High return draws private equity investments to Vietnam

Mobile World Group is Mekong Capital’s most successful private equity investment

Mekong Capital has recently announced that its Mekong Enterprise Fund II (MEF II) has successfully pested 100 percent of its final remaining investment in Vietnam, resulting in the fund achieving a net return multiple of 4.5 times and net internal rate of return (IRR) of 22.5 percent for its investors. This marked it as one of the most successful funds in the Asian private equity scene.

In the latest investment from Vietnam’s Asia Chemical Corporation (ACC) alone, MEF II gained US$8.9 million, generating a gross return multiple of 2.6 times and a gross IRR of 15.%.

Earlier, MEF II also completed the sale of its last remaining five million shares in Vietnam’s largest retailer of mobile devices and consumer electronics, Mobile World Group, resulting in 56.9 times of gross return multiple and 61.1% gross IRR, making this investment one of the most successful investments in the history of Asian private equity.

Prior to that, the fund generated a gross return of 4.5 times and 9.0 times for its investments in two other Vietnamese firms Vietnam Australia International School and Golden Gate, respectively.

Mekong Capital’s latest investment vehicle - Mekong Enterprise Fund III (MEF III) - has to date also announced investments in seven companies, including lending firm F88, logistics companies Nhat Tin and ABA, restaurant operator Red Wok, Ben Thanh Jewelry, Yola Education, and mattress retailer Vua Nem.

Besides Mekong Capital’s investments, Vietnam has also lured many private equity giants such as Warburg Pincus, KKR and TPG. Warburg Pincus, for example, is investing more than US$1 billion in Vietnam, of which US$370 million is in Vietnam Technological and Commercial Joint Stock Bank (Techcombank).

Jeffrey Perlman, Southeast Asia chief of Warburg Pincus, said that Warburg Pincus is relishing its opportunities in Vietnam as the economy grows and capital markets develop. "It's a market that we think there's a lot of opportunity in," he said.

Private equity drivers

According to a report on private equity in Vietnam released by Mekong Capital, there are many drivers to the growing interest in Vietnam including a stable political backdrop, a GDP growth hovering around 6%, and the increasing number of large-sized companies.

“Part of this has been driven by liberalization of the Investment Law and the Enterprise Law,” the report says. “The changes make it easier for funds to structure their investments and to invest in more sectors with greater certainty.”

Besides, Brahmal Vasudevan, founder of Malaysia-based investment fund Creador, which plans to spend as much as 15% of its upcoming US$500 million Creator IV fund on Vietnam-based private equity over the next three years, said: “We see tremendous opportunities for growth capital along the lines of emerging companies, but also the Vietnamese government continues pestments of state-owned enterprises.”

According to the Ministry of Finance’s plans, the number of SOEs in Vietnam will reduce from the current 583 to around 120 by 2020 as the government is looking to speed up the pestment process.

However, according to Mekong Capital’s report, as in any emerging market, there are several operational challenges and risks for private equity firms in Vietnam. In particular, corporate governance and management standards in Vietnam are low in many sectors, which is both a challenge and an opportunity for private equity in Vietnam.