Theproblems
PrivateEquityisabroadandcomplexassetclasswithintheAlternativeInvestme nts.I t s m a r k e t i s s t r u c t u r e d w i t h s p e c i a l i z e d P r i v a t e E q u i t y f unds.Th einvestmentsinPrivateEquityarestillfreshandattractiveinvestment toolinVietnambutarestronglydevelopinginemergingmarketlikeChina, Thailand,an dI nd on esi a et c T h e rec en t d e v e l o p me n t in Vietnamstoc kmarketleadPrivateEquityInvestment(PEI)isonthedemandofmanyinves tors.Thereforeinthatcontext,thequestionofhowPrivateEquityinvestsn eedbeanswered.
Thisthesisa i m t o s t u d y h o w t o i n v e s t inPrivateE q u i t y a n d outlines o m e p r i n c ip a l s ofPEIforinvestor
Objectivesand Aims
Witht h e s e aboveo b j e c t i v e s , t h i s t h e s i s a i m s atgivinga basictheor eticalfo un d at ion forinvestorswhoarenowconsideringinPrivateEquityInvest mentandt h e n studyt h e factofo p e r a t i o n o f P E I i n emergingmarketandVietn ammarket.
Research questions
Scopeof work
Fort h e factresearch,t h i s thesisw i l l s t u d y a n d d e s c r i b e t h e P E I i n d u s t r y th ro ugh studyitsassociationsoperationreportsandalsoinheritr esearchresultsf r o m s o m e institutionsw h o d e e p l y s t u d y aboutt h i s P r i v a t e E q u i t y I n d u s t r y
Datasources
Forthetheoreticalpart, datasourcesaretextbooks,articlesfrominternet.A sf o r thefact,thedatasourcesaremainlyfromsomePEIassociations’reports.F o r thecaseMekongcapital,thefigureandlessonarewithdrawnfrommanag ementinterview.
Methods
Choiceofinterviewees: T he choice ofi nt er vi ewees wasa rigidprocessan dv ery importantsinceiftheintervieweedoesnotholdtherightknowledget heen tire thesismightendupuseless.Theauthorchoosessomeinvestment managersw h o a r e e x p e r i e n c e i n privatee q u i t y investmenti n d u s t r y f o r int erviewing.
Interviewstructure: T h e t w o l o n g e r i n t e r v i e w s w e r e c o n d u c t e d i n a qualita tive manner,but withsomewhatspecificquestions andmakesur ethateverytopicofinterestwastreatedtheinterviewerfollowedamanualwithth ekeysubjects.
Significance
The thesismaycontributeasmallparttothedevelopmentofinvestmentindustry,whichh asbeenemerginginVietnam.Sincetheinvestmentindustryi s boominginVietna minrecenttwoyears,manyinvestorscanimplementtheknowledge studiedint histhesisfortheirbusinessactivities.
Limitation
Thebiggestlimitationofthisthesisis d uet o the freshness ofPrivateEquityI n v e s t m e n t i n Vietnam,sof e w academicalsr e v i e w s h a v e b e e n a p p l i e d a n d p r o v e d
Theotherlimitisfrom casestudymethod.Thismethodcannot coverallthet h e o r e ti c a l issuesofPrivateEquityInvestment.Thus,laterthiscase,thisthesison lystudiestheoverallperformanceofPEI.
Expectedresults
Thet h e s i s e x p e c t s t o givet h e systematicalt h e o r y i n P r i v a t e E q u i t y Inv es tm ent, andgivesomeprincipalsguidelineforinvestors.
Outline
VietnamInvestmentContext
VietnamnowisconsideringasanemergingtigerofAsia.Justoneyearafterjoini ngWTO,V i e t n a m r a p i d l y b e c a m e attractivedestinationo f a l l d y n a m i c i n v e s t o r s T h i s r e s u l t c o m e s a l o n g b y s o m e f u n d a m e n t a l f a c t o r s i n m a c r o economicsview:
Vietnam'se c o n o m i c g r o w t h rateh a s i n t h e r e c e n t p a s t b e e n secondo n l y t o China inAsia,averaging7.4%fortheperiod2000-
[Source:DeutscheBank,InvestmentReport2007-'UnderstandingVietnam,page3]
Ont h e o t h e r h a n d , i t s developmentleveli s morel i k e I n d i a ' s w i t h n o m i n a l GDPpercapitafor2006estimatedatUSD715,closetoIndia'sUSD765and lessthanhalfofChina'snearlyUSD
2,000.Incomparison,Vietnamisaspoora s India,butisgrowingatalmostthesames peedasChina(India’sgrowthhasa c c e le r a te d , though).
[Source:DeutscheBank,InvestmentReport2007-'UnderstandingVietnam,page3]
G model,w h i c h f o r e c a s t s realGDPgrowthformorethan30industrialcoun triesandemergingmarketsu n t i l 2 0 2 0 , V i e t n a m i s l i k e l y togrowa t a b o u t thesames p e e d a s Indiaa n d C h in a inthenextoneandahalfdecades−atanesti mated5.7%p.a.Hence,in2020, Vietnam’sG D P p e r c a p i t a w i l l h a v e r e a c h e d a p p r o x i m a t e l y t h e samelev elasChina’stoday.
