Q&A: VinaCapital's Andy Ho

Q: How has the PE investment environment evolved over the last five years?

A: I think there have been three major changes. First, the size of the stock market – by number of companies and the overall market capitalization – has increased dramatically. We now have more than 700 companies and the market cap is over $100 billion. It is important because we tend to invest in unlisted companies, either private businesses or state-owned enterprises that are being equitized, and eventually some of them will list. To the extent that the stock market is larger, and that means an improvement in quality and liquidity, it means exits are easier. Second, the cost of capital for foreign investors, particularly multinationals, has gone down significantly. If they have access to cheap debt then they would likely rather purchase a company in Vietnam than build organically, and that makes the trade sale route more feasible. Third, there have been regulatory changes, notably the move in 2015 to lift foreign ownership limits for listed companies in certain industries. It is now possible to sell a controlling stake in a public business to an overseas buyer.

Q: What is the primary strategy of the VinaCapital’s Vietnam Opportunity Fund (VOF)?

A: When we launched in 2004 we raised $10 million. Over the years we have raised a bit more and the fund is now nearly $1 billion. We make investments, sell the assets, and recycle the cash into more investments. Our portfolio is about 55% public equities, but when we enter most of these businesses they are private. There are four things we get that we typically would not get when purchasing shares via the public markets: a meaningful stake of 20-30% without driving the price up or down; minority protection in the form of a profit guarantee or profit commitment with penalties if it is not achieved; financial, legal and technical due diligence rights; and the right to participate at some level on the board and in management. This is important because transparency and corporate governance are pretty weak. As we get more involved with these businesses we hope to get more transparency, enabling us to exit down the road to a groups that value companies with higher levels of transparency and governance, as well as having grown revenue and profit during the investment period.

Q: Does Vietnam have characteristics that make it particularly suited to a listed closed-end fund?

A: I think some of my professors from business school would say a closed end, listed fund is the perfect vehicle because it allows investors to go in and out as they wish. With the LP-GP model the investors are beholden to the activities of the manager over the life of the fund, but they don’t have to suffer from the volatility of market prices. When we started, a listed closed-end vehicle was relevant because the illiquid nature of the underlying assets meant that investors had to wait a long time for an exit. As the market has matured over time, the LP-GP model has become more relevant. But fund managers still have to prove they can exit assets and make distributions to investors.

Q: What is the scale of VinaCapital’s other interests?

A: We manage about $1.8 billion across multiple funds. In addition to the VOF, we have real estate and infrastructure funds, and a VC fund with Draper Fisher Jurvetson. In addition to those four, there are a number of segregated mandates. We have strategies covering fixed income, warehousing, real estate development, operating assets – it’s really a function of what the investors want and what we can deliver to them. Everyone has their own idea of what risk-return profile they want in Vietnam.

Q: To what extent should investors be concerned about rising private market valuations?

A: We focus on sectors that contribute to the growth of the economy. Over the years, all these assets go through some sort of cycle. Right now valuations are very rich because they follow public equity cycles and valuations in that space have gone up to 15-16x earnings. We have to think more about the growth of a business before investing. A good company does not necessarily make for a good investment. For example, a lot of companies are stressed so we can come in when valuations are low and help with restructuring. We have been in Vietnam since 2004 and we are seeing the third cycle now. If you look at our activities over the past year, we’ve made more divestments than investments.

Q: Are these cycles becoming less extreme?

A: From a macro perspective, Vietnam is a frontier market. It wasn’t until the late 1990s and early 2000s that capital markets structures were put in place, and at the beginning you tend to have less liquidity and more volatility, and more speculation. As people learn more about the fundamentals of businesses and what drives value, they will be able to react faster, and so with each cycle the peaks and troughs should become smaller. Back in 2006-2007 the stock market hit 1,100 points; it will not hit that level for a while at least. As the size of the cycles gets smaller, the opportunity to make outsize returns in the public markets will be reduced, but there will still be opportunities to look at private businesses. 

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• Topics
• Southeast Asia
• GPs
• Vietnam
• VinaCapital
• Andy Ho