Supporting Vietnamese growth

Why PE investors believe returns will hold up in Vietnam

Can the industry build on its recent successes in one of Asia's most promising markets? And can it do so without compromising returns?

Over the past few years, Vietnam has started to come into its own as one of Asia’s most dynamic private equity (PE) markets thanks to its companies’ willingness to embrace partnerships and desire for capital to keep pace with GDP growth and drive intra-sector consolidation.

Last year, deal volumes tripled to $3.1 billion according to the EY rankings. That put Vietnam in third place behind Singapore and Indonesia in Southeast Asia.

The key question, however, is whether this was a one-off, or the sign of a sustainable uptick in deal flows. In 2018, PE activity was very heavily concentrated in the same two leading conglomerates that have dominated fundraising activity for the past decade.

They are Vingroup, which floated real estate developer Vinhomes, plus Techcombank, which also listed in 2018 and is tied to Masan Group through founders, Nguyen Dang Quang and Ho Hung Anh.

It is already clear that 2019’s PE total is unlikely to come close to last year’s levels, although SK Group’s Vnd17.4 trillion ($747 million) investment in Vingroup, this May, shows that the latter’s appetite for cash remains as undimmed as ever.

Nevertheless, experienced PE practitioners like Jeffrey Perlman, head of Southeast Asia at Warburg Pincus, believe that Vietnam has the potential to overtake Indonesia and inch closer to Singapore over the coming few years. The Park Hyatt Hotel in Saigon is certainly a hub of activity as the favoured resting place and watering hole for prospective investors who have flown in from around the region.

“Until about three years ago, I rarely saw other offshore PE investors in Vietnam,” commented Terry Ting, who recently joined Tybourne Capital Management to set up a private investment initiative. “There’s been a noticeable acceleration over the past year and they often express their surprise when they bump into me in the lobby or coffee shop.”

Ting would be well-placed to remind them that he has been coming for 12 years after making his first investment as head of PE for Asia ex-India at Goldman Sachs Principal Strategies group in 2007.

This was one year after TPG and Intel’s landmark $36.5 million acquisition of a 10% stake in technology group FPT. It remains legendary within Vietnamese PE circles for good reasons and bad.

On the plus side, TPG reputedly netted about 10 times its money after investing in the software company two months before it listed and selling out a few months afterwards at the very top of Vietnam’s first major equity bubble. The swift turnaround and outsized returns demonstrated the country’s potential.

But the aftermath also highlighted the stock market’s volatility and illiquidity. The subsequent crash took Vietnam’s equity markets years to recover from and the government has remained wary about short-term foreign flows ever since.


One decade on and Vietnam is firmly back on the radar. Unlike most other Asian countries, it also has a group of very well-established foreign-owned entities that have made the country their home, although few new ones have set up recently.

The market’s stalwarts include Mekong Capital, established in 2001 with its first fund supported by the Asian Development Bank, VinaCapital (2003), PENM Partners (2006) and Vietnam Investment Group (2007).

Then there is the market’s granddaddy, Dragon Capital, which was established back in 1994. The asset management firm remains the only one still standing from the very first crop set up in the mid-1990s when the US lifted the sanctions it had imposed after the Vietnam War. Its first two investments were in engineering company REE Corp and Asia Commercial Bank.

Today, senior executives from PE firms headquartered in Ho Chi Minh contend that there is no substitute for having boots on the ground. This is partly because they believe that many of Vietnam’s most interesting opportunities still lie in smaller, unlisted companies, which are generally off-radar and less easy to spot from regional hubs like Hong Kong and Singapore.

Yet, big global players like KKR and Warburg Pincus have been doing well, as has Singapore’s GIC. More recently, regional players like NavisCreador and GAW have also become more active.

KKR first invested in Masan Consumer in 2011, while Warburg Pincus entered Vincom Retail in 2013. The following year, GIC entered the fray with investments in FPT, Pan Group and Vinasun.

Last year, both GIC and Warburg Pincus struck a number of deals that upped the ante size-wise for the whole market.  

GIC made the largest ever PE-style investment when it ploughed $853 million into Vinhomes as a pre-IPO investment in May 2018. Two months earlier, Warburg Pincus had invested $370 million as a pre-IPO investment into Techcombank’s IPO.

