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By Dean Page
CEO, Foreya Partners
and
Brandon Boyle
Vice President, Foreya Partners


Japanese Eye Expansion of Private Equity Investment in Vietnam


With a short term GDP growth rate projected in excess of 6% and long term prospects cautiously optimistic, the Vietnamese market presents strong opportunities for private equity managers considering Asian locations for investment. 2010 has already seen a plethora of foreign firms raising funds for investments in Vietnam, and preliminary figures indicate that M&A deal valuations have doubled in the first half of 2010 to over US $580 million. The ability of the Vietnamese economy to continue expansion despite the souring global economy has sparked heightened interest in Vietnam’s private equity and mergers & acquisitions markets. “Vietnam has weathered the recent economic downturn surprisingly well” says Paul Previtera, a Tokyo-based attorney and adjunct professor at Temple University Japan. “With inflation in check and reductions in commercial bank interest rates, Vietnam certainly has improved its standing as a destination for global private equity activity.”


Vietnam’s growth has not been lost on investors in Asia looking for new markets as the regional economy slowly recovers. Japanese firms in particular have shown increased interest in tapping into the Vietnamese private equity and M&A markets. Last year, deals between Japanese and Vietnamese companies totaling US $27.7 million were consummated. Additionally, the Japan Bank for International Cooperation (JBIC) recently signed an agreement for equity participation in a fund that invests in Vietnamese growth companies. The fund, jointly managed by Dream Incubator and ORIX, was launched with initial capital commitment of approximately 5 billion yen, of which 1 billion yen was contributed by JBIC. As Japan’s domestic private equity and M&A activity remains sluggish, and with Japanese firms increasingly looking overseas for new investments, interest in Vietnam’s private equity and M&A markets is beginning to pick up steam.

Investment Drivers

Japan’s optimism regarding opportunities in the Vietnamese private equity and M&A market can be attributed to several factors. For example, Japanese firms often have operational synergies with Vietnamese firms which tend to make the Vietnamese firms a particularly attractive destination for private equity investments. Because there are many early stage companies with promising core technologies, a private equity firm that can supplement its capital infusion by playing matchmaker to Japanese partners will add significant value over the life of the investment. In particular, Japanese funds are clamoring to pair their Vietnamese investments with Japanese technology in sectors including automobile technology, information technology services, construction, transportation and finance.   

In addition to operational synergies, low valuations have also been a strong driver of Japanese interest in acquisitions in Vietnam. Although low valuations have increased sellers reluctance to deal, the urgent need for working capital is fast overriding such hesitance. Globally, Japanese firms have spent US $27 billion on M&A’s so far in 2010 (compared to US $21 billion total in 2009). In Vietnam, this year there have already been five M&A’s worth $56.3 million between Japanese and Vietnamese companies, demonstrating that that value is still out there for firms with the patience and perseverance to chase the deals. Additionally, the recent strength of the yen has created a sense of urgency on the Japan side to vertically integrate operations via overseas acquisitions 

Also, as many private equity transactions are structured to include significant advisory participation in strategic operations of the investee company, Japanese managers are continuing to integrate global best practices into the funded companies, leading to less risky and more profitable investments. This phenomenon is especially prevalent in the area of corporate governance, with private equity managers, via board representation and protective clauses, building best practices into the structure of the deal.  “Japanese private equity firms have become much more insistent that good corporate governance mechanisms are included in offshore deals” says Jon Karlsson, President of the Japan Association of Independent Directors.  “This requirement ultimately serves to benefit the Japanese firm, which gains a more accurate assessment of the investee’s financial health, as well as the investee, who gains exposure to global corporate governance standards."

Recent changes to Japan’s tax laws, brought about to promote repatriation of foreign income from Japanese companies, have also played a part. For example, until 2009 dividends received from an offshore investment were also subject to tax in Japan; however, since 2009, 95% of such dividends are exempt in Japan.  Proposed changes to Japan’s controlled foreign corporation (CFC) rules are also likely to have a favorable impact.  Additionally, the Japan-Vietnam double taxation agreement serves to provide additional protections to firms to ensure that the same profits are not being taxed in both countries.

Challenges Remain

Despite these positives, a major hurdle has been and continues to be Vietnam’s regulatory regime.  The investment process is bureaucratic and lengthy, and the lack of clear standards and precise definitions (especially in regards to M&A transactions) has led many investors to shy away from committing significant resources to the market. Regional differences in interpretation of investment licensing requirements and procedures only add to this confusion. Additionally, corruption continues to be a major concern, with Vietnam ranking in the lower half of Transparency International’s Corruption Index. To its credit, the Vietnamese government has made progress in reducing the bureaucracy associated with investments and weeding out corruption, but the process has been slow.