[Source:GlobalEconomicsPaperNo165-Vietnam:TheNextAsianTigerIntheMaking, page5]
[Source:GlobalEconomicsPaperNo165-Vietnam:TheNextAsianTigerIntheMaking, page5]
InlongtermperspectiveVietnamhasbeentheattractivedestinationforinvest orwhow a n t s tog a i n significantp r o f i t a l o n g w i t h t h e d e v e l o p m e n t o f th isc o u n t r y I n t h i s opportunityc o n t e x t , w e b e l i e v e t h a t p r i v a t e e q u i t y w i l l gainsignificantconsiderationanddevelopmentinnearfuture.Thisfactis notonlyprovedbyattractivecharacteristicofPrivateEquityasitsamazingpe rf or m an ce butalsobyitsactivecontributiontobusinessactivitiesofi n v e s t e e companies.
PrivateEquity inVietnam
ThereareanumberofinvestmentfundsfocusingprimarilyonVietnamattheprese nttime.Broadly,thefundsoperatingprimarilyinVietnamcanbecategorizedasfol lows:
2007 I n thisp e r i o d f o r e i g n a n d domesticinvestorssawa boomingi n t h e s t o c k marketwiththe averagereturnover100%.Thisincredible taleattrac tsmoreandmorefunds penetratingtoVietnam.Somanyreportsof credibilityi n s t i t u t i o n s referredVietnamasthenewdestinationofthiscentury.Investm entinVietnamwasconsidereda s h i g h returnand fashioninthisperiod.
Ofa l l p r e s e n t investmentf u n d s i n V i e t n a m , 6 7 % o f f u n d s w e r e e q u i t y m i x fu nd ;theirmajorobjective&aimarelistedequity,privatizedSOE,andsma llportionmixo f privatee q u i t y 2 8 % o f thesef u n d s f o c u s e d o n r e a l – e s t a t e investmentandwealsosawtheboominginrealestateinrecent2year2006 –2 0 0 7 Itistheresultofhugeinvestmentflowtothissectorinthisperiod.
70%ofinvestmentfundschosengeneraliststrategy.Theirmajorfocuseswered r a m a t i c growthinrevenueorearningoffirmratherthanthesectororindustryiti nvolve.28%ofthemspecializedinpropertyinvestment.Theonlys e c t o r t h e y i n v e s t e d a r e r e a l – estate.T h e s e f u n d s u s u a l l y h a d h u g e capitaland longfundlifetofollowma nyhugepropertyprojects.
Fund Manager Capital Fundstructure Generalstrategy
Cayman Indochina- atleast70%investedcompany listed inVietnam onLondonStock
Focusonkeygrowthsectorsof Exchange(AIM) thedomesticeconomy,seekingto capitalizeontheirbroadnetworkofloc albusinessleadersandgovernmentoffi cialstorealizesustainablecapitalappre ciationandprovideattractivelevelsof r e t u r n forinvestors
Vina USD790 Cayman Indochina-atleast70%invested Capital million company listed inVietnam
(NAVaso f 30 onLondonStockE xchange(AIM) Focusesonthekeygrowthsegments within Vietnam’s
June20 08) emergingrealestatemarket,in c l ud i n gresidential,o f f i c e , retail,indus trial , andleisureprojects
USD249Cayman Providea diversifiedportfolioofmilli oncompanylistedVietnam-based investments,
(NAVasonLondonStocki n c l u d i n g listedandOTCo f 3 0 Exchange( AIM)securities,stakesinVietnameseJune privatecompanies,andother
Investsinlistedandlistablemillioncompanylistedsecuritieso n l y Thi sincludesdebt(NAVasonLondonStocka s wella s e q u i t i e s andb o t h of 3 0 Exchange(AIM)offshoreanddomesticsecurities.June
Longt e r m capitalgrowthbymillioncompanylistedinvesting principally in(NAVasonLondonStockVietnameselistedcorporates,oro f 3 0 Excha nge(AIM)thoselikelytolistonthedomesticJune stockmarket,whichopenedin 2008)
Thep r i v a t e e q u i t y fundraisingh a s i n c r e a s e significantlyi n recenty e a r w i t h t h e boomingininvestmentflowtoVietnam.In2006,thefundraisingofp r i v a t e fundare5timesasitsinitialyearin2002.In2007,newcapitalraisinggrew5 3 % as previousyear.Comparetor e g i o n , t h e p r i v a t e e q u i t y f u n d s o f V i e t n a m ar estillatsmallsizebutfastgrowth.
Fund Manager Capital Generalstrategy Typicalinvestment
VietnamandEgyptasitske y countries of PENMinvestedin operation AAAAssurancein
PENM's investment focus is on unlisted companieswitha proven
PENMInvestedin track record and a strongAsia Fan in February 2008 future potential. development
The capital from PENM will typically be applied PENM invested in Duc Thanh in 2007 towards expansion:
Growing the business via investments acquisitions.
