private equity in vietnam: investment sentiment & outlook ...€¦ · this report is the 4 th...

Private Equity in Vietnam: Investment Sentiment & Outlook Quarter 4, 2010

Grant Thornton Vietnam, December 2010

2

Ken Atkinson

Managing Partner

Grant Thornton Vietnam

Contents

About the study 3

Foreword 4

Key highlights of the survey 5

Economic landscape 6

Investment attractiveness 7

Industry attractiveness 8

Access to finance 9

Investment holding periods 10

Key factors for investment 11

Investment obstacles 12

Exit strategy 13

“The Private Equity investment space remains as competitive as ever in Vietnam. New funds continue to enter the market, seeking quality investments – something that takes time and perseverance to get right. Existing participants are not standing still either, with numerous announcements of investment commitments and new fund launches reaching the market this year. ”

About the study This report is the 4th report that Grant Thornton Vietnam has released looking at investment sentiment and outlook for the Private Equity sector in Vietnam. The results in this report are based upon survey responses provided by decision makers working in the Private Equity space. Respondents are located both in and outside of Vietnam and are involved in Vietnam’s Private Equity sector. In this study we have again sought to understand the current sentiments of investors in Vietnam towards the economy generally, their industry preferences and the impediments to investment. This survey was undertaken in October 2010.

Survey participants – sector analysis

55%

4%

29%

2%2%

4%

Investment Fund/Fund Manager 55%

SecuritiesFirm 4%

Advisory/Legal Firm 29%

Institutional/CorporateInvestor 2%

PrivateInvestor 2%

Others 4%

4

Private Equity in Vietnam: Q4, 2010 – Grant Thornton

Foreword

Our Quarter 4, 2010 Private Equity Investment

Sentiment Survey continues to track the feeling

in the investment community towards Vietnam’s

economic conditions and the future that lies

ahead.

Since conducting our initial survey in April 2009,

we have seen the ups and downs in regards to general

sentiment and towards specific sectors and issues. The

concerns raised by investors when making and

monitoring their investments are certainly valid and

these issues are often the reason we don’t see more

participants enter, into Vietnam, despite the high levels

of optimism to the market.

That said, the general interest in Private Equity

investments in Vietnam remains high and subject to the

completion of a number of the large fund raisings that

have been announced, in recent times, the volume of

investment transactions should continue to increase.

This is the fourth Private Equity survey that Grant

Thornton Vietnam has conducted and we look forward

to continuing to produce and release these, every six

months, to assist the investment community into the

future.

“New Private Equity investors into Vietnam are often

caught in a trap: very buoyant sentiment and compelling

investment opportunities in the market, but overwhelming

challenges and issues that can take many years to

understand. The quandary is whether to jump in and learn

from potential mistakes, or to take the time to study

carefully and miss out on the opportunities. Both have

their risks and rewards.”

Matthew Lourey

Advisory Services Director


5


Key highlights of the Survey

Key survey highlights from Quarter 4, 2010 responses

65% of respondents maintain a positive outlook for Vietnam’s economy over the next 12 months

76% rank Vietnam as more attractive than other investment destinations

59% of investors plan to increase their portfolio allocation to Vietnam

Retail is the most attractive sector for Private Equity investment in Vietnam

71% consider the availability of debt finance to be an obstacle for Private Equity investment

76% of investors intend to, on average, hold Private Equity investments for more than 3 years

Legal system

is the biggest obstacle for Private Equity investors when investing in Vietnam

6


Economic outlook over the next 12 months

Positive sentiment towards Vietnam’s economy

has decreased compared to our previous survey

however 65% of all respondents still rate the

outlook for Vietnam’s economy as positive over

the next 12 months.

The feature that possibly underlies the confidence in

Vietnam’s economy is the percentage of respondents

indicating a negative outlook for the next 12 months at

only 4% and this has remained constant over the past

two surveys. The percentage of respondents who have

indicated a neutral view with their outlook has increased

to 31% from 15% in our previous survey.

Despite the generally positive view, there are still

many businesses in Vietnam that have been struggling,

particularly those who never fully recovered from the

global downturn. Unlike other nations, bankruptcy and

forced sales remain relatively low in Vietnam due to a

range of legal and social reasons and our survey results

confirm this with only 22% of respondents indicating

that distressed assets are a driver of investment

transactions in Vietnam.

