendous digital potential, particularly in e-commerce and data analytics. BPEA prioritizes digital transformation in all of its portfolio companies, and we look forward to working with the company in its next stage of growth.”

A large amount of funding has been accumulated in recent times, with the Mekong Enterprise Fund IV, for example, raising $246 million in January. And deals this year have revealed the increasingly diverse interests of PE funds. According to Grant Thornton, PE funds were interested in a number of industry groups last year, including renewable energy, real estate, healthcare, technology and communications, financial services, and manufacturing. Compared to 2019, industries growing in popularity included fintech, e-commerce, and e-learning.

Seizing opportunities

Vietnam’s PE market in the first five months of 2021 showed no real signs of slowing down despite the imposition of another lockdown caused by Covid-19, according to data from Grant Thornton, with 34 closed transactions and a total disclosed value of $605 million. “The pandemic has obviously brought with it multiple challenges for businesses and PE funds,” Mr. Ken Atkinson, Founder and Senior Board Advisor at Grant Thornton Vietnam, told VET. “Transactions have been put on hold due to different reasons, such as unexpected poor performance impacting prospects and valuations, limitations in travel, and in some cases PE funds shifting their focus towards stabilizing existing portfolio companies and providing operational support.”

However, challenges also bring opportunities. While many companies last year thought they could endure the hardships from Covid-19 while anticipating strong recovery in 2021, the prolonged and unpredictable pandemic has probably forced many to seek funding this year. PE funds may now have access to companies on their watch list, bringing capital to the table and negotiating favorable deals. Emerging industries and trends established during the crisis also offer new sector opportunities for PE investment, such as healthcare technology, information technology, edtech (education technology), and omni-channel retail, according to Mr. Atkinson.

Vietnam has actually managed the challenges posed by the pandemic quite well, all things considered. It was one of the top-performing Asian economies in 2020 and one of only a few to post positive GDP growth for the year. “As a long-term investor in the country, we think Vietnam has a long runway for growth supported by strong macro-economic tailwinds and attractive demographics,” Ms. Leow said.

Supported by this positive backdrop, KKR has seen continued interest in the country, with a number of investments made by PE investors despite the travel restrictions. “Vietnam’s long-term prospects are bright, and we would expect continued interest in the country despite Covid-19,” Mr. Yan told VET. “Investors are slowly becoming used to conducting deals and due diligence online due to the ongoing travel restrictions. KKR is a patient, long-term investor with the ability to look beyond near-term challenges. Supporting local champions remains a cornerstone of our strategy in Vietnam.”

Meanwhile, Mr. Ovel said that Mekong Capital’s focus isn’t too much about what’s happening in the macro-economy and is more about finding companies with a big vision who want to build a management team in a way that will achieve that vision. “Companies that are most effective at continuously building strong management teams and leadership on an ongoing basis will emerge as the leaders in their sectors and achieve attractive growth in net profit,” he added.

Moving forward, Vietnam’s PE market is expected to also see robust activities from local funds. Mr. Ovel said that since travel is still restricted, foreign investors face difficulties in coming to Vietnam. Some domestic funds will therefore have more favorable conditions to support companies with new investments than funds that are not ready to be disbursed at this time. However, since Vietnam’s economy is looking like it’s going to see robust growth over the next 6-12 months, more deals with foreign and regional investors are still happening.

Indeed, the current fluctuations of the crisis will continue to bring more investment opportunities for PE investors to consider a wider range of companies and at more attractive entry valuations than would be possible in normal circumstances. “But we are not hunting for low-priced assets,” Mr. Ovel said. “We are in the game of paying fair valuations, and growing revenue multiple times in a five-year period takes a lot of work to support a fast-growing team. This is why we have been very selective with our deals, and our strategy is not to close as many as possible. We announced two investments, in Marou and Mutosi, in the first half of the year, so we expect to have three or four more deals before year’s end.”

In addition, in an emerging market like Vietnam, PE funds usually look at growth investments, which are mostly found in industries such as retail, healthcare, education, and logistics, as outlined in Grant Thornton’s latest PE Survey. Companies operating in these industries and with innovative tech solutions such as e-commerce, fintech, health technology, and e-learning platforms, etc., will claim the spotlight.