PENM invested in Eurowindow in 2007 or
Focusing on growth- equity investments in the first generation of private companies in Vietnam MEF invested in Lac
MEF Invested in Gold Sun in 2005
MEF II invested in Ngo Han in 2004
Investing in companies that are likely to have net profit per share grow at an average rate of at least 30% per year during the period in which the MEF
MEF II invested in ICP in November 2006
MEF II invested in Ngo Han in 2007
Viet Focusing in pharmacy industry and acquire high growth revenue & GMP USD30 standard companies
MekongCapitalisaVietnam- focusedprivateequityfirm.Establishedin2001,andwithateamof50+fullti mepeopleinourofficesinHoChiMinhCity andHanoi.
TheMekongEnterpriseFund,Ltd isa$31million privateequityfundfocusingongrowth- equityinvestmentsinthefirstgenerationofprivate companiesi n Vietnam.T h e fundmade1 0 i n v e s t m e n t s b e t w e e n 2 0 0
TheM e k o n g EnterpriseF u n d I I , L t d i s a $50m i l l i o n privatee q u i t y fund whichfocusesongrowth- equityinvestmentsinthenewergenerationofpriva te companiesinVietnam, whichareoftenfastergrowingthantheearliergenerationofprivatecompanies. Thesecompaniesweretypicallyfoundedbye n t r e p r e n e u r s withahighleve lofinternationalexposure,eitherasaresultofw o r k i n g orstudyingoutsideofVie tnam,orhavingbeeninseniorm a n a g e m e n t positionsatmultinationalcompani esinVietnam.TheFundf o c u s e s o n m a n u f a c t u r i n g , branding,distribution a n d retailandh a s a typicalinvestmentsizeof$5million.
TheV i e t n a m AzaleaF u n d , Ltd i s a $ 1 0 0 millionf u n d whichf o c u s e s o n m a k i n g minorityinvestmentsinthepre- listedandlistedsegmentsofthep r i v a t e equityinvestmentspace.Thefundtarget sVietnamesefutureblue-chipcompanies,bothprivatelyandformerlystate- owned.
F u n d " , i s a pr iv at e equityfundfocusingonwell- managedprivatebusinessesinVietnam.T h e F u n d w a s l a u nc h e d i n 2 0 0 2 w as w a s f u l l y i n v es t e d in 1 0 c o m p a n i e s b ytheendof2005.
TheMekongEnterpriseFund’sfairmarketNetAssetValue(NAV)wasapproximatel y$31millionasof31March2008.
Thea v e r a g e a n n u a l r e v e n u e g r o w t h ratef o r t h e Fund'si n v e s t e e c o m p a n i e s hasb e e n 3 4 5 % b e t w e e n t h e p e r i o d i n w h i c h i t i n v e s t e d and31December2006.Meanwhile,averagea n n u a l n e t p r o f i t growthh a s b e e n approximately4 6 9 % o v e r t h e s a m e p e r i o d Netprofithasgrownfa stert h a n t h e rateofrevenuessince,theaveragenetprofitmarginshavegrownatt hesecompanieso v e r theperiodthattheFundhasbeenashareholder
TheF u n d ' s l i f e is expectedt o b e 1 0 ye a r s f r o m thedate o f it s l a u n c h o n 2 2 Apr il2002.WhentheFundmakesaninvestment,itexpectstoholdtheinvestmentf or5to8years,butitcouldbelongerorshorterdependingonthecircumstances.
TheF u n d i s uniquef r o m o t h e r investmentf u n d s lookingf o r i n v e s t m e n t s i n V i e t n a m inthefollowingways:
1 TheFundinvested onlyinprivate sector companies foundedbyloc alentrepreneursinstead offoreign-invested companiesorprivatized/ equitizedcompanies;
3 TheF u n d p r o v i d e s s i g n i f i c a n t levelsof v a l u e - a d d e d assistancet o t h e companiesi n whichi t invests,i n c l u d i n g h e l p i n g companiesm a k e t h e c h a n g e s necessarytoprepareforsuccessfullis tings;
5 TheF u n d a i m e d t o o n l y i n v e s t i n companiest h a t havestrongma n ag e m en t t e a m s a n d a commitmentt o c o n t i n u o u s strengthenin go f theirmanagementteams;
6 TheFundwas veryselectiveabouttheinvestmentsthat itmakes,preferringt o m a k e fewerinvestmentsi n o r d e r t o o n l y i n v e s t i n excellentcompanie swithahighlikelihoodo f being successfulinvestments.AsaresultnoneoftheFund's10investmentshav efaileda n d allhavegrownsincetheFund'sinitialinvestment.
I n d e x It’sbecausem a j o r p a r t o f M e k o n g as s e ts wereallocated in gr owth& privatecompanies These companies haven’tl i s t e d o n t h e sto ckm a r k e t , s o t h e i r sharesa r e illiquiditya n d l e s s v o l a t i l e thanVN- Index.
Thep e r f o r m a n c e r e t u r n a l s o p r o v e d f o r t h e c h a r a c t e r i s t i c ofp r i v a t e e q u i t y investment.Dislikelistedequityinvestment;theinvestorofpr ivateequityhasgenerallya negativec a s h - f l o w d u r i n g thef i r s t y e a r s o f t h e investmenta n d t h e n startst o g e t h i s r e t u r n Theexpectationreturno f privatee q u i t y f u n d s highlydependonthep erformanceofinvesteecompaniesandtheirattempttocreateaddedvaluetotheent repreneur.