“Recent economic data, particularly

rising inflation and likely continued

devaluation of the Vietnam Dong, has

provided some investors with reasons to

be less confident about the Vietnamese

economy. However, the fundamentals for

growth remain and most investors sit on

the positive side of the fence.”

Trinh Kim Dung

Advisory Services Manager


General outlook for the Vietnamese economy over the

next 12 months

Are distressed assets a driver of investment transactions

in Vietnam?

27%

51%

22%

No

Unsure

Yes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Positive Neutral Negative

Q2, 2009Q4, 2009Q2, 2010Q4, 2010

7


Investment attractiveness

Allocation of investment funds to Vietnam

Respondents have shown their confidence in

Vietnam’s investment attractiveness when

compared to other investment destinations, with

76% indicating that Vietnam remains more

attractive.

The Quarter 4, 2010 survey results show a decrease

in attractiveness from the 87% recorded from the

previous quarter. However, the generally high levels of

investment attractiveness recorded, along with the 59%

of respondents indicating an increasing allocation of

investment funds to Vietnam, should see both existing

fund managers and new market entrants continuing to

raise fresh capital for investment into Vietnam.

There has been some negativity in international

investment circles in recent times towards listed

investment funds focused on Vietnam, however those

with experience in investing in Vietnam appreciate the

opportunities that exist and remain buoyant towards the

economy.

76% of respondents

believe that Vietnam

remains a more attractive

investment destination

Vietnam’s ranking in terms of investment attractiveness,

compared to other destinations

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Extremelyattractive

More attractive Neutral Less attractive Not attractive

Q2, 2009Q4, 2009Q2, 2010Q4, 2010

9%

32%

59%

6%

28%

67%

32%

5%

63%

42%

50%

8%

Decreasingallocation to

Vietnam

No change

Increasingallocation to

Vietnam

Q2, 2009Q4, 2009Q2, 2010Q4, 2010

8


Industry attractiveness

“With domestic retail sales growing

at 25% year-on-year, it is not

surprising that retail remains the

most attractive sector for Private

Equity investors.

The domestic economy

continues to shift towards modern

trade and away from traditional

markets, and this is providing

opportunities for investors to

develop brands and to gain market

share as a foundation for their

future.”

Ken Atkinson

Managing Partner


Retail has returned to top the list again as

respondents’ most positive sector when investing in

Vietnam. Oil, Gas and Natural Resources, along with

Agriculture, remain the least positive sectors,

consistent with sentiments from our last survey.

The survey results indicate that the higher ranked

sectors are generally those with more of a domestic focus

and less of an international or export reliance. Education,

Real Estate, Healthcare and Retail all fit into this category.

The lowest ranked sectors, Oil, Gas & Natural

Resources, Manufacturing, Agriculture and Hospitality, all

have a larger reliance on international markets and were

ranked as the least positive sectors. It should be noted that

no sector received an overall negative response for

sentiment from respondents, providing quite a solid base

and expectation across all sectors and the economy.

Industry sectors in Vietnam: Most positive or negative for investment

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Hospitality

Transportation & logistics

Retail

Financial Services

Agriculture

Manufacturing

Healthcare & Pharmaceuticals

Real Estate/Property

Oil Gas & Natural Resources

Education

Very positive

Somewhat positive

Neutral

Somewhat negative

Very negative

9


Access to finance

The availability of debt finance in Vietnam remains a

barrier for Private Equity transactions. Respondents

to the survey indicated that debt finance remains

difficult to access and is an impediment to

investment.

Although the availability of debt finance for Private

Equity transactions actually improved compared to our

previous survey, 71% of respondents still indicated that

debt was somewhat difficult or extremely difficult to obtain

(Quarter 2, 2010 – 88%).

Private Equity investors, in Vietnam, are no different to

those undertaking transactions elsewhere and rely on a

portion of debt to leverage their investment returns and to

extract maximum profit from their investment. In Vietnam

41% of respondents indicated that debt finance was

important to Private Equity transactions, essentially

unchanged from our previous survey. If not for high

interest rates in Vietnam at present we would expect the

importance of debt finance to be higher.

