Foreign funds start to make capital gains

The numbers game: local securities firms are confident they are coming up with the correct

It’s not easy to catch Don Lam, managing director of VinaCapital, these days. He and his staff are engrossed in preparing for a new overseas fundraising scheme due to kick off next month.
VinaCapital, the management arm of the Vietnam Opportunities Fund (VOF), is working to raise a further $25 million for the fund to stimulate investment in the country, Don said.
It will offer 18.25 million new shares for $1.35 each to existing stakeholders, and raise a small sum from other investors, he said. VOF shares are currently trading at around $1.67 each on the London stock exchange.
The offer, which is expected to close on April 18, should enable the fund to take advantage of attractive opportunities in the country, including buying into private and listed companies.
This is the fourth time VOF has embarked on such a fundraising scheme since its establishment in September 2003. As a close-ended fund it opens for subscription only during a specified period.
The fund began with the first tranche of $10 million. The fund had planned to invest the amount over 12-18 months, but it returned to investors for a second tranche of $20 million after only six months of operations. This helped increase VOF’s capital to $30 million by the end of July 2004.
The fund increased its capital a third time to $37 million just five months later. More than 90 per cent of this capital has been invested in more than 30 companies and projects spanning financial services, real estate and manufacturing sectors in Vietnam.
Its latest investment is in Kinh Do, Vietnam’s leading confectionery producer. In a $5-million deal, which took place in January through a secondary purchase of shares, VOF now owns a 10 per cent stake in Kinh Do and has become the first institutional investor eligible to sit on the food company’s management board.
According to the UK’s LCF Rothschild Country Funds, VOF was the top performing foreign investment fund in Vietnam last year with a net asset value growth rate of nearly 25 per cent, outperforming its two peers VEIL, which was up 15 per cent, and PXP Vietnam Fund, which was down 4 per cent.
“The investors are very happy with the better-than-expected performance, and they have committed to pour more money into the fund to tap more investment opportunities in Vietnam,” Lam said.
Listed on the London Stock Exchange’s second equities market, VOF’s major investors now include the US-based Millennium Partners, Germany’s Deutsche Bank Securities, Sun Wah Group and American Fidelity.

Funding new opportunities
Don said Vietnam’s expanding economy with its high GDP growth, rapidly developing financial systems, accelerated restructure of state-owned enterprises, and dynamic private sector would offer abundant investment prospects.
“We’ve seen more and more opportunities in banking, consumer goods, education and real estate sectors. We will look for high-quality assets and enhance their value with investment and involvement,” he said.
While the number of listed companies remains small with capitalisation of $230 million, the over-the-counter (OTC) market is worth more than $3 billion with approximately 1,300 companies. Companies are still relatively starved of capital and hence available for the fund to invest in, he said.
The managing director expects a number of high quality state-owned enterprises to be equitised during the next few years, including Vietnam’s largest commercial bank, Vietcombank. Other candidates include state-owned petroleum companies and state-owned mobile phone companies.
Apart from VOF, many other foreign investment funds contacted by Vietnam Investment Review expressed optimism in their portfolios, and tabled plans to raise more funds to invest into businesses in Vietnam.
“The growth rates of the companies that we have invested in are very promising,” said Chris Freund, chief executive of Mekong Capital, which manages the Mekong Enterprise Fund (MEF).
He said these firms’ total sales had increased 28 per cent on average in the past two years, while their after-tax profits surged 50 per cent on average. The MEF, which is a venture capital fund of $18.5 million, has already invested $9 million into seven Vietnamese firms after more than two years of operations in the country.
The Ho Chi Minh City-based firms include Tan Dai Hung Plastic Company, the AA Construction and Architecture Company, Lac Viet IT Company, Nam Hoa Wood Toy Company, Minh Phuc Plastic Packaging Company and Duc Thanh Wood Company.
The MEF specialises in investment in private firms in Vietnam, Laos and Cambodia to help them elevate management skills and competitiveness. It is supported by international organisations and banks such as the Asian Development Bank (ADB), the Nordic Development Fund (NDF), the State Secretariat for Economic Affairs (SECO), and the Finnish Fund for Industrial Cooperation Ltd (Finnfund).
Mekong Capital’s Freund said the fund plans to invest an additional $6 million in four or five Vietnamese companies this year.
IDG Ventures Vietnam, a subsidiary of American IDG group and the world’s leading technology media, research and event firm, is planning to disburse all its entire investment capital of $100 million in its first five years of operations.
The fund’s CEO Nguyen Bao Hoang said his fund has already selected four Vietnamese projects it will invest in, and it was expected to disburse capital for one project each month.
Dragon Capital, which is currently managing two investment funds – Vietnam Enterprises Investment Limited (VEIL) and Vietnam Growth Fund (VGF) –said it was currently seeking to invest in eligible companies or projects worth up to $200 million.
Through Dragon Capital, these funds have thus far invested about $100 million in nearly 40 Vietnamese enterprises, most of them listed firms.

More than money
When receiving investment from funds, companies also get something more important from the funds besides money. They gain insight, experience and management know-how, said observers.
Freund said more than half of Mekong Capital’s staff have been assigned to work with the companies that the fund has invested in.
“Normally, we work with them to understand what is holding back their growth and help them find measures to tackle problems.”
He said in the main obstacles for the majority of companies are production planning and management, and shortage of qualified personnel. Many companies are unable to increase their capital and sales and marketing capacity, he added.
VinaCapital’s Lam said one potential area that VOF was interested in pursuing is management buy-outs (MBO), a term relatively new to many Vietnamese managers and directors, but common in developed countries.
“An MBO is basically where the owners of a business decide to sell and the buyer is current management team of the business. We will help to finance the transaction if we see potential in the management team as well as the business. In every deal, the management will be the most important aspect,” Lam said.
The fund is also interested in former state-owned enterprises that have been equitised and private companies, even loss-making ones.
“Many equitised or private companies have the potential to grow, but for some reason cannot realise their full value. We will assist them using our capital and experience to unleash the value within,” Lam said.
Pham Nguyen Nguyen has experience working with restructured SOEs and private companies at Bao Viet Securities Company and before that at Ho Chi Minh City Investment Fund for Urban Development (Hifu).
“Although corporate governance in Vietnam is very weak at the moment and the restriction of 30 per cent foreign ownership makes us a minority shareholder, we are still interested in looking at high-value business where we can help to enhance value,” Nguyen said.
And he shares the enthusiasm about the future role of these investment funds in the country.
“Investment in Vietnamese companies requires a long-term view and patience, but we are believers.”