Done deals

Recent investments in local companies can be seen as a milestone with respect to returning interest and confidence from international private equity funds in Vietnam. 

The increase in deals conducted by private equity firms, including a small number of larger deals, appears to reflect more favourable valuation multiples and also the ongoing need among some of the larger private Vietnamese companies for expansion capital. 

According to PricewaterhouseCoopers (PwC), there were some notable private equity activities announced during the second half of 2009.

In October, TPG Capital LP (TPG) from the US and the BankInvest Group (BankInvest) from Denmark announced investments in the Masan Group Corporation (MSN), a Ho Chi Minh City-based investment holding company, for an estimated $35 million and $22 million, respectively. On completion, TPG acquired bonds convertible into equity of MSN and BankInvest acquired a 10.15 per cent equity stake. Companies that MSN own and in which it invests include Masan Food, one of Vietnam’s largest food and beverage companies, and Techcombank, a leading joint stock commercial bank that has HSBC as a strategic partner.

On November 5, 2009, MSN began trading on the Ho Chi Minh Stock Exchange. At the close its market capitalisation was VND20,580 billion ($1.15 billion), making it one of the top five private sector listed companies in Vietnam by equity value, with the third largest weighting on the VN Index.

Later, in December 2009, BankInvest purchased an additional 6,350,474 shares of MSN at a market price of VND36,300 (around $2) per share (totalling over $12 million), increasing its ownership from approximately 10.15 per cent to 11.48 per cent. 

In December, Private Equity New Markets A/S (PENM), a $90 million private equity fund established by BankInvest in 2006, raised its stake in Vien Dong Pharmaceutical JSC, a Phu Nhuan-based manufacturer of pharmaceuticals to 40.4 per cent from 6.73 per cent, by acquiring a further 33.37 per cent stake, or 3 million ordinary shares, for VND80,500 ($4.347) per share, for a total of VND 241.5 billion ($13 million), in a privately negotiated transaction. 

In September, the DWS Vietnam Fund Limited (DWS) made a $10 million investment in Hoan My Corporation JSC (Hoan My) via a wholly-owned subsidiary. DWS is managed by Deutsche Asset Management (Asia) Limited, a member of the Deutsche Bank Group. Hoan My, established in 1999, is one of the largest private healthcare providers in Vietnam in terms of scale, with a combined 620 beds and 300 physicians at four operating hospitals. An additional hospital in Ho Chi Minh City is under construction. Later in October, Vietnam Opportunity Fund Limited (VOF), an AIM traded fund managed by VinaCapital and established to target key growth segments within Vietnam, also announced that it has acquired a minority equity stake of $10 million in Hoan My. 

In September, VinaCapital’s Vietnam Opportunity Fund Limited (VOF) announced the sale of its entire equity stake in the Hilton Hanoi Opera Hotel. According to VOF reports, the exit value was approximately 10 per cent above the March 2009 book value of the property used to calculate the funds’ net asset values and represented an IRR of 23 per cent over the three years since the stake was acquired. Together with a 52.5 per cent stake in the hotel owned by VinaLand Limited, which was also sold, the two VinaCapital-managed funds held a controlling 70 per cent stake in the hotel owner.

In August, Mekong Capital announced the sale of Mekong Enterprise Fund’s investment in Duc Thanh Wood Processing Joint Stock Company (Duc Thanh), a Ho Chi Minh City-based manufacturer and wholesaler of wood products, to Vietnam Rubber Corporation. It also announced the completion of the Fund’s sale of its holding in Tan Dai Hung Plastic Joint Stock Company (Tan Dai Hung), a leading manufacturer of polypropylene and polyethylene woven bags for packaging rice, fertiliser, animal feed, and other agricultural products. The Fund originally invested in Tan Dai Hung in March 2003, the purchase representing its first investment in Vietnam. Tan Dai Hung’s shares were listed on the Ho Chi Minh City Stock Exchange in November 2007 and it sold its shares in the company from May to August 2009 via a series of open market transactions. Following sales of holdings in Saigon Gas and Duc Thanh, this was the third full divestment by the Mekong Enterprise Fund. 

In October, VOF also announced the sale of its entire equity stake in the A&B Tower office project in District 1, Ho Chi Minh City. It purchased a 50.1 per cent equity stake in the project, now under construction, in 2004. According to VOF the (undisclosed) sale price results in 17.5 per cent IRR over the four year holding period. The office tower, with a gross floor area of 25,500 square metres, is expected to open in 2010. 

Several important developments occurred during 2009 of significance to the private equity sector in Vietnam, according to PwC experts. There are a number of reasons why. Firstly, there was acceleration in the number of divestments by the more mature funds, which was a very positive sign for the industry in Vietnam, indicating that profitable exits can be successfully concluded and achieved through a variety of routes. PwC experts also observed an increase in the rate of new investments by private equity funds, especially in the second half of 2009, indicating that funds were still available to invest and that market pricing had become more attractive, although in general it appears as if the funding for such deals represented either recycled cash following divestments of older investments or cash raised in earlier periods, as opposed to funds newly raised in 2009. Lastly, 2009 saw the demise of Indochina’s private equity fund, which is now in the process of being liquidated, an event that may affect efforts at further fund raising and encourage a more cautious future approach to investing in private equity amongst fund managers.

