Vietnam GPs: Five's company

Having deployed $40 million in Vietnam across four transactions working on a deal-by-deal basis, Japan-based ACA Investments is now looking to raise $100 million for a blind pool fund. The aim is to combine growth capital from ACA with strategic support from Japanese LPs that want exposure to Vietnam.

"A lot of people in Japan are looking to Vietnam. While the large companies can go direct, smaller players don't have the resources, time, networks or money to establish a team," says Hiroyuki Ono, a partner at the private equity firm. "We can be their partner."

Japanese and Korean strategic engagement with Vietnam is longstanding. They are comfortably the largest foreign direct investors in the country and their interest extends into private markets. An assortment of firms and individuals pitch deals to Japanese and Korean groups opportunistically and ACA is one of a small handful trying to win anchor commitments for funds that will largely or solely target Vietnam. 

Even the incumbent Vietnam managers are seeing more traction, with Chris Freund, a partner at Mekong Capital, citing support from Korea and Japan as part of a wider blossoming of interest among corporate investors in the region. "For our next fundraise we aren't planning to do any roadshows outside of Asia," he says.

If Korean and Japanese demand is real enough to support one or two new Vietnam-focused funds, it would shake up a GP base that for years has remained static. While there have been a few corporate vehicles in the past decade, the most recently established independent Vietnamese private equity firm is VI Group, which closed its debut fund in 2007. It is one of five domestic players active in the market.

"Our assessment a few years ago was that only two countries in Southeast Asia could be country markets for private equity – Vietnam and Indonesia. I don't think it has changed that much," says Sunil Mishra, a partner with Adams Street Partners. "At the same time, while there are a lot of good macro trends in Vietnam, LP returns haven't come through with much consistency. That's what is holding people back."

Then and now

The country last saw a PE boom in the two years before the global financial crisis when about 20 funds achieved full or partial closes. It coincided with a period of public market euphoria and both ended abruptly as the crisis hit. Niklas Amundsson, a managing director with placement agent Monument Group, notes that the ensuing years were marked by economic volatility as a currency crisis was followed by hyperinflation.

Now, though, the economy has returned to health, the public markets have reclaimed their buoyancy, and investors are talking with renewed excitement about Vietnam's demographics and consumer profile. Pan-regional and Southeast Asian private equity firms are committing considerable resources to deal-sourcing. But the consensus remains that a Vietnam-only fund would be a hard sell.

Two of the five – Dragon Capital and VinaCapital – didn't raise capital in the conventional way from the outset because they opted for listed closed-end funds, deciding the market wasn't mature enough to accommodate the GP-LP model. Both funds are still active, but the managers have substantially diversified their business models.

Public equities now account for the bulk of Dragon Capital's assets, while VinaCapital has a variety of funds across five asset classes. Flexibility is the underlying rationale – VinaCapital primarily focuses on private investment opportunities where it can deploy $20-50 million and these could be growth equity, pre-IPO or PIPEs – but it does not appeal to all LPs. "Strategies have been all over the place," one investor observes.

Of the remaining three, VI Group is the only one to achieve meaningful scale, closing its latest fund at $252 million in 2015 and receiving commitments from several large institutional investors. PENM Partners is currently deploying its fourth vehicle of $125 million, having once again received backing from a concentrated number of Nordic investors. Hans Christian Jacobsen, the firm's managing partner, would be happy to get $150 million for Fund V. 

Similarly, Mekong's Freund expects to raise more in the next vintage than the $112 million vehicle now being invested, but he is wary of leaving the firm's $8-10 million equity check sweet spot. The GP relied heavily on development finance institutions in the early days but its most recent fund reflects the shift towards Asian investors.

A tough sell

This raises the question as to whether Vietnam's traditional private equity space is subscale, making it harder for LPs to commit a local manager and curtailing that manager's scope to accumulate sufficient assets to move up a level. "Unless you can get to a modicum of scale, it's a tough business," says an investor with a global PE firm. He adds that size can be a problem when trying to exit businesses to larger investors: if an asset is too small for a regional fund, the seller could be left "in no man's land."

The limited number of country managers also counts against the incumbents as it becomes harder for LPs to benchmark. If a commitment is going to be made, it must be underpinned by a lot of conviction on the macro story as well as a high degree of confidence in the GP being chosen. 

"These situations are difficult for investment committees," says Vincent Ng, a partner at placement agent Atlantic Pacific Capital. "Unless you are a Japanese or Korean group with a strategic angle, an insurance company that has a balance sheet in Vietnam and needs to invest in local currency assets, or an investor has a developmental angle, you have to be very sure that a market is going to outperform others."

The overriding problem for a market with limited scale and active participants is it lacks impact: successes might be spectacular, but they barely move the needle. As Vietnam's economy advances and the consumer opportunity expands, domestic private equity firms could secure some bigger wins. 

"In this cycle we are finally starting to see businesses of scale," says Mishra of Adams Street. "A couple of funds need to generate good returns and that will create a wave of new funds launched by returnees and local professionals from financial institutions and operating background. That's what has happened in almost every other market."   

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• Topics
• Southeast Asia
• GPs
• Fundraising
• Growth
• Vietnam
• Mekong Capital
• PENM Partners
• VI Group
• VinaCapital
• Dragon Capital Group