Private equity funds in Vietnam are proving themselves invaluable as more of the country’s state-owned enterprises are privatised. Peter Janssen reports.


Vietnam is hot. In 2017, the country’s VN stock market index rose 48% year on year, the steepest hike in Asia. Gross domestic product (GDP) grew an estimated 6.8%, compared with 6.2% in 2016; exports were up 21% to $214bn; while actualised foreign direct investment (FDI) hit $17.5bn, compared with $15.8bn in 2016.

More importantly for the country’s economic future, the government’s privatisation programme for its huge stable of state-owned enterprises (SOEs) picked up steam, culminating in the divestiture of $4.8bn-worth of state shares in Saigon Alcohol Beer and Beverage, the country’s largest beer brewery, to Thai Beverage in December.

A dynamic domestic stock market has set the scene in 2018 not only for more SOE privatisations, but for more initial public offerings (IPOs) by the country’s fledgling private sector, which was altogether non-existent three decades ago when Vietnam began casting off some of its communist trappings.

These are relatively happy days not just for the government but also for the private equity (PE) funds that toughed it out during the hard times of 2010 to 2013, when the economy was dogged by high inflation, a depreciating currency, a stock market crash, a property crash and a high proportion of non-performing loans in its state-dominated banking system and the resulting tight credit environment for local businesses.

Brighter days

“I am on the happier side of cynical right now,” says David Do, managing director of the Vietnam Investments Group (VIG), one of the top four PE funds operating in Vietnam. “I think operationally it is easier now, mainly because we’ve acquired 10 years of scar tissue.” VIG runs three funds, handling about $500m in investments.

PE funds, essentially fuelled by private versus public capital, have played a vital role in Vietnam’s economic emergence that is arguably unique in south-east Asia. “Thailand, the Philippines, Indonesia and even Myanmar, in my view, are completely different because there you’ve got multi-generational wealth,” says Chad Ovel, founding partner at Mekong Capital, a PE manager that launched its first Vietnam fund in 2002.

“The large family conglomerates are very dominant in these markets so it is difficult for PE to invest in small and medium-sized companies. But the competition landscape here is wonderful, because there is very little in the space of these large dominant players.”

In Vietnam, the dominant economic player has traditionally been the state. Until 1990, all businesses were state owned. Over the past decade, the government has been consistently reducing its role in the market by divesting its shares in SOEs, primarily to raise funds for its massive infrastructure projects, but also to reduce inefficiency in the sector. The state, however, is retaining majority stakes in SOEs in sensitive sectors such as energy, banking and of course anything security-related. The first step was the equitisation of SOEs, often involving divesting shares to management and employees, a process which began in 1992. By 2002 there were still about 15,000 majority state-owned enterprises in operation. The number has since dwindled to about 2000.

[SMEs] invite us in because they need additional capital. We step in when they have exhausted their credit and they need to balance the equity side

Andy Ho

Thai interest

SOE privatisations offer opportunities for strategic partners eager to get into the Vietnam market and for smaller investors looking for profits. PE funds have played a role in the process all along, with varying results.

Thailand-based Finansa, which describes itself as a merchant bank, launched the Vietnam Direct Investment Fund in 1994 that was essentially investing in greenfield projects such as steel bar and small cement plants. Most PE funds seek an exit plan to close the fund, paying back their investors in 10 years and dividing the profits. Since the Vietnamese stock market was dormant in the 1990s, Finansa saw no exit and had to sell back its stakes in its greenfield investments to the promoters, at unfavourable prices. Things did not look good for the fund’s investors.     

But in the early 2000s, the Vietnamese government was keen to stimulate the stock market for equitised SOEs, creating a ‘grey market’ in shares of SOE staff who had acquired the equity. “So we thought, let’s start buying up the shares in the grey market of companies that had been identified to list,” says Finansa chief information officer (CIO) James Marshall. “And then the companies were subsequently listed and we exited the stock market. We made a lot of money to compensate for the earlier investments.”

The strategy worked, in part, because in the 1990s the management of equitised SOEs had a tendency to undervalue their company’s shares to get them at low prices, and then turn the operations around before they were listed, ramping up share prices. That was good for the former SOE management and also for Finansa. “In Vietnam it is a lot easier to align your interests with a former state-owned enterprise than with a family-run company in Thailand,” says Mr Marshall.

The Vietnamese government quickly caught on to the strategy and thereafter decided to keep large stakes in all equitised SOEs to benefit from the eventual listings. A lot of the current privatisation process is about divesting these state holdings in SOEs that should be competing on a level playing field with the private sector, such as in the consumer products market. But the state holding, generally above 36% of the equitised SOE, led to high valuations of SOEs that arguably slowed government efforts to find strategic partners for its corporate heroes.  

Vinamilk growth

One example is Vinamilk, the largest producer and distributor of dairy products in Vietnam. Vinamilk had its IPO on the Ho Chi Minh Stock Exchange in 2003. In 2016, the State Capital Investment Corp (SCIC), the investment arm of Vietnam's finance ministry, sold a 17.54% stake in the company to F&N Dairy Investment, the sole bidder. Singapore-listed Fraser & Neave Group was taken over by Thai Bev in 2013 for $11.2bn. In 2017, SCIC divested another 10.05% stake in Vinamilk to Hong Kong-based Jardine Cycle & Carriage. SCIC has announced it will divest its remaining 36% in Vinamilk eventually. Vinamilk’s shares soared in 2017.

