Vietnam fund firms moving with the times

We know you are preparing to establish an investment fund in Vietnam, but you have been very tight-lipped about it. What can you tell us?
The president of the European Central Bank, Jean-Claude Trichet, recently raised interest rates from 2.25 per cent to 2.5 per cent, reflecting the governors of EU central banks’ concerns about continuing inflation on the mainland. Apparently the focus is controlling the threat of inflation. This makes prospective investors in Europe think twice; should they stay with an established, saturated market or move to distant, emerging markets? I believe many investors would like to move elsewhere. However, they may not know that this investment opportunity exists in Vietnam or that a team of nationals has the capacity to manage their money in an ethical and efficient manner.
We had planned to establish the fund in Europe but now believe that the operation can be built on the financial strength of Vietnamese nationals. In fact, we will be willing to collaborate and provide investment services to other equity investment firms if required.
An immense reserve of capital is not one of our strengths. Instead, we will have a two-pronged strategy of know-how and know-who. Know-how means installing technically proven investment strategies from identifying projects to feasible exit solutions. Know-who refers to reliable judgements of businesses, their owners and their capacity to overcome obstacles. This is easier said than done, but when we provide professional services to clients, be they individual or institutional investors, we will also put in our own money. This is perhaps the strongest commitment to quality.
Before making any decision to invest in Vietnam, investors will first and foremost pay attention to one factor: professionalism. Everybody knows this word, but it is still unfamiliar to the daily operations of many domestic companies. There is clearly a trend away from short-term profits to longer-term interests through the tool of professionalism.

When will the fund be up and running and what will be its initial equity?
We look forward to getting it up and running by the last quarter of 2006. Although I have some invaluable experience of preparing for such fund in the past, I would like to exercise caution. After looking into the real financial performance of other funds, there is still worry.
One of the best ways is to start small. Many believe that a private equity operation must reach some level of equity, such as about $20 million, but I don’t agree. It may be just as good to try with just a quarter of this amount. However, it is challenging to raise funds and we can’t state anything decisively now. We would prefer a sizable operation but an efficient investing technology is really sine qua non.

Private equity and venture activity are picking up. Do you foresee any major flows of foreign indirect investment into Vietnam in the next few years?
I think so, although we can only check it empirically later on. Some newborn private equity funds in Europe require a significantly lower hurdle rate in dollar terms, such as five per cent. Now, we know that many emerging manufacturing and service firms in Vietnam could perform much better, and typically reach their gross operating margin of 30 to 40 per cent. This is a real dream for investors all over the world. However, it will take a wise strategy (not slick postulation) to make this known to international investors who really wish to stay with us. We don’t have to wait for these inflows, they’re already happening and will continue to happen.

What are the findings of Emiscom’s recent research on Vietnamese capital markets?
The literature on finance in Vietnam is thin, and we learned some interesting things. The market is young and isolated from the rest of the world, and like stock markets in Taiwan and Thailand, the Vietnamese stock market has shown that stocks tend to move together in strong herd-like behaviour. At one point in time, we believed that herd behaviour, in which investors suppress their own expectations and follow others, was only transient but it seems that the problem is recurring.
Our other findings suggest that news and corporate releases do affect stock performances, but bad news has more of an effect than good. The market has been turbulent, and continues to be. As my colleague Michel Beine from the Emile Bernheim Centre has suggested, this can establish a run of the zeroes.
Because the Vietnamese stock market is small and the level of trading is low, it is strongly affected by herd behaviour and movements of capital greatly affect the entire market. The single most important function of a stock market is not to raise funds, as many think, but to free up the movement of capital and the Vietnamese stock market has not achieved this yet.

What are the biggest challenges Vietnam will face when it enters the World Trade Organisation, given that its capital markets are still in the embryonic stage?
New firms will need to be more efficient at raising capital. There will be more links between the major regional stock markets, and the Vietnamese stock market will be competing with others for new listings. A more open economy will allow capital to move in and out of the country more easily, which will make the economy more volatile. A stronger Vietnamese stock market would stabilise investment and I hope this will be achieved in the near future.

The value of listed shares and bonds is estimated to be about 6-8 per cent of gross domestic product, and the average daily volume of trade on the stock market is about $1 million. Do you think these figures are disappointing given that the Ho Chi Minh City bourse has been running for five years?
We can compare these figures to those of the world’s economic powerhouse. GDP in the US currently stands at about $13 trillion, while the New York Stock Exchange is capitalised at over $20tr with more than 2,800 listed companies.
However, the world’s most technologically and financially advanced economy has taken over 200 years to achieve this. We cannot compare our figures to those of the US, but we do know that the market is much smaller than the average emerging market. We must recognise that the market is still in its infancy and keeping it up and running is itself an encouraging result. Smart people should not be disappointed. Instead, they should try to improve the situation. I believe the government and the corporate sector are trying to come up with solutions, and the draft securities law may be just the right step.

The over-the-counter market is worth four or five times more than the official bourse. What are the implications and what should be done to narrow this gap?
I don’t think our main objective is to narrow the difference in trading volumes between the two. Our main objective should be to develop them together by laying firm cornerstones without costing the investors money. There are a lot of things to be done in this regard: installing best practice in corporate governance, information disclosures, general understanding, accountability and transparency, business codes of conduct, mutually beneficial participations of market players, etc. We love prosperity, indeed, not just a nice figure.

So far, only nine foreign limited liability companies have been licensed to become joint-stock firms. Only half of them have done so and only one, Taiwan’s Taya, is listed on the bourse. Are foreign investors taking a wait-and-see approach or is the whole process of converting into joint stock companies unduly burdensome?
I don’t think they are taking a wait-and-see approach. Foreign direct investors focus on investing in real-world projects and try to expand existing operations. Their priorities lie with safe and sound business operations.
When FDI firms are more established and are doing well, then naturally more of them will think about diversifying their financial activities. We should not come up with hasty solutions to make them participate in the Vietnamese stock market. I like the Vietnamese expression “red does not always mean ripe”.


No. 752/March 13-19, 2006