Third, the thesis will provide some lessons which could be applied for investing to Private Equity in Vietnam for investment managers, who are managing fund and considering to allocate
The problems
Private Equity is a broad and complex asset class within the Alternative Investments Its market is structured with specialized Private Equity funds The investments in Private Equity are still fresh and attractive investment tool in Vietnam but are strongly developing in emerging market like China, Thailand, and Indonesia etc The recent development in Vietnam stock market lead Private Equity Investment (PEI) is on the demand of many investors Therefore in that context, the question of how Private Equity invests need be answered
This thesis aim to study how to invest in Private Equity and outline some principals of PEI for investor
Objectives and Aims
The objectives of this thesis is to study
The basic concept of Private Equity Investment
The fact of private equity investment in emerging market and Vietnam
Opportunity and principal guidelines to invest in PEI for investors
With these above objectives, this thesis aims at giving a basic theoretical foundation for investors who are now considering in Private Equity Investment and then study the fact of operation of PEI in emerging market and Vietnam market.
Research questions
The complete list of research questions is as follows:
What are definitions, types, common features of Private Equity?
What are steps in Private Equity Investment?
Describe the PEI industry and give a case study?
What are withdrew lessons for fund managers and investors?
Scope of work
For the literature review, this thesis will study the PEI theory and inherit some researches from some top scholars in this industry
For this fact-finding thesis, the Private Equity Industry (PEI) will be studied and described by examining the operational reports of relevant associations and by synthesizing research results from institutions that specialize in private equity This approach blends primary data from industry associations with rigorous published findings to deliver a clear, comprehensive view of the PEI landscape, its key trends, and implications for stakeholders.
Data sources
For the theoretical part, data sources are textbooks, articles from internet As for the fact, the data sources are mainly from some PEI associations’ reports For the case Mekong capital, the figure and lesson are withdrawn from management interview.
Methods
The thesis uses the empirical method, case study in the study process It also use interview as a qualitative investigation
Choice of interviewees: The choice of interviewees was a rigid process and very important since if the interviewee does not hold the right knowledge the entire thesis might end up useless The author chooses some investment managers who are experience in private equity investment industry for interviewing
Interview structure: The two longer interviews were conducted in a qualitative manner, but with somewhat specific questions and make sure that every topic of interest was treated the interviewer followed a manual with the key subjects.
Significance
The thesis may contribute a small part to the development of investment industry, which has been emerging in Vietnam Since the investment industry is booming in Vietnam in recent two years, many investors can implement the knowledge studied in this thesis for their business activities.
Limitation
The biggest limitation of this thesis is due to the freshness of Private Equity Investment in Vietnam, so few academicals reviews have been applied and proved
Another limitation stems from the case study method, which cannot address all the theoretical issues surrounding Private Equity Investment Therefore, this thesis focuses on the overall performance of Private Equity Investment (PEI) rather than attempting to cover every theoretical issue.
Expected results
The thesis expects to give the systematical theory in Private Equity Investment, and give some principals guideline for investors.
