Vietnam’s economy is primarily fueled by small and medium enterprises (SMEs), which comprise about 98% of the market share and contribute approximately 50% to the national GDP.
Given that many SMEs struggle to access finance or possess the operational skills needed for growth and expansion, there are abundant opportunities for private equity (PE) investments to contribute to the country’s economic advancement.
A May 2023 report by BDA Partners highlighted minimal PE activity in Vietnam before the 2000s, largely attributed to an unclear regulatory framework surrounding private investments. Establishing a common legal framework for state-owned and private enterprises under the 2005 Enterprise Law marked a pivotal moment, significantly enhancing investor confidence in private company investments.
VinaCapital Group CIO Andy Ho says the firm has seen many deals over the recent years, with companies capitalising on Vietnam’s domestic consumption growth. Last year, Growtheum Capital Partners announced that it would invest US$100 million ($133 million) in Vietnam’s dairy producer International Dairy Product, while Bain Capital announced its US$250 million investment in food and beverages distributor Masan Group. Both are investments in the consumer staples sector.
The year also saw KKR participating in education provider EQuest’s US$120 million financing round, while ESR purchased a US$208 million stake in industrial park developer BW Industrial.
VinaCapital manages Vietnam Opportunities Fund (VOF), a close-ended investment trust listed on the London Stock Exchange and a FTSE250 constituent. The fund invests in private equity and private market opportunities in Vietnam. Since its inception, the fund has invested in over 200 companies in Vietnam.
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VinaCapital Group CIO Andy Ho. Photo: VinaCapital
Ho explains that numerous publicly listed companies in Vietnam still enforce restrictive foreign ownership limits. While public companies can lift these limits, fewer than 100 have opted to do so. Therefore, foreign investors may need to pay a premium to establish a foothold, especially for high-quality publicly listed companies with no room for additional foreign investment.
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These foreign ownership restrictions largely do not apply to private unlisted companies, which allows VOF to take meaningful stakes in these high-quality companies, says Ho. “Our approach involves identifying private companies, investing at an early stage of their development, and capturing their long-term growth. Moreover, we can significantly influence governance and strategic drivers within private companies.
He adds: “Our approach to investing involves understanding business owners and their motivation and ensuring that we identify good management to work with. Furthermore, we perform extensive due diligence before investing in private companies; this due diligence may include financial, legal, operational, environmental, social and governance due diligence to help us identify weaknesses and ensure that we invest in quality companies.”
VinaCapital seeks terms of investments to protect its downside in the event of business underperformance and ensure that it can participate in the growth and upside of these companies as they mature and we seek to exit.
Many of the listed equities in VOF’s portfolio originate directly from investments made with private terms or through private equity. Over time, several of these investments will become public companies and list. Historically, approximately 80% of the investments held in the portfolio come through private equity or privately negotiated means.
Path to high returns
The exit strategy is one of the most important factors VinaCapital considers before investing. Its average holding period for private equity investments is between three to five years, with an average multiple on invested capital of 2 times, delivering an average internal rate of return of over 20%. Ho adds that these investments can be sold to strategic investors or go through an IPO and list.
“The terms of our investment allow us to bring the table majority and control stakes for buyers, which can attract a premium on exit. The typical buyers of the private equity investments have been international PE investors — mostly strategic investors within the region or globally, who are willing to pay the premium and synergistic value to access Vietnam’s market rapidly,” says Ho.
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The VOF has provided annualised total returns (US dollar terms) of 17%, 6.1% and 8.9% over the one-year, three-year and five-year periods, versus VN-Index’s 11.1%, 0.6% and 5.6%, respectively.
In terms of sectors, Ho points out healthcare as promising. Recently, KKR became the biggest shareholder in one of Vietnam’s top eye hospital chains, Medical Saigon Group, although the deal specifics were not disclosed. Additionally, Warburg Pincus was considering a deal with the hospital chain Xuyen A.
VinaCapital, which also focuses on healthcare services, seeks to invest in hospitals and medical clinics. VOF has invested in two hospital platforms: Thu Cuc International Hospital in the north and Tam Tri Medical in the south, totalling 14 hospitals and clinics nationwide.
In December 2022, the roll-up of two hospital platforms in the private equity portfolio was completed, with Thai Hoa International Hospital now integrated into the larger platform of Tam Tri Medical. This merger has created a platform for 970 in-patient beds. Tam Tri Medical has also expanded by acquiring two additional hospitals, increasing the total from four to eight.
In February 2023, VOF invested in Chicilon, a digital advertising infrastructure platform dominating over 70% of the market share in in-building screen advertising. This investment reflects VOF’s typical approach, providing substantial growth capital to support a skilled local management team in a sector benefiting from domestic consumption and a growing middle-income class.
“We continuously monitor the market landscape and our portfolio allocation across different sectors. We’re currently actively assessing a high-quality PE pipeline of US$200 million in potential opportunities within the banking, logistics, consumer goods, education and healthcare sectors,” says Ho.
He sees a bright future for Vietnam’s private market, fuelled by the country’s robust economy and rapid growth in Asia.
