• Industry: Private Equity
  • Type: Business and industry issue
  • Date: 12/8/2011

Capitalizing on growth: Vietnam 

Capitalizing on growth: Vietnam
KKR’s investment in conglomerate Masan has put PE in Vietnam on the radar. With interests in food, banking and mining, Masan has raised more than US$500m of PE capital in the past two years.1 Vietnam has an active cadre of domestic PE investors, including VinaCapital Dragon Capital and Mekong Capital but KKR’s US$159m investment has awakened the interest of international PE firms searching for US$50m-plus deals and made entrepreneurs aware of the PE proposition.

Vietnam’s growth prospects, demographics and increasing urbanization create a favorable environment for PE, but investors should be aware of the reality on the ground. The youthful population may be educated in terms of school attendance, but there is a lack of management expertise and Vietnamese citizens who have been educated and worked abroad have not returned in large numbers.

Rising wealth – per capita gross domestic product (GDP) has trebled in the past decade2 – is concentrated in urban areas, while 70 percent of the 90 million population live in rural areas.3

PE firms are targeting sectors that will benefit from the increasing urban wealth, including consumer goods, media, education, healthcare and pharmaceuticals. Successful growth investments in the US$5–15m made over the last few years are likely to generate dealflow for larger PE firms as exits are sought. Listed companies a significant number of which will not be profitable in 2011, could be targets for take private or PIPE transactions for investors prepared to take a hands-on, turnaround approach. Price expectations remain a barrier to deals, with vendors clinging to frothy valuations seen in the boom, but realism is kicking in.

Exiting larger investments is uncharted territory for PE investors but trade sales to regional or multinational corporate would seem the best bet for more substantial companies. A number of larger companies have looked at Singapore as an IPO destination, but this route remains unproven until a deal is executed.

Successful PE investment requires long-term commitment to building relationships with entrepreneurs, government and regulators in what is a poorly intermediated market to get into potential deals early and execute quickly.

Market Analysis

Vietnam’s economy has its challenges, with high inflation, interest rates and constraints on bank lending. Domestic issues have compounded problems in export markets in North America and Europe, with policy setting and implementation being slowed as a result of parliamentary elections in May 2011.

Foreign direct investment is beginning to rebound after slowing in 2009 and 2010 as multinationals reigned in regional expansion plans4. The Asian Development Bank forecasts growth of 5.8 percent in 2011 and 6.5 percent in 2012,5 slower than the 7.1 percent averaged from 1990–2009.6

Without substantial investment, Vietnam’s infrastructure, from road to rail, ports and power, will act as a brake on economic growth. New public private partnership (PPP) models are being tested, but they will need to provide attractive returns on equity and debt to secure investment.

Private companies are increasingly important but strategic sectors, including energy, transport, banking and telecoms, are dominated by state-owned enterprises (SOEs), and have foreign ownership restrictions. The government is trying to encourage investment in SOEs and in July 2011 announced a more flexible regime for SOEs targeting strategic investors, but progress is slow and many SOEs are resistant to changing behavior to drive efficiency.

Industry accounts for 40.3 percent of GDP and 20.3 percent of employment, with services accounting for 38.3 percent of GDP and 25.8 percent of employment. More than half the population work in agriculture (53.9 percent), producing 20.9 percent of GDP.8

Private equity investment has slowed sharply since 2007, when 63 deals worth US$840m were completed, with 18 deals worth US$220m completed in 2010. Activity is picking up, boosted by KKR’s US$159m acquisition of a 10 percent stake in Masan in April 2011.9

1Financial Times, 12 April 2011

2Economist Intelligence Unit, July 2011

3CIA World Factbook, September 2011

4Economist Intelligence Unit, TNS Research for KPMG, July 2011

5Xinhua, 15 September 2011

6Asian Development Bank: Vietnam Factsheet, April 2011

7Vietnews Today, 15 July 2011

8CIA World Factbook, September 2011

9Asian Venture Capital Journal, July 2011


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