Lac Viet LtdOctober 2003 Growth stageThe revenues of Lac Viet have grown by 143% over the period that MEF has invested in.
2006 Growth stageICP’s consolidated revenues in
2007 were $20 million, a 60% growth from previous year
NgoHan April2004 Growthstage Revenueshavegrownat49% peryearsincethen
Otheri n f o r m a t i o n o f investee companiesb u s i n e s s a r e d i sc l o s e d as following table
LacVietisoneoftheleadingITcompaniesinVietnam,provid ingarangeofhardwareandsoftwaresolutionstob u s i n e s s andeducationalcustomers.LacViethasdevelopeda n u m b e r o f p r e - p a c k a g e d softwareapplicationsf o r t h e businessande d u c a t i o n a l markets,someo f whicha r e l e a d e r s inth eirrespectiveproductcategoriesinVietnam,sucha s t h e A c c N e t a c c o u n t i n g software.L a c Vieta l s o h a s a r a p i d l y g r o w i n g softwareou tsour cing division.
( 1 ) cartonpackagingand(2)kitchenware.Goldsunprodu ceshigh- qua lit y cardboardcartons,usedforthepackagingofcon sumerp r o d u c t s s u c h asc o n s u m e r e l e c t r o n i c s , ho usehold an df o o d p r o d u c t s Goldsunm a n u f a c t u r es anddistributesmetalk i t c h e n w a r e i n c l u d i n g g a s s t o v e s fo r retail,stainlesssteelpansandotherkitchenuten sils.
InternationalConsumerProducts(ICP)isoneofth efastestgrowingFastMovingConsumerGoods(FMCG)co mp a n ie s i n Vietnam,w i t h w e l l - e s t a b l i s h e d b r a n d s suchasVegy,OCleen,X-Men,Dr.Menaswellas
NgoHanistheleadingmanufacturerofmagnetwireinVi etnam,withapproximately40%marketshare.Thec o m p a n y p r o d u c e s b o t h r o u n d a n d r e c t a n g u l a r m a g n e t wireo f v a r i o u s s i z e s M a g n e t w i r e i s u s e d p r i m a r i l y i n motors,transformers,ballasts,voltagestabil izers,electroniccomponentsand otheritemsusedto g enerateo r transform electromagnetic fields.NgoHa nhasastrongcultureofcontinuousimprovementandisth ef ir st V i e t n a m e s e o w n e d companyt o implement a S i x Sigmaprogram.
GoldenG a t e J o i n t StockCompanyi sr e c o g n i z e d a s thepioneerandthetopmushroomhotpotrestaurantc ompanyinVietnamundertheAshimabrand.Theirownu niquesellingpointsarereflectedbyanewcuisineconceptt o g e t h e r witha distinguishedservicem a n n e r AsofJ une2008,theCompanyhas7AshimarestaurantsinHanoi, HoChiMinhCityandHaiPhong.
PotentialInvesteeCompanyandMekongCapital’sBusinessDevelopmentMana gerwillmeettodiscussthecompany’sintentionsandt o learnmoreaboutMek ongCapital’sbusinessmodel.
AnInvestmentTeamledbyaPrimaryClientManagerfromMekongCapitalwillp erforma detailedinvestmentappraisal,meetk e y peoplei n themanagementt e a m anddevelopa financialmodelwithfinancialp r o j e c t i o n s oftheinvest eecompany.
TheappraisalprocesswillenableMekongCapitaltoidentifyopportunitiesf o r t h e potentialinvesteec o m p a n y t o makeimprovementso r differentiateitsel ffromcompetitors.
Basedonafinancialmodel,MekongCapitalwillprepareaValuationProposalofth epotentialinvesteecompanytobediscussedwiththeo w n e r s ValuationProp osalproposeswhatMekongCapitalbelievesisthefairvalueofthepotenti alinvesteecompany.
MekongCapitalwilloutlineandagreeinprinciplet h e changesthatthepotentialin vesteecompanymustundertakeandthevalue- addedworkthatMekongCapitalwillcontributetomakethecompanysuccessful.E xamplesoftheseincludes:listingplans;tax;auditedfinancial
Implementation statements;corporategovernance;company’sCharterreview;h u m a n resource andleanmanufacturing.
Ifthecompanydoesn’talreadyhaveauditedfinancialstatementsforarecentperio dbyanacceptableauditor,itwillbenecessarytohavearecentperiodauditedbyana uditorwhichisacceptabletoMekongCapitalbeforetheMekongEnterpriseFundca ncompleteitsinvestmentinthecompany.T h e reasonf or this issothatMekong Capitalcanc onfi rm thec om pa ny’ s profitmargins,netassetvalueandotherf actorsthatmighthaveanimpactonthevaluationofthecompany.
MEFwillappointalawfirmtoperformlegalduediligenceontheinvesteecompan ytoensurealllegalissuesareresolvedtotheextentpossible.Timeframe:Approxim ately4weeks.