Outline
Excluding introduction, conclusion and reference part, this thesis includes three parts as follows:
LITERATURE REVIEW
PRIVATE EQUITY IN VIETNAM
Vietnam Investment Context
Vietnam now is considering as an emerging tiger of Asia Just one year after joining WTO, Vietnam rapidly became attractive destination of all dynamic investors This result comes along by some fundamental factors in macro economics view:
Vietnam's economic growth rate has in the recent past been second only to China in Asia, averaging 7.4% for the period 2000-2006 compared to China's 9.5% and India's 6.7%
Figure 2.1 The real GDP growth in 2006
[Source: Deutsche Bank, Investment Report 2007 - 'Understanding Vietnam, page 3]
On the other hand, its development level is more like India's with nominal GDP per capita for 2006 estimated at USD 715, close to India's USD 765 and less than half of China's nearly USD 2,000 In comparison, Vietnam is as poor as India, but is growing at almost the same speed as China (India’s growth has accelerated, though)
[Source: Deutsche Bank, Investment Report 2007 - 'Understanding Vietnam, page 3]
According to Deutsche Bank Research's Formel-G model, which forecasts real GDP growth for more than 30 industrial countries and emerging markets until 2020, Vietnam is likely to grow at about the same speed as India and China in the next one and a half decades − at an estimated 5.7% p.a Hence, in
2020, Vietnam’s GDP per capita will have reached approximately the same level as China’s today
2.1.3 Young and grow labor force
Vietnam population growth is the third ranking compare to other neighbors
[Source: Global Economics Paper No 165 - Vietnam: The Next Asian Tiger In the Making, page 5] With very young population, 65% population aged ranges from 15 – 64
Figure 2.5 Vietnam's Demographic structure (% total population)
[Source: Global Economics Paper No 165 - Vietnam: The Next Asian Tiger In the Making, page 5]
In long term perspective Vietnam has been the attractive destination for investor who wants to gain significant profit along with the development of this country In this opportunity context, we believe that private equity will gain significant consideration and development in near future This fact is not only proved by attractive characteristic of Private Equity as its amazing performance but also by its active contribution to business activities of investee companies.
LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM
Lessons from natural characteristic of private equity investment
PEI investments are illiquid Direct PEI investments typically require a long-term commitment of five to ten years or more under a limited partnership structure There is no active market for these partnership interests, and they cannot be readily liquidated or transferred.
The illiquid nature of Private Equity is reflected in the fact that the average
IRR increases with fund year, whereas its standard deviation decreases This means that long maturity investments mean-variance dominate short term investments Investment in Private Equity is thus not compatible with investors who have a short term horizon, like stock analysts or public investors
Returns are driven by management The ultimate level of investor returns hinges on the fund-of-funds manager’s expertise and their access to high-quality investment partnerships, with the competence of partnership management acting as the key driver of profits for PEI.
Information Access - the access information is crucial component of PEI But this issue is imbalance in the private equity investment The information is limited and many transparency issues such as the accuracy, timeliness, and transparency of financial and operating information provided to investors, and the willingness of managers to subject themselves to some degree of accountability to outsiders are usually constrained
Volatility is Understated – Because most assets are valued at cost until a measurable event occurs, private capital investments appear to be more stable in price than they actually are In addition, management fees and some losses are recognized early This gives rise to the “J curve effect.”
Lessons for investors who are considering allocate his assets to private
The ways of investing in private equity
The investor can invest to private equity through:
1 Private equity fund : such focus private equity funds as Mekong capital,
Bank invest (PENM), IDG…etc are specialized in investing to private equity Becoming shareholders of these funds, the investors will receive quarterly reports and monitor what entrepreneurs funds invest in period? Size of investment? The business activities report?
Performance of these investments…etc
2 Fund of funds : In other emerging markets, the government allows to set up fund of fund (FOF) type which is permitted to invest to other fund like private equity fund The investor can buy share of FOF, the FOF then buy share of PE fund which specialize in investing to private equity
3 Investment mix funds : Some funds with investment mix strategy will invest a portion of its capital to private equity If investor are interested in these vehicles they can invest to these funds
4 Directly invest to private company : for those who are capable competence in managing their investment by their own
The expected return is the relevant assumption from the point of view of a long term investor It is the return that the asset will experience over the long- term
Private equity investments are not made all at once as with traditional stocks; capital is typically deployed gradually, leading to negative cash flow in the early years before returns materialize, as illustrated in the accompanying figure.
Challenges: liquidity and flow of information
The development of the secondary markets for private equity partnership interests has also made investors in PE fund painfully aware that such investments are more difficult to sell than direct partnership interests In addition, the valuations of such PE fund interests usually include a full mark- down of the future management fees payable to the PE fund managers While the sale of such interests on the secondary market may not have been foremost on investors’ minds when they made the commitments, the difficulties experienced by investors who have tried to do so has certainly contributed to the somewhat heightened skepticism that investors display towards PE fund today
Freedom of information laws that push for greater public disclosure of private equity investments have led many general partners (GPs) to require limited partners (LPs) to sign non-disclosure agreements, constraining what LPs can disseminate about their private equity holdings This shift has diminished the scope and granularity of reporting within the PE fund industry, limiting transparency and reducing the information sharing and market insights that investors normally gain from their PE fund relationships.
