Vietnam redux

Development Finance Institutions (DFIs) are the great initiators in emerging markets private equity. They go where GPs are not plentiful but the need for alternative forms of capital is great; they make early commitments to funds that might not otherwise find the momentum to reach a first close; and they insist on good governance in markets that can only benefit from this kind of rigor.

When these groups begin to figure less prominently in a GP's subsequent funds, it is often an indication that the manager or the market has made sufficient progress that developmental capital is no longer required. Mekong Capital would place itself in the former category. The firm raised $50 million for its second Mekong Enterprise fund in 2006, with DFIs contributing much of the corpus. Fund III closed earlier this year on $112 million and the two DFI LPs involved are responsible for less than one third of the capital.

Mekong's development has much in common with that of the Vietnam private equity industry itself - having spent the past few years as a work in progress, nurturing certain approaches and scaling back others, all with a view to delivering consistent returns rather than a collection of home runs and strikeouts.

Sentiment on Vietnam has shifted markedly since the previous fundraising peak of 2006-2007, more or less corresponding to the swings in the country's economy. Now might be a good time. AVCJ spoke to a range of Southeast Asia-focused GPs, none of them Vietnam specialists, and there was a general approval of the opportunities available.

The market remains so shallow that a single, sizeable transaction distorts the broader picture - for example, the $735 million investment by Cool Japan Fund in 2014 that went to a Vietnam-based logistics operation - but a growing number of private equity investors are looking for deals. The likes of TPG Growth, Standard Chartered Private Equity, CDH Investments and Warburg Pincus have all made bets of $50 million or more in the last couple of years.

The local GP community is also relatively vibrant given the size of the economy. There are four or five Vietnam-only private equity funds active in the market and three have been through multiple vintages. In addition to Mekong, PENM Partners is raising its fourth fund and targeting a final close of $150-175 million this year, while VI Group now has $400 million under management across three funds.

The question is whether the investment opportunity and the GPs pursuing it have matured enough to avoid the pitfalls of the last cycle. During the three-year period from 2006 to 2008, 29 raised a combined $3.4 billion. Since then, fundraising has passed $200 million twice, with no more than two managers achieving closes in any one year.

Much like Mekong, the industry's future is dependent on more consistency in performance - which will hopefully come from the relatively small number of managers now deemed worthy of investment.

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• Topics
• Southeast Asia
• GPs
• Performance
• Vietnam
• Mekong Capital