Ifinvesteecompanywasalimitedcompany,jointstockconversionisrequiredbefor ereceivinganinvestmentf r o m MEF.MekongCapitalcanassistwiththeconversi onifnecessary.
Shareholder’sAgreementnegotiationa n d c o m p a n y ’ s Charterr e v i e w T imeframe:Approximately2-3weeks.
Asourinterviewtime withMekonginvestment managersaboutthepros pectofprivateequityinVietnam,t h e y r e s p o n s e w i t h t h e i r s t r o n g l y b e l i e v e t h a t P r iv a t e EquityIndustryw i l l h a v e v e r y brightfuturei n V i e t n a m
D i f f e r e n c e f r o m o t h e r e q u i t y f u n d , p r i v a t e e q u i t y usuallyr e q u i r e f u n d m a n a g e r s f o l l o w closelytothecompanygrowth;italsorequirethefundc ontributeaddedvaluet o t h e b u s i n e s s , i m p r o v e qualityo f c o r p o r a t e g o v e r n a n c e a n d f i n a n c i a l transparency I n theirm i n d , p r i v a t e e q u i t y i s r e a l l y w i n – winc o o p e r a t i o n Suchinvestmentsas:GoldSun;Asima,LacViet… areprovedfortheiractivecontributioni n c o m p a n i e s ’ b u s i n e s s F o r t hequestion“whatarethemajort h r e a t ofaPrivateEquityInvestment”,theiropinion sarefollowingas:
The initial gap in the emerging private equity market stems from the lack of accuracy, suitability, and transparency in financial and operational information provided to investors, along with managers' reluctance to embrace accountability to external parties The intricate and often contentious relationships between investors and company managers are exacerbated by weak corporate governance practices, particularly in family-owned firms, which are prevalent in developing countries These firms typically feature entrepreneurs who build successful businesses with minimal external capital or shareholders, leading to a blending of personal and corporate interests and a lack of accountability to outside stakeholders Deep-rooted traditions of autonomy, secrecy, and independence within the corporate culture of many developing country firms often go unchallenged until the necessity for outside capital arises Only a few entrepreneurs have engaged independent auditors adhering to international accounting standards, which are essential for attracting professional investors.
Prospective investors rely heavily on entrepreneurs for essential information to evaluate company performance and value Common practices, such as maintaining multiple sets of accounting records to evade taxes, hinder due diligence efforts and obscure the true financial picture Poor bookkeeping and lack of transparency can delay access to critical information, including environmental liabilities and legal disputes, which may alter investor perceptions Additionally, the need for capital often does not outweigh investors' resistance to management that is unwilling to implement necessary changes for increased transparency and value Consequently, fund managers frequently cite assessing the competence and integrity of entrepreneurs as their most challenging task during due diligence This corporate governance issue persists even after a deal is finalized, as investors require a consistent flow of accurate financial and operational data to monitor performance and engage in significant decisions affecting future outcomes Typically, a newly structured board of directors is established, along with clear governance procedures that define the relationship between management and the board.
Ine m e r g i n g m a r k e t , h o w e v e r , minoritys h a r e h o l d e r s e n c o u n t e r a m u c h differentr e a l i t y , w h e r e n e w b o a r d m e m b e r s h a v e l i t t l e l e v e r a g e t o e x a c t t h e necessaryinformationifmanagementchoosestocircumv entagreements,furthe r underminingtheoutsideinvestor’sabilitytoorchest rateanacceptablee x i t
Weak corporate governance is exacerbated by legal systems that lack reliable dispute resolution mechanisms Well-constructed and enforceable legal contracts are essential for all financial transactions, regardless of the country Investors, including banks and equity providers, often have limited control over the firms they invest in and rely heavily on the legal system to safeguard their rights However, early private equity experiences in emerging markets reveal that even well-defined agreements offer minimal legal remedies in cases of serious disputes with management This issue is further complicated by local owners who are skilled at navigating the legal system, putting investors at a distinct disadvantage in judicial matters Inadequate shareholder protection has led to a significant backlash, prompting many fund managers to alter their investment strategies or withdraw from countries altogether unless they can secure majority control, stemming from their challenging experiences as minority shareholders.
The private equity cycle is fundamentally driven by the need for a profitable exit within a specific timeframe In developed nations, a robust IPO market is essential for the success of the private equity industry, as it provides crucial exit options Without a credible IPO market, private equity firms are largely limited to management buyouts and sales to strategic investors or later-stage financial investors Empirical evidence indicates that exits achieved through IPOs tend to maximize firm value compared to alternatives such as selling shares to strategic investors or returning them to original owners.