The bank’s CFO, Bang Trinh, believes that Vietnam is Asia’s most receptive market to PE.

“It’s made a real difference here,” he told FinanceAsia. “In the early days, access to other forms of capital was limited because the bond and equity markets were still in their very early stages of development.”

Many others echo this view. Andy Ho, chief investment officer (CIO) at VinaCapital, also adds that, “the banking sector has never given companies enough capital to capture the country’s economic growth so they’ve turned to PE instead.”

That makes Vietnam unusual within the history of Asian financial markets. 

Thanks to the Vietnam War, the country’s private sector started to take-off much later than the rest of the region. And it did so at a time when private equity had already become an established force.

As a result, first generation entrepreneurs are still running Vietnamese companies. Many share a similar can-do mindset with the PE investors who court them. Both are natural disruptors.

Mekong Capital partner, Chad Ovel, describes Vietnam as an “entrepreneurs’ nirvana”. But he also adds that, “limited capital availability meant that many had to band together to form partnerships. They developed a more consensual operating style that gels well with PE investors.”

Warburg Pincus’s Perlman says it helps that Vietnam can look to China and India’s lead.

“It can be difficult for entrepreneurs to make that leap if they’re the first in their social circle to consider PE investment,” he reflected. “What’s been a real differentiator for us has been taking them to China and India to meet entrepreneurs who’re successfully partnered with us in the past and are already on their second or third PE round.”

Perlman adds that when companies make the decision to embrace PE money it is increasingly about finding a partner to give them a “leg up” by importing international best practises rather than simply accessing capital. “That’s the value proposition,” he continued, “It’s all about fuelling growth.”

Vietnam is still a long way from the type of PE investments that involve financial engineering, not least because it still does not have deep enough capital markets to support them.

Perlman also notes that Warburg Pincus has yet to take part in an auction process. Negotiations are typically conducted face-to-face with the founders themselves. Vietnam’s entrepreneurs are generally far more interested in a good psychological fit than setting up competitive tenders.


One person who is very well aware of how far Vietnam’s PE industry has come is Masan Group's deputy chief executive and chief financial officer, Michael Nguyen.

“We’ve made the PE industry a lot of money over the years,” he told FinanceAsia. “PE investors who invested in Masan during the early states of our group and subsidiaries’ development profited handsomely by taking a bet on our vision and strategy before our business outperformance was certain.”

Masan’s experience dates back to 2006 when VinaCapital made its first investment in the group. The fund exited three years later, making 2.5 times its original investment.

Since then, Masan has concluded PE deals every couple of years, often with KKR. Indeed, New York-headquartered firm has been so keen on it that it has made numerous repeat trips since 2011 when it invested $159 million in Masan Consumer for a 10% stake.

In 2016, it purchased PENM Partners 4.7% stake in Masan Consumer for $100 million. This enabled the Ho Chi Minh-based PE firm to net a 4.5 times return on its investment in the space of seven years.

Just 18 months later, however, KKR doubled its money after selling the stake back into the public equity markets for $209 million.

These two divestments highlight how exit choices have changed for the better in recent years. Back in 2016, PENM would not have even considered the public equity markets a viable option to cash out of its stake.

Things only really started to change at the very end of the same year when VietJet broke new ground by introducing the concept of book building for the first time when it listed on the Ho Chi Minh Stock Exchange (HOSE). The following year, Warburg Pincus was able to exit Vincom Retail during its flotation.

“That was a game changer,” said Warburg Pincus’s Perlman.

KKR’s own divestment in Masan, last October, represented the largest ever block trade from the country. This was also important because the $209 million offering showed that the market had developed sufficiently enough to attract the kind of institutional investors that make such deals viable.

Masan’s Nguyen reflects how grateful he is for PE’s role helping Masan to scale its business empire. But he is understandably glad that the pricing dynamics have progressively tilted in his favour.

“We initially had to offer guaranteed returns in the mid-teens as a floor,” he commented. “But liquidity was scarce so we had few other options to fund growth.”

That has now changed. “These days I can borrow working capital at around local deposit rates,” he continued. “But we are still open to work with PE investors as partners to share in the risks of new initiatives.”

Masan finds itself in a particularly privileged position by Vietnamese standards. It can pick and choose its partners and its funding sources have multiplied, although the bond market still does not function efficiently enough even for the country’s most creditworthy companies.

