Vietnam: Diamond in the rough

And yet, Vietnam is very quiet, in spite of the hype and headlines that surrounded it at the end of 2009.

“In the fourth quarter of last year,” explains Andrew Legge, Director at Dragon Capital, “there was a bit of momentum building” about investment in both Indonesia and Vietnam, “though not necessarily a strong feeling toward which one. It was more, how do we play this?” Coming into 2010, “resources being what they are, the fact that both markets require a fair bit of effort, research and studying, means that simultaneous efforts are essentially not possible.”

With several notable transactions already inked in Indonesia, Vietnam may not have been as prominent in the headlines during the first quarter, but it certainly hasn’t changed its tune. The same fundamentals that have always made Vietnam interesting continue to make it a country rife with opportunity – for those who take the time to understand the market.

Surveying the land

Andy Ho, Managing Director and Head of Investment for VinaCapital Investment Management, explains that the investment pecking order during a downturn can lead to a perceived lack of interest in emerging markets. “Throughout the financial crisis,” he says, “you had a situation where people saw less expensive assets in a lot of markets.” This leads to a reorganization of an order of interests. “The pecking order will be deploying money in their own countries first – whether private equity or real estate – and next is BRIC. Once those reach a higher valuation level, then people start looking at emerging economies.” That puts countries like Vietnam, Indonesia and the like into the third category.

However, it doesn’t take too long for appetite for emerging markets to return, he notes. “When it comes to testing the confidence level [of those investing into] Vietnam, it has been fairly challenging over last 12-18 months; many people pulled back and exited the emerging economies.”

While investment into the country may have slowed, Dr Thomas Lanyi, Director at Mekong Capital, said that 2009 had a silver lining for some: “2009 was very good in terms of exits for us,” he notes. “We were able to last year utilize the uptick in the financial markets in Vietnam [in the second half] to our advantage, and exit two companies during that phase.” In that respect, even with the financial crisis, “it has worked out according to plan.”

Looking into the rest of 2010, investors are becoming more interested in what the country has to offer, as is evidenced by the number of visitors coming to see the country for themselves.

Who’s investing and who should be investing?

“Investors who look here look to us as a diversification play,” says Andy Ho. The profile ranges from family offices with the right risk appetite to emerging markets-focused fund-of-funds out of Europe. Important to remember as well, he says, is that “many of the previous investors were hedge funds, and they have since closed up shop, so you are actually looking at educating and speaking to a whole new set of investors.”

Dr Lanyi says that more recently, the interest of foreign investors in Vietnam “has grown again; we are seeing more requests for meetings and more visitors to Vietnam looking for investment opportunities.” These include GPs and LPs, in particular funds-of-funds from Asia and Europe,  as well as government related investment institutions and family offices. He says, “Our experience is that family offices tend to lead the curve.”

On the whole, fundraising is not an easy task though, as Vietnam is a country with a much smaller flow of information to the outside world. Says Legge of Dragon’s most ongoing fundraising experience, “A few LPs have made investments, and some would like to take a longer, harder look, and are turning the corner for dedicating the time to do the due diligence required to make an informed decision. Now, that list is relatively small, but those LPs indicating interest also represent the type of long-term capital needed in Vietnam.”

In a trend that is perhaps for the best – though a longer road to travel – he explains, “We are generally seeing large, accomplished LPs coming out of either fund-of-funds, sovereign wealth funds, or the direct institutional investment world. Interest from corporate pension funds is on the rise as well.”

And what is it exactly that they see in Vietnam? A story of growth and an economy that is pushing ahead and expanding rapidly, with innumerable opportunities for the private sector to help things along.

Opportunities

Vietnam requires a view from medium- to long-term perspective, says Andy Ho, but “the fundamentals are still there: fertile rivers and land; a country that is a huge rice and coffee exporter and a large exporter of fish and shrimp; a population in which 95% of the people can read and write; and a stable political system.”

For the fund VinaCapital is currently raising, Vietnam Opportunity Fund II, Andy Ho says that it is “based on investing in sectors that are domestically-tied, like financial services, branded food and beverage for domestic consumption, property, logistics, and education and healthcare. Our investments will continue to target those sectors.”

Mekong believes the consumer story continues to be strong. Dr Lanyi says, “From our perspective, the secular Vietnam story remains very much intact [in terms of the opportunity set], largely related to the favorable demographic situation in Vietnam.” He notes that last year, amid concerns that the economy would slow, the Vietnamese consumer continued to spend, spurring growth for companies who could meet basic demands. Several of Mekong Capital’s funds’ core holdings boasted extraordinary net profit growth, despite the slowdown in the overall environment, according to Dr Lanyi.

“There are certainly deals to be done,” explains Legge, “and we comfortably take the view that a 2010 vintage for Vietnam will be a good one.” The macroeconomic fundamentals of the country are strong, but foreign investment tends to swing markedly in bad years. Perhaps 2010 will mark a new trend for Vietnam – one in which investors come to the table ready to take a long-term view, as excited about the opportunities that lie ahead as the entrepreneurs across the country.

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• Topics
• Southeast Asia
• Investments
• Early-stage
• Andy Ho
• Mekong Capital
• VinaCapital