Aslongasthereisaninternationalagreementabouttheprivatesector’sessentialrol e int h e developmentp r o c e s s , alternativef i n a n c i n g techniquessucha s p r i v a t e e q u i t y mustr e m a i n o n c e n t e r s t a g e G l o b a l i z a t i o n , w i t h i t s emphasisonopenmarkets,lowerbarrierstotradeandinvestment,and cross- bord ercompetition,w i l l s t r e n g t h e n t h i s t r e n d b y f o s t e r i n g i n t e n s e s t r u g g l e amongb o t h c o u n t r i e s a n d f i r m s f o r scarcef i n a n c i a l r e s o u r c e s Somegovernmentsalreadya r e respondingb y passinglegislat iont o b e t t e r p r o t e c t t h e r i g h t s o f m i n o r i t y shareholdersa n d b y l i b e r a l i z i n g b u r d e n s o m e t a x regulationsthatdiscourageforeigninvestors.Th isnewenvironmentalsofavorsso- calledn e w economycompanies,w i t h m a n a g e r s w h o a r e l e s s resistanttothird - partyinvestorsandmoreacceptingofinternationalstandardso f corporategov ernance.
Despite early setbacks, there are encouraging signs that a private equity rebound in emerging markets is both desirable and credible Key players must implement innovative adjustments that align with the current realities of this investment landscape By adopting a new approach, the potential of private equity can begin to be fully realized.
Lessonsfromnaturalcharacteristicofprivateequityinvestment
Invest toPEIdirectlyusually requirealongtermholdingwithtermof5-10ormoreyearsunderthelimitedpartnershipform.Therearenomarketsf o r th esep a r t n e r s h i p interestsa n d theyc a n n o t b e liquidatedo r e a s i l y transfer red.
IRRincreases withfundyear,whereasi t s standard deviationdecreases Th is me a n s thatlongmaturityinvestmentsmean- variancedominateshortterminvestments.Investmenti n P r i v a t e E q u i t y i s th usn o t compatiblew i t h i n v e s t o r s whoha v e a sho rt te rm horizon,like s t o c k ana lys tso r p u b l i c inv es tors.
Theultimate levelofreturnsreceivedbyinvestorsishighlydependentonthes killofthefund-of- fundsmanagerandt h e i r accesstogoodinvestmentpartnershipsandthecompetenc eofpartnershipmanagementisthecoreenergytoacquireprofitforPEI.
InformationAccess- theaccessinformationiscrucialcomponentofPEI.Butt h i s i s s u e i s i m b a l a n c e i n t h e p r i v a t e e q u i t y investment.T h e informationisl i m i t e d a n d manyt ransparencyissuessucha s t h e a c c u r a c y , t i m e l i n e s s , a n d transparencyoff inancialandoperatinginformationprovidedtoinvestors,andt h e w i l l i n g n e s s o f m a n a g e r s t o s u b j e c t t h e m s e l v e s t o s o m e degreeo f accountabi lity tooutsidersareusuallyconstrained.
B e c a u s e m o s t a s s e t s a r e v a l u e d a t c o s t u n t i l a measurableeve ntoccurs,privatecapitalinvestmentsappeartobemorestablei n pricethantheyact uallyare.Inaddition,managementfeesandsomelossesar erecognizedearly.Thisgivesrisetothe“Jcurveeffect.”
Lessonsforinvestorswhoareconsideringallocatehisassetstoprivateequityfunds48
The ways of investinginprivate equity
1 Privateequityfund :suchfocusprivateequityfundsasMekongcapital,Ban kinvest(PENM),IDG…etcarespecializedininvestingtoprivate equity.Becomingshareholdersofthesefunds,theinvestorswillreceivequ arterlyreportsandmonitorwhatentrepreneursfundsinvestinperiod? Sizeofinvestment?Thebusinessactivitiesreport?
2 Fundoffunds :Inotheremergingmarkets,thegovernmentallowstos e t up fundoffund(FOF)typewhichispermittedtoinvesttootherfundlikeprivat eequityfund.TheinvestorcanbuyshareofFOF,theFOFthenbuyshareof PEfundwhichspecializeininvestingtoprivateequity.
3 Investmentmixfunds :Somefundswithinvestmentmixstrategywilli n v e s t aportionofitscapitaltoprivateequity.Ifinvestorareinterestedi nthesev ehiclestheycaninvesttothesefunds
Thee x p e c t e d r e t u r n i s t h e r e l e v a n t assumptionfromt h e p o i n t o f v i e w o f a longterminvestor.Itisthereturnthattheassetwillexperienceoverthelong- term.
Thei n v e s t m e n t i n P r i v a t e E q u i t y i s n o t doneatoncelikeforaclassicstock.Th einvestorh a s g e n e r a l l y a n e g a t i v e c a s h - flowduringthefirstyearsoftheinvestm entandthenstartstogethisreturn.Thisi sillustratedinbesidefigure.
Challenges: liquidity and flow of information
Thedevelopmentofthesecondarymarketsforprivateequitypartnershipinterestsh asalsomadeinvestorsinPEfundpainfullyawarethatsuchinvestmentsar emoredifficulttosellthandirectpartnershipinterests.Ina d d i t i o n , thevaluati onsofsuchPEfundinterestsusuallyincludeafullmark- downofthefuturemanagementfeespayabletothePEfundmanagers.Whilet hesaleofsuchinterestsonthesecondarymarketmaynothavebeenforemosto n i n v e s t o r s ’ mindswhent h e y madet h e commitments,t h e d i f f i c u l t i e s e x p e r i e n c e d b y i n v e s t o r s whoh a v e t r i e d t o d o s o h a s c e r t a i n l y contributedtothesomewhatheightenedskepticismthatinvestorsdisplayt o w a r d s PEfundtoday.
