BANGKOK -- Vietnam is still a communist country, but it is fast becoming one of the world's hottest markets for companies that are synonymous with aggressive capitalism: private equity firms.
The appeal for Western private equity firms -- known for their appetite for risk and debt-fueled buyouts -- is clear. Vietnam's economy is growing fast, its stock market has been performing well and the government has rolled out plans to privatize many state-owned enterprises. These are ideal conditions for private equity giants such as Warburg Pincus, KKR and TPG, which have been pumping money into Vietnam as opportunities shrink at home.
Warburg Pincus has led the pack, committing $1 billion to invest in Vietnamese companies. In March, the firm made Vietnam's largest-ever private equity investment by taking a $370 million stake in Technological and Commercial Joint Stock Bank (Techcombank) ahead of its listing on the stock exchange in Ho Chi Minh City in June.
Warburg's first Vietnamese investment was $200 million -- later raised to $300 million -- in Vincom Retail, a shopping mall owner now valued at around $3.5 billion.
KKR is also turning its attention to Vietnam. The leading U.S. private equity firm invested in Masan Group, a Vietnamese food and beverage company, last year. Ashish Shastry, head of KKR Southeast Asia, said, "Vietnam holds great opportunity with its growing economy and favorable demographic trends."
Vietnam's boom is part of a larger trend across Asia, where total private equity investment rose 38% to $158 billion in 2017 -- eclipsing Europe for the first time, according to research company Preqin. More money is coming. Carlyle Group has established its largest-ever Asia fund, at $6.65 billion, and Blackstone Group announced in mid-June that it has closed its first Asian-focused private equity fund, at around $2.3 billion. Together with commitments from its global buyout fund, Blackstone said it has a minimum of $3.8 billion to invest in Asia. Joe Baratta, Blackstone's global head of private equity, said, "The region continues to experience strong growth compared to other major markets, presenting compelling investment opportunities across sectors."
Growth has been particularly strong in Southeast Asia, where total private equity investment nearly tripled to $23.5 billion in 2017. Investors are betting on higher economic growth, rising investment in technology and growing middle classes across Southeast Asia.
The World Economic Outlook report by the International Monetary Fund forecasts stable growth for the five major ASEAN nations of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, with growth of 5.3% in 2018 and 5.4% in 2019.
While the projected growth rates for China and India are even higher, a Hong Kong-based investment fund specialist points out that with shares already trading at relatively high levels in those countries, big returns on investments are less likely.
In Southeast Asia, on the other hand, investors have more opportunities to invest in promising companies without breaking the bank. As a result, the specialist said, "high yields can be expected in three to five years."
Another factor steering funds' attention toward Southeast Asia is widespread capital market reforms.
The 1997 currency crisis hit several ASEAN members hard, prompting them to introduce new regulations and other measures to prevent a recurrence. These included improving corporate governance practices to protect the interests of investors.
These reforms, which were largely modeled on those in the U.K. and the U.S., generally started around 2000 and have served as a catalyst for private equity funds to invest in the region.
Reforms in Vietnam have focused on the public sector, including recently privatizing state-owned enterprise.
The privatization push officially began in 2011, but it only started making significant progress in 2016 under the government of Prime Minister Nguyen Xuan Phuc. The number of SOEs that year fell to 583, down from 1,500 in 2010, and the number is projected to fall further to around 120 by 2020, according to Vietnam's Ministry of Finance. The number of listed companies, meanwhile, grew from 2 in 2000 -- the year Vietnam's first stock exchange opened -- to 686 as of the end of 2015, an overview by the State Securities Commission shows. Total market cap over the period went from 0.28% of GDP to 34.5%.
The government had intended to privatize state companies more gradually, but is now looking to speed up the process, in part to meet a projected $9 billion shortfall in its 2018 budget. A decree that took effect in January has made it easier for investors to take part in IPOs.
State companies that have gone public so far this year include Binh Son Refining and Petrochemical, PV Oil, PV Power and Vietnam Rubber Group. Major upcoming offerings include mobile network operator MobiFone, Vietnam Posts and Telecommunications Group and Vietnam National Tobacco Corp.