Lesson for fund managers who are considering allocate his fund capital to
The key success of fund managers to private equity investment is the synergy of fund capital, active consultant with entrepreneurs’ spirit and expertise
Trend and source of fundraising: the trend of fundraising determine action plan of investment fund managers, with the significant growth of fundraising in Vietnam since 2006 and the focusing of capitalist on emerging market, Vietnam investment manager are now facing with huge opportunity to raise their fund size
In 2006, the fundraising of private fund are 5 times as its initial year in 2002
In 2007, new capital raising grew 53% as previous year We haven’t seen the dramatic growth like this in the past many years Fuel of this growth was the booming in FDI flow, investment activities and stock market
Most of private equity funds focus on generalist strategy They chose high return margin with sustainable sale growth entrepreneurs They also limit their investment to take them with high care and effort They are really active in contributing more and more precious advisory to entrepreneurs
From recommendations of professionals in this newly industry, the investment managers need make sure these principles presented in their investments:
Value creation in emerging markets is a core mandate for private equity, and the management role is often more critical there due to the tougher path to a profitable exit Fund managers must rethink the professional capabilities needed across the life cycle, recognizing that the analytical and negotiating skills that close a deal differ from those required to improve portfolio company value in the post-investment phase Early industry practice leaned too heavily on ex-investment bankers who were eager to do deals, take their fees, and move on, underestimating the practical time required to monitor portfolio company performance Merely attending periodic board meetings, reading financial reports, and watching performance from afar is not enough; professionals must take on the challenging tasks of strengthening corporate governance, restructuring management, and positioning the company for a lucrative exit.
Funds are becoming more proactive in deal selection, choosing targets rather than waiting for proposals or pitches The best deals are those we create, and in our most successful transaction we proactively approached a company after deciding to enter the sector to avoid a bidding auction Deals should align with the fund manager’s skill set and industry knowledge and offer clear opportunities to unlock value.
Creative exit strategies “Every time we look at a new investment opportunity we rigorously assess our exit strategy before deciding whether to make the investment,” according to one Mekong investment manager In spite of the expected uncertainties about an event that will not occur for at least three to five years thus, there is increasing rigor applied to the exercise of mapping out a viable exit at the outset, whether by an IPO, a management buyout, or a strategic investor, and then ensuring that company management understands and commits to the strategy Are the owners willing and able to execute a management buyout after a prescribed time period? Or if a strategic investor is the preferred alternative, who are the likely candidates, and what must be achieved by management during the intervening years to attract these buyers?
Promoting & protecting shareholder rights Few reforms are more important to strengthening investor confidence, current weak regulations may affect minority shareholders, such as voting rights and timely and reliable enforcement of shareholder and creditor disputes Therefore, investment fund managers should actively campaign and pursue entrepreneurs to reform their corporate regulator and business charter to better protect minority shareholders
Promoting sound corporate governance standard An international consensus also is emerging on acceptable standards of corporate governance, another increasingly important benchmark for investors Corporate will be at a distinct advantage with private equity investors if they effectively establish standardized public disclosure and management accountability, including internationally accepted accounting practices, independent audits, and defined responsibilities of boards of directors
Private equity is suitable to consider as a long term investment with high risk and return characteristics, which provides diversification benefits to a traditional stock and bonds portfolio
Private market investments are typically structured as long-term limited partnerships, with terms of 10 years or more There are no markets for these partnership interests, and they cannot be liquidated or easily transferred Private capital investments can appear more stable in price than they actually are because most assets are valued at cost until a measurable event occurs The ultimate level of returns to investors depends largely on the skill of the fund‑of‑funds manager and their access to strong investment partnerships.