Theu s e o f f r e e d o m o f informationlegislation,t o demandi n c r e a s e d p u b l i c d i s c l o s u r e bylimitedpartners(LPs)ofthedetailsoftheirprivateequityinve stments,hasc a u s e d a g r o w i n g numbero f G P s t o requirei n v e s t o r s t o e n t e r i n t o non- disclosureagreementsthatlimittheabilityoftheirLPstodistributeinformation.InthePEfundindustrythistrendhascausedadecline int h e c o m p r e h e n s i v e n e s s a n d d e t a i l o f r e p o r t i n g i n f o r m a t i o n a n d t h u s reducedthe benefito f informationsharingan dmarketins ig ht s thatinv estorsm i g h t otherwisehavereceivedasaresultoftheirPEfundrelationships.
Lessonforfundmanagerswhoareconsideringallocatehisfundcapitaltopri v at e e quity
Trenda n d s o u r c e o f fundraising:t h e trendo f fundraisingdetermineactionp l a n ofinvestmentfundmanagers,withthesignificantgrowthoffundraising i n V i e t n a m s i n c e 2 0 0 6 a n d thef o c u s i n g o f capitalisto n e m e r g i n g m a r k e t , Vi et na m i n v e s t m e n t m a n a g e r aren o w facingw i t h h u g e o p p o r t u n i t y t o r a i s e theirfundsize.
In2006,thefundraisingofprivatefundare5timesasitsinitialyearin2002.In20 07,newcapitalraisinggrew53%aspreviousyear.Wehaven’tseenthedramat icgrowthlikethisinthepastmanyyears.Fuelofthisgrowthwastheboomin ginFDIflow,investmentactivitiesandstockmarket.
Mosto f p r i v a t e e q u i t y f u n d s f o c u s o n g e n e r a l i s t s t r a t e g y T h e y c h o s e h i g h returnmarginwithsustainablesalegrowthentrepreneurs.Theyalsoli mitt h e i r investmenttotakethemwithhighcareandeffort.Theyarereallyact iveincontributingmoreandmorepreciousadvisorytoentrepreneurs.
Fromrecommendations o f professionalsi n t h i s ne wl y industry,the investme ntmanagersneedmake suretheseprinciplespresentedintheirinvestments:
The management role of private equity investors in emerging markets is crucial, particularly due to the unique challenges in creating viable exit opportunities Fund managers need to reassess the professional expertise necessary for these tasks, acknowledging that the analytical and negotiation skills required for making investments differ significantly from those needed to enhance corporate value post-investment Initially, the industry overly relied on former investment bankers who focused on closing deals and moving on, underestimating the time required to monitor portfolio company performance Active involvement, including attending board meetings, reviewing financial reports, and observing performance closely, is essential Professionals must engage in the challenging tasks of strengthening corporate governance practices, restructuring management, and positioning companies for profitable exits.
Morediscerningd e a l selection F u n d s arebecomingm o r e p r o a c t i v e i n d e a l s e l e c t i o n , ratherthanwaitingforbusinessproposalstolandontheirdesks orforinvestmentbankerstomakeapitchonbehalfofaclient.“Thebestdealsar eo n e s w e c r e a t e I n o u r mosts u c c e s s f u l t r a n s a c t i o n , w e p r o a c t i v e l y approachedt h e c o m p a n y oncewehadd e c i d e d t h a t w e w a n t e d t o b e i n t h e s ec to r.W e l o o k e d f o r a n a t t r a c t i v e c o m p a n y w h e r e w e w o u l d n o t b e i n a biddingauction.”– a s a n e x p e r t s a i d G o o d d e a l s mustf i t t h e skillseta n d industryknowled ge ofthe fundmanager,andoffer identifiableopportunities for enhancin gvalue.
Creativeexitstrategies “Everytimewelookatanewinvestmentopportunityw e r i g o r o u s l y a s s e s s o u r e x i t s t r a t e g y befored e c i d i n g whethert o maket h e investment,”accordingt o o n e M e k o n g investmentmanager.I n s p i t e o f t h e e x p e c t e d uncertaintiesabout aneventthatwillnotocc ur fo ra t leastthr ee to fiveyearsthus,thereisincreasingrigorappliedtotheexerciseofmappingoutav i a b l e e x i t a t t h e o u t s e t , whetherb y a n I P O , a m a n a g e m e n t b u y o u t , o r a strategicinvestor,andthenensuringthatcompanym a n a g e m e n t understandsa n d c o m m i t s t o t h e s t r a t e g y A r e t h e ownersw i l l i n g a n d a b l e t o e x e c u t e a managementbuyoutafteraprescribedtimeperiod?
Orifastrategic investori s t h e preferredalternative,w h o a r e t h e l i k e l y c a n d i d a t e s , a n d w h a t m u s t b e a c h i e v e d bymanagementduringtheinterveningy earstoattractthesebuyers?
