LPs look for signs of maturity in Vietnam PE - AVCJ Forum

“Vietnam is still an underdog. It is not growing fast enough to attract big ticket investments from high-quality global investors,” Huai Fong Chew, regional lead for the International Finance Corporation’s PE funds team covering East Asia and the Pacific, told the AVCJ Vietnam Forum. “More time is needed for mid-market firms to grow so they can attract more capital and attract more institutional investors. Right now, it’s a smallish mid-cap play and not vibrant enough in my view.”

This was echoed by Sam Robinson, managing partner for North-East Private Equity Asia, which represents a European family office. He observed there is barely a handful of country managers and they struggle to invest funds of more than $200 million in a market dominated by small deals. Accessing Vietnam is therefore tricky unless going through a larger pan-regional manager.

Yet the Vietnam story is increasingly compelling. The economy was among the fastest-growing globally thanks to a swift rebound from COVID-19 and it is well-positioned for further expansion given the diversification of supply chains within Asia and the emergence of middle-class consumers.

“We see how China has developed over the past 10 years, the shift from manufacturing to service-oriented, and we see the same happening in Vietnam,” said Thomas Kronsbein, a vice president at DEG, a German development finance institution (DFI).

Meanwhile, Vietnam has also steadily climbed the World Bank’s ease of doing business rankings – now sitting above Indonesia and the Philippines – and its capital markets have grown tenfold in the past decade. Moreover, the currency – a key area of weakness in the macroeconomic crises that have troubled the country every 10 years for the last four decades – has been more stable than many of its regional peers in recent times.

IFC considers Vietnam a core market and the Asian Development Bank (ADB) expects the country to account for 10% of its private equity portfolio within five years. Ian Teo, a principal investment specialist at ADB, noted that Vietnam stacks up well against other frontier markets, especially in terms of political stability and macroeconomic performance.

ADB made its first commitments to local funds in the early 2000s, which Teo compared to “buying a call option” on a volatile and unproven market. Early difficulties were characterized by a manager seeking to make distributions to LPs only to find that the law prevented repatriation of investment proceeds. It took two years and a change in the regulatory regime before the distributions could be made, which had a debilitating impact on IRR.

Even now, the market requires thorough due diligence. Robinson observed that a lack of case law means it has only become clear in the last 10 years how laws are likely to be interpreted by courts, while the banking system is much improved but hardly represents the finished article. And against this backdrop of historical chaos, it is hard to find proven managers.

“The market peaked in 2007 and then lost 75% of its value and took 10 years to recover to where it was before. During that period, investors became wary,” Teo said. “It was difficult to find GPs that had that experience of the whole economic cycle. No matter how much capital we want to deploy, we have run into difficulties, which is why our allocations to Vietnam have fluctuated.”

Any market highly dependent on DFI money is also to some extent wedded to DFI priorities. Robinson observed that any assumption that Asia’s frontier jurisdictions trail their developed market peers on ESG (environment, social and governance) might be misplaced: DFIs are crucial to the establishment of GPs, and they typically account for a large chunk of the fund corpus, so they are obliged to meet DFI requirements on ESG.

North-East Private Equity Asia’s ESG policy is a work in progress, so the firm often looks to LPs that are more advanced in this area for direction. That said, no one is working from a fully formed plan. “ESG is a hot topic, but everyone is quite new to it. Even if you are not new to it, you have probably changed your approach, or it has evolved a lot over the past 10 years,” said Robinson. “The idea that there’s a checklist everyone has subscribed to, it just isn’t true.”

Chew of IFC added that ESG is a dealbreaker for her organization and this is made clear to GPs even before entering a formal dialogue. However, the emphasis is on mindset.

“We haven’t met with much opposition, but it is unfamiliar territory for a lot of managers,” she said. “We don’t expect them to meet the gold standard overnight; we want to help them achieve it over time. The most important points are attitude and intentionality. You have to really intend to move in that direction and we have specialists who can help fund managers achieve this.”

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• Topics
• Southeast Asia
• LPs
• Fundraising
• Vietnam
• LPs
• AVCJ Events
• IFC
• Asian Development Bank
• German Investment and Development (DEG)
• North-East Private Equity Asia