Private equity investment is increasing substantially in this decade Globalization, with its emphasis on open markets, lower barriers to trade and investment, and cross-border competition are creating attractive and supported environment for private equity growing in emerging markets Such country like Vietnam is in front of large opportunities to assort the capital from the ventures
For investors who are interested in allocating a part of his asset to private equity investment, they should prepare knowledge and focus much on very natural characteristic of private equity investment such as: Illiquidity: commitment holding period of 5-10 or more years; Results dependent on management – its ultimate level of returns is highly dependent on the corporate management; Information Access: the information is limited; Volatility –private capital investments appear to be more stable in price than they actually are They should also learn and study deeper the success story & merits of fund managers who are allocating major part of their asset to private equity and conduct fund as an investment vehicle for investors Some active contribution and rationale statement of them should be carefully analysis and refer: Add value to investee company : actively add value to investee companies is the most direct way to enhance their management and operation and also reduce risk of highly dependence on management performance
More discerning deal selection : more proactive in deal selection, rather than waiting for business proposals to land on their desks Good deals must fit the skill set and industry knowledge of the fund manager, and offer identifiable opportunities for enhancing value Creative exit strategies : rigorously assess exit strategy before deciding whether to make the investment Promoting & protecting shareholder rights: actively campaign and pursue entrepreneurs to reform their corporate regulator and business charter to better protect minority shareholders Promoting sound corporate governance standard: encourage management establish standardized public disclosure and management accountability, including internationally accepted accounting practices, independent audits, and defined responsibilities of boards of directors
Finally, due to lack of time and source of information access, the thesis hope to contribute some of its result to investors, fund managers who are considering to allocate their asset to private equity investment When conducting this study, a number of different issues have come up, which researcher feel would be interesting to further investigation For this reason, I will now present a list of suggestions for future research, which I think are suitable topics for a future studies
- Private equity fund organization & management
- Private equity fund raising & investment vehicle
1 Deutsche Bank, Investment Report 26 July 2007 - 'Understanding
2 EMPE, 2007 - Emerging market Private Equity 2007 Fundraising
Review, Emerging market Private Equity Association, Page 1 - 12
3 Ennisknupp, updated January 2008 - ENNISKNUPP capital markets modeling assumption, page 1-10
4 Ennisknupp, updated July 2005 - ENNISKNUPP capital markets modeling assumption, page 1-10
6 Global Economics Paper No 165 - Vietnam: The Next Asian Tiger In the Making, page 1 – 12
7 LCF Rothschild, March 2008 - Country Funds Research, page 6
8 Ludovic Phalippou and Maurizio Zollo, 2005 - The Performance of Private Equity Funds,
9 Saša Djokić Marc Kilbert, January 2006 - Private Equity Investment
10 Standard & Poor’s 2007 - S&P LISTED PRIVATE EQUITY INDEX
Mr Nguyen Hai Ha, ex Investment Manager of Mekong Capital, CFO of Hanoi Fund Management
Mr Nguyen Duc Hung, Investment manager of Mekong Capital
Mrs Tran Kim Cuong, portfolio manager of Manulife
Bank Invest’s Private Equity New Markets
Ban Viet Pharmacy Focus Fund 2008 30 PE investment pharmacy
IDG Venture's IDG Vietnam Ventures
VinaCapital's DFJ-VinaCapital LP 2007 25 Technology venture technology
VinaCapital's VinaLand 2006 790 real-estate property
Anpha Capital’s Vietnam Equity Holding
Bao Viet Fund Management Co.’s Bao
BIDV-Vietnam Partners' Vietnam 2006 100 equity mix generalist
Deutsche Bank's DWS Vietnam Fund 2007 486 equity mix generalist
Golden Bridge Financial Group's Vina
Hanoi Fund Management’s Hanoi Fund 2006 120 equity mix generalist
Manulife Vietnam Fund Management Co
Mekong Capital's Vietnam Azalea Fund 2007 100 equity mix generalist
PXP Vietnam Asset Management's PXP
Vina Capital - Vietnam Opportunity Fund 2003 662 equity mix generalist
Viet Capital Fund Management’s Viet
Vietnam Emerging Market Fund (VEMF)