Debt finance is difficult or

extremely difficult to obtain

in Vietnam according to

71% of respondents

The availability of debt finance for Private Equity

investments in Vietnam

The importance of debt finance in Vietnam for Private

Equity transactions

0%

10%

20%

30%

40%

50%

60%

70%

ExtremelyEasy

to obtain

RelativelyEasy

to obtain

Neither Easynor

Difficult toobtain

SomewhatDifficultto obtain

ExtremelyDifficultto obtain

Q2, 2009Q4, 2009Q2, 2010Q4, 2010

22%

37%

41%

Not Important

Neutral

Important

10

0%

5%

10%

15%

20%

25%

30%

<1 y ear 1-2 y ears 2-3 y ears 3-4 y ears 4-5 y ears 5+ y ears


Expectations of holding periods for investments

27%

41%

32%

Longer

No Change

Shorter

The general expectation for the length of time investors

plan to stay invested in Vietnamese companies

Will the transactions undertaken in Quarter 4 2010 take a

longer or shorter time to complete compared to one year

earlier?

Survey responses show that Private Equity investors in

Vietnam intend to stay invested in Vietnamese

Companies for mid to long-term periods, with less than

24% of respondents indicating they expected to hold

investments for periods of less than 2 years.

This result is consistent with commentaries from

investment professionals that quick profits are difficult to

achieve in Vietnam and that Private Equity investors need to

stay invested in companies for longer periods, than in other

destinations. 27% of investors expect to stay invested 5 or

more years for each individual investment.

When asked about timing to complete transactions,

respondents were split over whether there was any change in

the market that will result in shorter or longer time periods to

complete. 32% felt that the period to complete would be

shorter, with 27% believing they would be longer. This may be

more a reflection of individual investors than the market as a

whole.

76% of respondents

expect to hold

investments for 3 or

more years

11


Key factors to be considered when investing in Vietnam

The most important factors to consider when investing in

Vietnam

Most concerning issues when investing in Vietnamese

companies

8%

12%

13%

18%

8%

14%

9%

8% 8%

2%

Operational / Cultural fit

Speed which value can becreatedTax shields and investmentsavingsTarget's management support

Brands / Products

Transparency in businessactivitiesStrategic fit

Growth story / forecasts

Track record

Cash flow

Other

Transparency in business activities continues to

be the most important factor that Private equity

investors consider when making investments in

Vietnam at 18%, followed by the Growth

Story/Forecasts of the target at 14%.

Successful investors in Vietnam tend to spend a

considerable time to understand their investee

companies before making an investment. The

transparency, or more importantly the lack of

transparency and openness, combined with growth

forecasts, will often be the two key factors determining

whether money will be spent on a formal Due Diligence

or not.

There are a number of other key factors, such as

management support, brands/products, and track

record, that rank highly and which are considered

throughout the assessment process.

Of the issues that raise most concern to investors,

Corporate Governance and Transparency continue to

be the biggest issues. The results show that not only are

these concerns when making investment decisions, they

remain considerable issues throughout the investment

cycle.

Corporate Governance is the

most concerning issue for

when investing in

Vietnamese companies at

29%

29%

16%

26%

10%

5%

14%Corporate Governance

Skills / Experience of existingmanagementTransparency

Finance / debt issues

Existing shareholders

Financial records and reporting

12


Investment obstacles in Vietnam

“Infrastructure is constantly raised by

foreign investors in Vietnam as a major

constraint holding back additional

investment.

The Government is acutely aware of

many of these problems, such as power

disruptions, however, difficulties remain

that prevent infrastructure needs being

effectively addressed.”

Nguyen Thi Vinh Ha

Audit Partner


Investment obstacles when investing in Vietnam

The legal system in Vietnam is indicated as being the

biggest obstacle, when investing in Vietnam

according to respondents, replacing corruption from

the top of the list in our previous survey.

Infrastructure came second in this survey, and combined

with Government red tape and Corruption, the top four

issues have remained consistent across recent surveys as

problems for investors. Although still rated as the third

biggest issue, the decrease in corruption as a problem to

investment in Vietnam would be a pleasing result to many.

We have continued to see a decline in employment laws

being an obstacle to investment in Vietnam. This is not to

say that there isn’t room for improvement, but recently some

issues, such as work permits for foreigners, appear to have

decreased in importance.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Access to debt finance

Real estate ownership laws

Government red tape / processes

Corruption

Legal system

Currency controls

Infrastructure

Employment Laws and processes

Substantial problem

Problem

Neutral

Not an obstacle \

13


Exit Strategy

The most attractive or achievable exit strategy for

investments in Private Equity

41% of respondents believe that a

Trade Sale is the most attractive or

achievable exit strategy in the

current environment.