Two additional challenges are the availability of financing and Vietnam’s infrastructure. Access to debt finance has been notoriously difficult due to high interest rates and state bank lending constraints. The Vietnamese government has announced measures intended to boost liquidity, yet it remains to be seen if this will increase the amount of finance available and whether foreign firms will be treated on a non-discriminatory basis. Vietnam’s relatively underdeveloped infrastructure represents yet another barrier to investment. Due to a lack of capacity, power shortages are common, and it is often difficult to find skilled labor, especially for positions with some technological component. However, as discussed below, Vietnam’s underdeveloped infrastructure may also present unique opportunities for investors in this market.

Growth Industries

Looking forward, there are a several industries that are poised to benefit from an increase in Japanese private equity and M&A activity. Domestic demand in Vietnam is experiencing robust growth, which has in turn led to growth in the consumer-oriented manufacturing sector. For example, the healthcare and pharmaceuticals sectors are projected to continue double-digit growth over the next five to ten years, resulting in some attractive targets for companies looking to gain an early foothold in Vietnam’s rapidly aging market. Opportunities in the healthcare sector have spilled over to the food sector and in particular the market for functional foods. Last year saw House Foods making a $20 million investment in Masan Group and Sapporo Holdings buying out Kronenbourg Vietnam Limited. Additionally, citing strong prospects for growth, Pepsi recently announced a US $250m investment in Vietnam over the next three years.

Depending on how announced governmental reforms play out, infrastructure-related investments may also provide strong value over the next few years. The Vietnamese government has announced both its intention to reduce the regulatory burden associated with public-private partnership (PPP) infrastructure projects and to implement build, operate and transfer (BOT) model in the power sector. For BOT projects in particular, new government guarantees and shortening of the document transaction time will likely serve as a catalyst to the initiation of more large-scale PPP power projects. Japan’s strong proficiency in infrastructure development, coupled with low valuations in Vietnam, could lead to a boom in acquisitions over the next two to five years.

Future Returns Likely

Given the relative immaturity of Vietnam’s equity markets, it is no surprise that trade buyouts have generally been the preferred exit for Japanese private equity funds. As previously noted, low valuations led to a surge in M&A activity last year, with approximately 300 M&A’s representing a 77% increase year over year. The Vietnamese government is predicting M&A activity to increase annually at a rate of 30-40 percent in the coming years and although this frenetic pace may not be supportable over the long term, it is likely that for the next few years double digit growth in mergers and acquisitions will continue. Recently, IPO’s have also emerged as a viable exit strategy for early-stage investors – it remains to be seen whether the equity markets will overtake buyouts as investors preferred exit.

As Vietnam’s economy continues to expand, opportunities for private equity and M&A deals will grow as well. As demand for capital has already outstripped domestic capacity to provide such funds, naturally the number of foreign players in the private equity and M&A spheres will increase. Whether Vietnam asserts itself as an attractive locale for private equity and M&A activity will be in large part dependant on the fortitude of the Vietnamese government to make good on its promises to reduce the regulatory burden and free up access to debt capital over the coming year. 

In a recent survey, fifty-eight percent of Japanese enterprises in Vietnam indicated that they planned to raise their investments over the next one to three years. Given the synergies and advantages between Japanese capital providers and Vietnamese firms, as the regulatory regime continues to mature and as access to debt finance improves, an increase in the number of private equity and M&A deals by Japanese firms is sure to follow. “We are definitely bullish on private equity in Vietnam over the next five years” says Chris Alderson, Japan-based Chief Operating Officer of Accounting Asia. “We see Vietnam solidifying its place as one of the top locations for value investments in Asia.”

About the Authors

Dean Page

DEAN PAGE
CEO, Foreya Partners

Dean’s career stretches over nearly 15 years, focused on providing accounting, tax, and business advice to foreign companies doing business in Asia. Dean worked for nearly seven years in the Big 4, most recently as a partner at Ernst & Young. Previously at PricewaterhouseCoopers, Dean headed the Pathfinder Group, a team that specialized in assisting foreign companies to set up new ventures globally. Dean is admitted as both an Attorney (England/Wales & Australia) and as a CPA (U.S. & Australia). He co-heads the International Tax Education Program (ITEP) in the law school at Temple University in Japan where he has acted as an Adjunct Professor since 2001.

Brandon Boyle

BRANDON BOYLE
Vice President, Foreya Partners

Brandon Boyle is a Japan based US attorney with more than ten years of experience working at the intersection of US-Japan business. He is currently vice president of Foreya Partners, where his work focuses on disruptive business models in the professional services sector. Brandon is a frequent speaker on Asian business topics and he has been published in areas as diverse as Islamic finance and taxation e-commerce. He is admitted as an attorney in the State of California and has a certificate in Accounting for Financial and Business Analysts from UC Berkeley.