In making PE investments, Masan can also arbitrage the difference between its own valuation, which averages a price-to-earnings ratio in the mid-teens, and target companies trading around the mid-single digit level.

HSBC’s Vietnamese CEO Hai Pham, highlights that a number of the country’s leading private sector companies are ideally placed to act as consolidators across fragmented industries.

Hai Pham, CEO HSBC Vietnam
VinaCapital’s chief economist, Michael Kokalari, agrees. “Everything in Vietnam is subscale so intra-sector productivity growth is poor,” he commented. “There are few large companies for PE to invest in so a lot of activity will involve buying stakes in smaller companies and then merging them together.”

For the PE firms themselves, there are two main considerations. What kind of companies do they want to invest in and can they write the size of cheque they want?


Where target companies are concerned, the state-owned sector is pretty much a no-go.

“We’ve not had much success there,” Mekong Capital’s Ovel commented. “Salaries are low and performance-based compensation like stock options isn’t allowed, so it’s hard to foster any form of dynamism.”

VinaCapital’s Ho also says he has learnt to avoid export-oriented manufacturers.

“Their gross margins get squeezed over time as competition heats up,” he explained. “We favour companies that contribute to, or benefit from the domestic economy.”

Governance is also a big swing factor. On a relative basis, Vietnam has done far more at this point in its economic development than other countries around the region had at theirs. But it is still behind most of them on an absolute basis. 

This is one thing, says Ovel, of which Mekong Capital is particularly conscious.

“In the early days, we thought that governance would improve post investment,” he commented. “But we discovered that what we tolerated at the beginning tended to persist.”

Nowadays, Mekong insists that prospective investee companies meet a number of up-front criteria, which tends to rule quite a number out. This includes full tax compliance, the establishment of a board with independent directors, plus environmental and social standards that meet IFC guidelines.

“Tax compliance is very important otherwise economic returns aren’t normalised,” he continued. “Once it’s factored into the equation it can quite easily show that a company isn’t profitable at all.”

However, Ovel highlights that the corporate sector is making progress and notes that roughly half the companies he now meets are fully tax-compliant.

Recent deals show that there are a number of sectors which the industry favours. Standouts are: banking, consumer, education, fintech, logistics, pharmacies and tourism.

This May, for example, Malaysian-headquartered Navis Capital invested in the private education arm of the Thanh Thang Cong conglomerate for an undisclosed sum. The same month Mekong Capital invested in Pharmacity.

Ovel cites drug stores as a good example of the growth opportunities on offer.

“Only one group has more than 50 pharmacies,” he commented. “There’s a high degree of fragmentation in the sector, which makes it ripe for consolidation.”

Mekong no doubt hopes its investment will prove to be as fruitful as the $3.5 million one it made in MobileWorld in 2007 from its $50 million Mekong Enterprise II Fund.

At the time, the mobile device retailer had just seven stores. Today, it operates 2,371. That growth provided Mekong with a 57 times return over the lifetime of its investment.

Chad Ovel, partner Mekong Capital

Warburg Pincus, meanwhile, has started branching out from investing in Vietnam’s emerging private sector stars to partnering with them and other local players.

In 2016, it invested $300 million alongside VinaCapital to establish a hospitality and tourism joint venture called Lodgis. Current assets include the Sofitel Metropole Hotel in Hanoi.

Last year, it also set up a $200 million joint venture with the country’s largest real estate developer, Becamex, to enhance the logistics sector.

This is one area where Perlman believes Vietnam could surpass Indonesia. “The government needs to continue to prioritise the right infrastructure projects to help accelerate the flow of goods around the country,” he stated. “But if it gets it right, e-commerce could grow a lot faster than Indonesia.”

The Vietnamese government’s receptivity to all forms of foreign investment, including private equity has generally enabled capital to be allocated more efficiently and effectively. One sector, however, where its attitude may change is fintech.

Perlman and Ting, who is also chairman of e-payments operator Momo, both say that, in this instance, the Vietnamese government can benefit by learning from other countries’ experiences. “Countries are starting to wake up to the fact that payments are a strategic national interest and the Vietnamese government certainly recognises this to a greater degree than probably other markets in the region,” Perlman commented.

It therefore seems unlikely that Ant Financial will be announcing majority control of a Vietnamese fintech player anytime soon. Strategic investments in the banking sector also remain capped at 30%.

