Investment Firms with Longest Track Record Operating in Vietnam Tend to Be Most Effective

 

Some highlights of strengths include fragmented retail and consumer markets that still provide plenty of room for consolidation and market share gains; Vietnamese spending power outside of HCMC and Hanoi is growing rapidly, driven in part by Vietnam’s competitiveness as an exporter of agricultural products such as rice, coffee, rubber, catfish and shrimp.

Besides, Vietnam is at the beginning of a housing and infrastructure investment cycle, starting from a very low base, that could be a catalyst for significant growth over the next 10 years. A robust M&A market driven by international strategic investors, especially from Japan, has developed as global, regional and local investment banks have enhanced their presence in Vietnam. Vietnam has an extensive history of private equity investments.

 

Meanwhile, the weaknesses should also be considered as Lowest GDP growth rate in the last 25 years has been 4.7 per cent (in 1999). Vietnam has a shortage of experienced professional managers for investee companies. High employee turnover is the norm in the private sector (but not former SOEs where teams tend to be very stable). Rules are conflicting or uncertain regarding what sectors are open to foreign investment, and what levels of foreign ownership trigger additional hurdles such as the dreaded Economic Needs Test. The many licensing and approval requirements, especially from local Departments of Planning and Investment (DPIs), along with corruption and poor capital efficiency in State Owned Enterprises (SOEs) are a drag on the economy, and correlated with low levels of transparency. The prevalence of Vietnam companies investing in non-core businesses, especially real-estate, is another negative, and real borrowing costs are above 10 per cent.

 

Currently there are many private equity funds active in Vietnam. As fund raising has been more challenging recently, these funds have a small amount capital to invest at present, but as the global economy continues to recover, some of these will successfully launch new funds. Given that situation, Vietnam private equity is now paying more attention to post-investment value creation, like how fund managers can be responsible that the investee companies achieve attractive EBITDA or net profit growth over the investment period, as well as exits.

 

While the general environment does influence the ease or difficulty of generating attractive returns, success in private equity will always be closely correlated with the private equity firm’s effectiveness at selecting attractive companies, negotiating attractive terms, adding real value in the post-investment phase, and exiting in the way that achieves the highest premium. As a general observation, I would say that the investment firms with the longest track record operating in Vietnam tend to be the most effective, as they have more experience and lessons learned, although it has not yet showed up in the performance of some firms due to mistakes they made in the past which are still in their portfolios.

 

In general, our consumer-driven businesses are doing well. MobileWorld has been growing around 100 per cent per year since we invested. They have 5 co-founders who are all very capable and committed, and who are very proactive about identifying and applying international best practices. Therefore, MobileWorld’s systems, and the strength of its management team, are far more advanced than its competitors, which is why it has been growing so much faster. Currently they have 19 percent market share in mobile phone sales, which makes them the largest mobile phone retailer in Vietnam. Meanwhile, Traphaco’s management team is doing a great job, recently leading to Traphaco emerging as the second largest pharmaceutical company in Vietnam in terms of net profit. Traphaco still has many growth opportunities, so we continue to expect strong growth in coming years. In the housing sector, Nam Long has been significantly strengthening its senior management team to fill the gaps in project management, construction, finance and investments. The company is now focusing on scaling the EHome brand with seven more projects from EHome 3 to EHome 9 from 2012 until 2016, launching approximately 1,500 units a year.

 

In manufacturing, the environment is more difficult. While costs in China are rising, and therefore contributing to Vietnam’s competitiveness, demand is still weak in many export markets. However, well managed manufacturing companies such as Ventures International, based in Hai Duong Province, are doing very well.

 

With the intention of ensuring a fair environment for investors to attract more foreign institutional investors to invest in Vietnam, we would recommend the Ministry of Finance and the Tax Policy Department consider and approve an amendment to the Draft Circular on Guidance on Value Added Tax, Corporate Income Tax, and Personal Income Tax for securities investment. Removing the Capital Gains Tax on private companies will lead to increased investment in the private sector, thus boosting production, exports, employment, and the competitiveness and modernization of Vietnam’s economy. It will also lead to increased tax revenues from corporate income tax, VAT and personal income tax. This is also in line with Vietnam's WTO commitments.

 

Another problem we would also suggest the Ministry of Finance consider is the uncertainty over which sectors are open to foreign investment. This would benefit Vietnam’s economic development and help Vietnam to raise management standards and catch up to international best practices in those sectors. These foreign invested companies also typically have very good tax compliance, which will benefit the state budget.