Promoting&protectingshareholderrights.Few reformsaremoreimportantt o st rengtheninginvestorconfidence,currentweakregulationsmayaffectminority s hareholders,suchasvotingrightsandtimelyandreliableenforcementofshareho lderandcreditordisputes.Therefore,investmentfundm a n a g e r s shoulda ctivelycampaign an dpursue en t r e p r e n e u r s tore fo rm th ei r corporate r e g u l a t o r a n d b u s i n e s s chartert o b e t t e r protectm i n o r i t y sh a r e ho ld e r s.
Promotingsoundcorporateg o v e r n a n c e standard Ani n t e r n a t i o n a l c o n s e n s u s alsoisemergingonacceptablestandardsofcorporategovernan ce,a n o t h e r increasinglyimportant be nc hma rk for investors Corporate willbeatadistinctadvantage withprivateequityinvestorsiftheyeffectiv elyestablish standardizedp u b l i c disclosurea n d m a n a g e m e n t accountabilit y,i n c l u d i n g internationallyacceptedaccountingpractices,independentaudits,a nddefinedresponsibilitiesofboardsofdirectors.
Private market investments typically take the form of limited partnerships with terms of ten years or more, lacking established markets for these partnership interests, making them difficult to liquidate or transfer While private capital investments may seem more stable in price, they are often valued at cost until a measurable event occurs The ultimate returns received by investors are highly dependent on the skills of the fund-of-funds manager and their access to quality investment partnerships.
Privateequity investmenti s i n c r ea s i n g s u bs t a n t i a l l y i n th is decade.G l o b a l i z a t i o n , withitsemphasisonopenmarkets,lowerbarrierstotradeandin vestment,a n d cross- bordercompetitiona r e c r e a t i n g a t t r a c t i v e a n d s u p p o r t e d environmen tforprivateequitygrowinginemergingmarkets.Suchcoun try l i k e V i e t n a m i s i n f r o n t o f largeopportunitiest o a s s o r t t h e capitalf r o m theventures
Fori n v e s t o r s w h o areinterestedi n allocatinga p a r t o f h i s a s s e t t o p r i v a t e e q u i t y i n v e s t m e n t , t h e y shouldp r e p a r e k n o w l e d g e a n d f o c u s m u c h o n v e r y natural c h a r a c t e r i s t i c o f p r i v a t e e q u i t y i n v e s t m e n t sucha s :Illiquidity:c o m m it m e n tholdingperiodof5-
Investing in private capital can yield significant returns over a period of 10 or more years, but these results heavily depend on the effectiveness of corporate management Access to information is often limited, which can obscure the true volatility of private capital investments, making them appear more stable than they are Investors should thoroughly study the success stories and merits of fund managers who allocate substantial portions of their assets to private equity Additionally, careful analysis of their active contributions and rational statements is essential for informed investment decisions.
To enhance the management and operations of investee companies while reducing reliance on management performance, it is crucial to actively add value This involves a more discerning approach to deal selection, where fund managers proactively seek opportunities that align with their skills and industry knowledge, ensuring identifiable avenues for value enhancement Additionally, rigorous assessment of exit strategies is essential before making any investment decisions Protecting shareholder rights is vital; therefore, it is important to advocate for reforms in corporate regulations and business charters to safeguard minority shareholders Promoting sound corporate governance standards is also necessary, encouraging management to implement standardized public disclosures and accountability measures, including adherence to internationally accepted accounting practices, independent audits, and clearly defined responsibilities for boards of directors.
Finally,duetolackoftimeandsourceofinformationaccess,thethesishopeto c o n t r i b u t e someo f i t s r e s u l t t o investors,f u n d m a n a g e r s w h o a r e co nsideringt o a l l o c a t e t h e i r a s s e t t o p r i v a t e e q u i t y i n v e s t m e n t
W h e n conducting thiss t u d y , a numberof differentissueshavecomeu p , w h i c h researcherfeelwouldbeinterestingtofurtherinvestigation.Forth isreason,Iwilln o w p r e s e n t a l i s t o f suggestionsforfutureresearch,whichI thin karesuitabletopicsforafuturestudies.
1 DeutscheBank,InvestmentReport26July2007-'UnderstandingViet nam,page3-15
EmergingmarketPrivateEquity2007FundraisingReview,Emerging marketPrivateEquityAssociation,Page1-12
IDGVenture'sIDGVietnamVenturesFund 2004 100 Technologyvent ure technology
VinaCapital'sDFJ-VinaCapitalLP 2007 25 Technologyvent ure technology
AnphaCapital’sVietnamPropertyHolding(VPH) 2007 50 real-estate property
IndochinaCapital'sIndochinaLandHoldings 2007 300 real-estate property
VinaCapital'sVinaLand 2006 790 real-estate property
AnphaCapital’sVietnamEquityHolding(VEH) 2007 80 equitymix generalist
BIDV-VietnamPartners'Vietnam 2006 100 equitymix generalist
VietFundManagement’sVietFund1(VF1) 2004 61 equitymix generalist
VietcombankFundManagement(VCBF)'sV i e t c o m b a n k PartnersFund1(VPF1)
VietnamAssetManagement(VAM)'sV i e t n a m EmergingMarketFund(VEMF)