“Before the Vinamilk IPO, the government owned 100% of a $400m business and today it holds 36% of a $14bn business,” says Andy Ho, CIO of VinaCapital, one of the leading PE funds in Vietnam. “How did it do it? It allowed the private sector to come in, it became more efficient, put a bit of pressure on management, profits grew, revenues grew, and now it has a smaller percent of a bigger pie. The reality is the way it’s been done does maximise proceeds to the government.”

VinaCapital bought into Vinamilk in 2004 and 2005 when the stock prices were a lot lower. Unlike most PE funds, which have a 10-year duration, VinaCapital operates the Vietnam Opportunity Fund (VOF), which is listed on the main board of the London Stock Exchange and valued at $1.2bn (only Dragon Capital is bigger, with a portfolio of about $3bn). This structure allows VOF to be a longer term investor in Vietnamese companies with no pressure to exit by investors. “We are still an investor in Vinamilk today, after more than 10 years. As long as the business continues to grow and offer shareholders value, there is absolutely no reason why we should sell,” says Mr Ho.

Private vs public

While VinaCapital invests in equitised SOEs, it has arguably played a bigger role in Vietnam's private sector space. The strategy is usually to buy a stake in a private company, boost its management standards and then sell to a strategic investor or on the stock market. “By far the best exit is through a strategic partner because they are going to pay a premium for control, for the accelerated acquisition of market share,” says Mr Ovel of Mekong Capital.

Given the limited resources most PE funds work with, it makes sense that most have concentrated on Vietnam’s private sector space. “Privatisations have been hard for us because they have been slow here, and we like to work with entrepreneurs and just push our own agenda at the pace that we like,” says VIG’s Mr Do.  

The competition landscape here is wonderful, because there is very little in the space of the large dominant players

Chad Ovel

Vietnam’s fledgling private sector arguably needs more help than the SOE sector in increasing its competitiveness on the market. Both are losing share to FDI, which now accounts for 75% of all Vietnam’s exports and threatens to overshadow both state and private firms on the Vietnamese domestic market. According to data from the country’s General Statistics Office, the contribution of the state sector to Vietnam’s GDP declined from 40.2% in 1995 to 32% in 2016, while the private sector’s contribution slid from 53.5% to 47.3% in the same period. By contrast, FDI has grown from 6.3% of GDP in 1995 to 20.7% in 2016.

“The issue for a lot of companies is the increasing foreign competition, and how to sustain growth,” says Mr Do. Since 1990, the government has been focused on attracting FDI and improving the efficiency of its massive and often corrupt SOE sector that has historically received preferential treatment. The SOE privatisation programme therefore appears to be good news for the private sector too. “They don’t like dealing with the government, so they think privatisation is good because that means the SOEs will have less of an advantage,” says Mr Do.  

Mekong Capital, which has also been concentrating on private sector investments, has noticed changes in the field over the past decade. “In the mid-1990s, everyone in this country was equally poor and what emerged, that first wave of private sector entrepreneurs, they were all family-held businesses,” says Mr Ovel. “That was the investment universe for our first fund in 2002. Now what we’re seeing is very different.” 

Vietnam’s new wave of entrepreneurs tend to be younger, may have worked abroad or at multinational companies and are now starting their own firms. Another new business phenomenon is a cluster of co-investors, such as Nhat Tin Logistics Company, which was started by 60 former employees at Tin Thanh Logistics, and which sold out to Kerry Express in 2012. Nhat Tin now owns 150 trucks and is making $20m in revenues, according to Mr Ovel.

More capital

Besides bringing in management and marketing know-how, PE funds have played a role in providing small and medium-sized enterprises with capital. While the trend is changing, Vietnamese banks have in the past favoured the SOE sector and larger private companies that have land or factories as collateral. “No one prefers PE funds, because we are difficult to work with,” says VinaCapital’s Mr Ho. “They invite us in because they need additional capital. We step in when they have exhausted their credit and they need to balance the equity side.” 

Another reason to go to a PE fund is to prepare for an IPO, another means of raising capital. “They invite you because they have found that if they are going to take their company public they have to have some fundamental business standards that are acceptable to outside investors, such as accounting standards and corporate governance,” says Mr Ho.

Frederick Burke, managing director of Baker & McKenzie (Vietnam), adds: “Dragon Capital, Mekong Capital, VinaCapital and VIG, they have all had a lot of influence with the private sector and they have helped a lot of companies get to the level where they can make a business [grow].”

Mr Burke notes that when the US’s Walmart comes in to source products made in Vietnam, it often runs into compliance obstacles with Vietnamese private-run companies so it ends up sourcing from foreign firms instead. There has been much talk among development banks on how to improve the private sector’s standards to get them up to international levels. “But the guys I think who are doing the best work there are really these funds,” says Mr Burke.

For Vietnam’s private sector, the challenge over the next five to 10 years seems to be more about securing its own domestic market. Creating regional or international corporate players is still a distant goal, given the size of current Vietnamese private companies. “I don’t think we will have the wealth concentration that we see in Thailand, the Philippines and Indonesia,” says Mr Do. “Probably that’s a good thing from a social point of view.” 


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