2010 is likely to see much of the same, with the more mature funds looking to exit quite a number of mature investments and to recycle funds into more dynamic sectors or companies, and this will also create opportunities for strategic investors to acquire significant stakes in a number of private or newly-listed Vietnamese companies from the private equity funds. Certain fund managers are looking to raise new funds in 2010 but admit that the environment is still very challenging in this regard. However, most still have cash available to invest, while regional and global fund managers will be focusing greater attention on Vietnam due to its economic performance and prospects, hence the opportunities for deals appear positive. “Pricing for private equity investments, while still expensive relative to other countries in the region, remain below the levels seen in 2007 and to some extent reflect the rapid rates of growth being achieved by many private companies,” according to PwC experts. 

The combination of the above factors leads PwC experts to expect an increase in divestments from the established funds and an increase in new investments by Vietnam-focused and regionally-focused funds during 2010. Increasing interest rates may also encourage cash-hungry private Vietnamese companies to turn to private equity for expansion capital, creating more opportunities for fund managers.

According to Mr Ken Atkinson, Managing Partner of Grant Thornton Vietnam, more and more private equity investors are seeking to acquire strategic stakes in local Vietnamese companies as part of their investment portfolio. “The continued growth in the domestic economy during a globally uncertain investment period offers opportunities that other economies cannot provide,” he said.

A hard role to uphold

The Vietnamese prime minister at the opening session on Wednesday of the National Assembly put the partial blame on the Government and relevant ministries for the collapse of the country’s shipbuilding giant Vinashin.

An 18-page report on the Vinashin debacle sent to lawmakers who are attending the year-end meeting of the legislature reveals the Government was fooled by Vinashin leaders. In many instances, Vinashin’s top management sent to the Government the debt-laden company’s reports that had been falsified to bloat earnings.

Vinashin is part of the broader picture about the problematic management of state-owned enterprises, particularly conglomerates and corporations.

“The role of the state as an administrator and an owner at state-owned enterprises in general and conglomerates in particular has exposed problems and failed to catch up with changes in a market economy,” says a National Assembly Economic Committee review of the Government report on social and economic performance. “Mechanisms for scrutinizing, supervising, auditing and managing corporate finance have proved to be inefficient.”

The state corporate sector has got a lot of handsome privileges from the Government, such as easy and cheap access to capital and resources like land and minerals, which are still a far-fetched dream for the non-state sector that consists of local private and foreign-invested firms.

With such favorable treatment, state-owned enterprises should have led the charge on the country’s development front as had long been desired by the authorities. Surprisingly, however, the state sector has had the lowest growth rate and created the lowest number of jobs, according to Saigon Tiep Thi newspaper.

The paper quotes statistics as indicating that the state corporate sector’s ICOR (Incremental Capital Output Ratio) – the extra capital needed to increase one unit of output – has kept rising over the years, now at between 8 and 14. Meanwhile, the private sector with limited incentives from the Government has proved to be more efficient with the ICOR index ranging from 3 to 5, and thus contributed significantly to the nation’s growth.

Nguyen Quang A, a high-profile economist, says half the total amount of investment in the economy is sucked into the state corporate sector. But this sector’s contributions to the economy have been largely insignificant despite the huge investment being funneled into state firms by the Government. What’s more, they have been steadily falling over the years.

Vu Thanh Tu Anh, director of research at the Fulbright Economics Teaching Program in HCMC, says in an article published in Thoi bao Kinh Te Saigon of Saigon Times Group this week that state-owned enterprisers generated 30% of GDP in 2001-2005 but the ratio dipped to 28% in 2006-2009.

Their contributions to GDP growth plunged from 33% in 2001-2005 to 19% in 2006-2009, Anh says, because the state corporate sector’s GDP growth slowed down from 7.6% to 4%, half the percentage achieved by the private sector.

The state corporate sector workforce has also declined over time. A survey by the General Statistics Office shows the combined workforce of state-owned businesses slid from 44% in 2001-2005 to 24% in 2006-2008, Anh says, adding that even worse, massive layoffs happened at these companies with new job creations dropping from minus 4% to minus 22% in the corresponding periods.

The role of this sector in the manufacturing industry has also tapered off though the Government has taken a vision to steer Vietnam toward an industrialized economy by 2020. “If we look at industrial production, a focus of Vietnam’s industrialization strategy, state-owned enterprises have a very humble role,” Anh says. “In 1995, the proportions of industrial production value in the state and private sectors were equal but changed to 20%-80% in 2009.”

The picture about the state corporate sector is pretty clear now. It has failed to live up to expectations that it leads the economy. Resources should have been channeled into where efficiency of capital use is greater, more jobs are generated, and productivity is higher.

Another high-profile economist, Le Dang Doanh, has cast doubt over the lead role of state-owned companies. Speaking to Tien Phong newspaper late last month, he proposed the phrase “The state economic sector upholds the lead role” be removed from the draft document to be presented at the National Party Congress slated for January next year.

Sticking to this ideal is stirring up controversy, especially at a time when Vinashin remains a hot-button issue, he says, and Vietnam needs real conglomerates, not those technically merged via administrative decisions.

The state has kept insisting on championing a level playing field for all, so it is a paradox to emphasize the lead role of the state corporate sector only, he says.

Meanwhile, an editorial of Thoi bao Kinh te Saigon suggests putting an emphasis on the role of the state in macro-economic policymaking rather than the lead role of state firms. The rationale of this suggestion is that in the aftermath of the global financial crisis, developed economies have acknowledged the important role of the state in economic regulation and control and in coping with market shortcomings to reduce market volatility bred by greed or asymmetric information.

“It is the state that, through tools such as taxes and investment incentives, can orient businesses in all sectors toward the fields that most benefit the economy,” says the editorial.