33%

14%

41%

10%

2%

IPO

Secondary Sale

MBO

Trade Sale

Refinancing

Other

Over the past 6 months there has been a

movement away from IPO’s as the most favoured

exit strategy in Vietnam and a strong move

towards Trade Sales as the preferred exit for

Private Equity investments.

Over recent years, IPO’s have been the favoured exit

for investors, due to the low costs and higher P/E ratios

received on the Vietnamese stock exchanges. However,

as the local stock exchanges have remained flat, investors

are returning to the more traditional route of seeking

trade buyers.

The market sees secondary sales as a less attractive

option, although it was still indicated by 14% of

respondents as their preferred exit strategy. New Private

Equity funds into Vietnam, in particular, often seek to

acquire a stake in businesses that have gone part way

through a transformation with an existing Private Equity

investor, for their first foray into the market.

14


About Grant Thornton Grant Thornton

Grant Thornton Vietnam, an independent member within

Grant Thornton International and a wholly foreign-owned

company, was established in 1993 as the second international

firm to operate in audit and business advisory services in

Vietnam, with offices in Hanoi and Ho Chi Minh City. Our

mission is “To be the leading service provider in the Greater

Mekong region, providing distinctive client service and bold

leadership through empowered people”.

Whether we are acting as independent auditors, advising on

funding a business, looking into tax issues, or restructuring a

business, meeting our clients' objectives and their expectations,

through practical solutions based on our practice values of

integrity, reliability and personal attention, is our aim.

Assurance

In today's ever-changing business climate, effective management

of resources and access to information are crucial. Our

approach to assurance services is focused on enhancing the

value of audit services to businesses and business owners,

ensuring the integrity of financial information and helping to

reduce compliance costs. Clients benefit from our proprietary

audit software to deliver a cost-effective, risk-based, paperless

audit.

We provide assurance services to:

• Public companies;

• Foreign invested companies;

• Locally owned business;

• Non Governmental Organisation and donor funded

projects.

Tax Services

Our committed tax professionals can maximise your earnings by

combining a comprehensive knowledge of tax regulations and

the capacity to plan creatively to reduce your taxes.

We help corporate clients structure their investments in

Vietnam and assist those operating internationally to capitalise

on the lowest effective tax rates across multiple jurisdictions.

For expatriate and local personnel, we provide tax-effective

salary packages and advise on offshore solutions. We also help

you deal with the tax authorities and provide regular tax

updates, training and seminars.

Business Risk Services

Grant Thornton offers a broad range of Business Risk Services

that stand out because we focus on turning compliance

obligations, risk concerns and performance questions into

opportunities for business improvement.

We work with you to understand your business and the risks

you are exposed to. We detect inefficiencies in existing

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While the specific findings, recommendations and

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Advisory Services

Our Advisory Services team can help you achieve your

objectives by developing effective plans and strategies relevant

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undertaking a financial restructuring in a turnaround phase or

seeking to divest, our diverse range of services including Lead

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With careful planning and co-ordination, we will not only

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value.

15


Contact Details

For any queries please visit our website www.gt.com.vn, or contact us below:

Ken Atkinson Dung Trinh

Managing partner Advisory Service Manager

T +84 8 3910 9100 T +84 8 3910 2650

E [email protected] E [email protected]

Grant Thornton (Vietnam) Ltd offices:

Hanoi

8th Floor, Vinaplast-Domus Bldg

39A Ngo Quyen Street

Hoan Kiem District

Vietnam T +84 4 2220 2600 F +84 4 2220 6449

Ho Chi Minh City

28th Floor, Saigon Trade Center

37 Ton Duc Thang Street

District 1

Vietnam T +84 8 3910 9100 F +84 8 3914 3748

Matthew Lourey

Advisory Service Director

T +84 8 3910 9149

E [email protected]

16

www.gt.com.vn

© 2010 Grant Thornton (Vietnam) Ltd. All rights reserved.

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(‘‘Grant Thornton International’’). References to Grant Thornton are to Grant Thornton

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firms are not a worldwide partnership. Services are delivered independently

by the member firms.

This publication is general in nature and should not be construed as providing advice.

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