This limit has long frustrated prospective foreign investors, but overall the banking sector still remains a firm favourite for PE investment.

In January this year, GIC entered Vietcombank alongside Mizuho via a Vnd6.2 trillion investment, while CVC made its first big investment in Asia Commercial Bank in January last year for Vnd2.55 trillion, according to S&P Global Market Intelligence figures. 

Carlyle also seems keen to become a fixture in the country and came close to buying a stake in Sacombank before turning its attentions to Military Bank according to local players.


The biggest hurdle PE players have consistently faced is a lack of sizeable opportunities and that has still not really changed. There are not yet enough Vingroup’s and Masan’s.

VinaCapital’s Ho says that it is a real problem. The target return on his $1 billion closed-end Vietnam Opportunity Fund is 8% per annum. PE deals with an average ticket size of about $10 million are not going to help him to hit it.

He would like the fund to have a 20% PE weighting, but has yet to achieve it, although he remains an optimist over the longer term. He says that about 65% is currently invested in listed equities and a further 25% or so in unlisted equities.

He believes the sweet spot for deal sizes is currently $20 million to $50 million. Limited investment opportunities have also prompted some PE investors to buy other funds’ investments from them, particularly if they are new to the market.

In 2014, for example, Standard Chartered Private Equity purchased Mekong Capital’s stake in restaurant chain operator, Golden Gate for $35 million. Mekong exited with a 45.1% IRR, or nearly 9.1 times its original investment.  

Another example is Malaysian-headquartered Creador. It made its first Vietnamese investment in January 2018 by spending $43 million to buy the remainder of Mekong’s stake in MobileWorld.

So while the industry has developed considerably in recent years, it has still been a slog to get where it is today, as Dragon Capital CIO, Bill Stoops attests. Dragon initially tried to raise money for a pure PE fund at the turn of the decade.

“It was too early then and even today, it’s not easy to pull off,” he commented. “That’s why so many PE investors end up buying listed equities. It’s easier and cheaper.”

One thing the public equity market does not provide, however, is a good benchmark for valuing prospective PE deals according to VinaCapital’s Ho.

“Listed companies average EPS growth in the mid-teens, whereas private business are often growing at 50% to 75% a year,” he noted. “It isn’t like the developed markets here. There’s a disconnect between the public and private equity markets.”


Vietnam’s stock market is also not without its drawbacks when it comes to exits. It remains plagued by volatile foreign inflows and outflows with no counter-balancing domestic institutional investor base.

This can temporarily leave it shut for business. And that is certainly the case right now thanks to a sizeable gap between issuers’ and investors’ valuation expectations.

Nevertheless, VinaCapital’s Ho says that while trade sales are cleaner, IPOs remain the preferred route. Sponsors typically want to keep control of their businesses. And as first generation entrepreneurs, many have an emotional attachment to the companies they founded.

The country also still lacks experienced managers to replace them in the event that they do want to sell out. “We don’t tend to do control deals for that same reason when we enter investments either,” Ho said.

“Vietnam is still at the stage when all the management expertise lies with the first generation, or those who’ve been trained by multinationals operating in the country,” he added. “Overall, they’re still a small cohort and it’s expensive to import regional managers to fill the gaps.”

Mekong Capital's Ovel has a slightly different take on the situation. “Our best exits involve trade sales because strategic investors are willing to pay a control premium,” he stated.

Mekong’s exit strategy has also changed between the time of its $50 million Enterprise II Fund, which was launched in 2006 and its $112 million Enterprise III fund, launched in 2015.

The 10 exits from Mekong II had an equal one-third split between strategic sales, public equity offerings and sales to other private equity funds. The fund achieved a 22.7% net internal rate of return (IRR).

Ovel predicts that Mekong III will have a 50/50 split between strategic sales and public equity offerings over its 10-year life. And he does not see why returns will go down given the fund is targeting a gross IRR of about 30% and a net one in the 20s.

“We’re early stage investors,” he explained. “There’s higher risk and that’s reflected in our returns.”

Perlman also believes that returns will not be affected by increasing competition from more investors.

“More players means more capital, which means more opportunities to exit that isn’t reliant on the capital markets,” he concluded. “I’m always encouraging people to come to Vietnam as the opportunities are boundless.”


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