Industry Q&A: Andrew Legge, Dragon Capital

Q: At the end of 2009, there seemed to be growing interest – and certainly growing hype – about private equity potential in Vietnam. However, it’s been fairly quiet so far this year. Why is that?

A: Indonesia and Vietnam seem to be the natural diversification play for those feeling heavy on China and India. In the fourth quarter of last year, there was a bit of momentum building to this end, though not necessarily a strong feeling toward which one; it was more, how do we play this? Resources being what they are, and the fact that both markets require a fair bit of effort, research and studying, mean that simultaneous efforts are essentially not possible.

I don’t think it’s that anyone made a conscious decision, but clearly if those are the two natural options for diversification, Indonesia has stepped out in terms of attracting attention and capital as we’ve come into 2010.

Q: Looking at the draw of a market like China, wouldn’t you argue that with so much competition, it would be worth investing in a less crowded market like Vietnam, where the valuations are still reasonable?

A: I had a meeting recently with an LP who is currently considering third and fourth tier [PRC] cities versus Vietnam. The coastline of China is where everyone already is, but as the more popular areas of the country become too competitive, one must contemplate the hinterland to find value. The natural question then becomes, why not look south?

In fact, there has been [research put out on this recently] based on wages. The view has been that there is wage inflation occurring along the coastline of China, whilst labor rates in Vietnam are some 40% of those in China. The biggest issue, by comparison, is infrastructure. One might argue that Vietnam’s coastline ought to prove more advantageous than western China in terms of development potential..

Q: And how do LPs view the market currently?

A: We have been aiming for a first close through these rather frantic markets, and have been happy to take our time. We appreciate that we’re looking at a new space in private equity within Vietnam. We also appreciate that there needs to be a lot of education in the traditional LP community. We’ve been in Vietnam for 16 years, so if it takes more time to do it right, then we’re okay with that.

Generally, we are getting beyond the basic education part of the process, though there are some that are still in that stage. 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.

It would be great for us and for Vietnam to see them move ahead; in fact, we would like to be investing and have deals on our desks to execute on.

Q: Is there a prevailing personality of those who have invested in Vietnam?

A: 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. US endowments, on the other hand, have committed to fund-of-funds in Asia, and thus their capital seems to be allocated through [that channel].

Their mentality does tend to vary, though. Some [LPs] want a better-trodden path before looking at Vietnam; some want to get into Vietnam before the path is determined, and competition drives valuation.

Q: What are the most common misconceptions still hindering LP investment?

A: People don’t realize the disconnect between what you read and what’s really going on in Vietnam. You have to land in the country before you realize how dynamic the economy is.

One of the things people say over and over after visiting Vietnam is, “We had heard about the entrepreneurialism and the fast-paced society, but we had to see it to understand it.”

Private consumption is two-thirds of GDP and 60% of the population is under 30 years old. The people here are highly entrepreneurial, highly motivated and very excited about the opportunities that lie ahead for them and for the country.

Still, one has to look through those numbers to find the reality. You need to weigh where the money is going and what it means for the domestic economy. For instance, one number we track is dispersed FDI, and that is growing at a healthy rate, such that it was above 10% of GDP for 2008, and the published number is the same for 2009. 

Q: Then where are the opportunities for private equity investing in Vietnam?

A: Given the size of the market, one is required to take a broad view when formulating an investment mandate. One thing we’ve done successfully over the last 16 years is maintain efforts to focus investments toward the domestic economy. This is unchanged looking ahead, as we home in on continued private sector development, and a renewed effort toward the privatization of state-owned enterprises.

There are certainly deals to be done. We look forward to introducing the greater LP community to Vietnam and comfortably take the view that a 2010 vintage for Vietnam will be a good one.

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