The prime minister has pitched these IPOs at numerous local and overseas business conferences, describing them as "opportunities for private and foreign investors to hold shares in Vietnamese enterprises."
These efforts are being recognized internationally. At a high-level conference in Hanoi in March, Ousmane Dione, the World Bank country director for Vietnam, said, "Recent progress in enhancing Vietnam's business climate has been very encouraging and clearly reflects the government's strong commitment to narrow the gap with top performing economies."
The private equity industry has its roots in the 1970s, when financiers such as Jerome Kohlberg, Henry Kravis and George Roberts used debt to make "leveraged buyouts" of family-owned businesses. An LBO boom followed in the 1980s, and the impression of these firms as ruthless profit-hunters -- sometimes known as "vulture capitalists" -- was cemented by the best-seller "Barbarians at the Gate."
While it has taken time to shake the "barbarian" moniker in the West, private equity funds enjoy a considerably higher reputation in Asia, where many see them as sources of not just funds but also management expertise.
"Private equity firms provide Asian companies with a wide range of human resources, governance and growth capital," said Luke Pais, a partner at consultancy EY.
TPG, the private equity fund run by David Bonderman, set off a series of deals in Southeast Asia's beer and spirits industries after it bought a 50% stake in Myanmar Distillery for $150 million in December 2015.
The private equity group advised Myanmar Distillery in a range of areas, including ways to improve management efficiency. Last October, TPG sold its entire stake to Thai Beverage (also known as ThaiBev) for an estimated $490 million in a sooner-than-expected exit, more than tripling its investment in just two years. (ThaiBev acquired a total 75% of Myanmar Distillery by buying shares from another party.)
ThaiBev is in a relatively mature market with an aging population, so making forays into frontier markets like Myanmar is a matter of survival. In December, it bought a stake in Vietnam's largest state-owned brewer, Saigon Beer Alcohol Beverage, or Sabeco.
The ThaiBev-TPG deal offers an example of how a private equity firm's exit strategy can influence industry realignment.
Private equity has also helped shape the epic ride-hailing battles in Southeast Asia, with KKR leading a $550 million investment in Go-Jek, the Indonesian ride-hailing company, in 2016. That investment boosted the startup's credibility, paving the way for later investments from Google and other big-name companies -- and fortifying it as it takes on Singapore-based Grab, which recently forced Uber Technologies out of the market after about four years.
A recent move by the ASEAN Economic Community may spur more private equity activity. In January, the group abolished nearly all tariffs in the bloc, giving companies a stronger incentive to formulate cross-border strategies in Southeast Asia. For many companies, this will mean pursuing growth through mergers and acquisitions. And if history is any indication, private equity firms will likely play a significant role in these M&A deals.
Atsushi Saito, former chairman of KKR Japan, said that in Europe, KKR was involved in a number of takeovers after the introduction of the euro as a common currency. This helped improve European companies' competitiveness, Saito said, suggesting that private equity funds could play a similar role in Asia.
Shifting sources of cash
The rise of private equity in Asia dovetails with another recent development in the region: rising personal wealth.
On May 17, fund managers, investment bankers and financial consultants from across Asia gathered at Singapore's Shangri-La Hotel to attend a conference of the Singapore Venture Capital & Private Equity Association.
Some of the newer faces at the conference belonged to family offices -- private wealth management advisory firms that serve the ultra-rich.
In the past, most family offices were based in Europe, but they are now becoming more common in Asia. Conferences like the one in Singapore are an opportunity for them to gather information on private equity funds in which they can park their clients' cash.
Data from Preqin shows that family offices are becoming an increasingly important source of investment money. Pension funds were the biggest supplier of cash for private equity funds established between 2012 and 2014, accounting for about 28% of all the money injected. They remained the top supplier in 2015-2017, but their share dropped to 20%. The figure for family offices, by contrast, tripled to 15%.
Western private equity firms do not have Southeast Asia all to themselves. Malaysia-based Navis Capital Group is one of several local players competing not on size but on expertise. Founded in 1998, just after the Asian currency crisis, Navis Capital started investing in undervalued companies and helping them turn their businesses around.
Thailand's Lakeshore Capital, which was launched in 2009, got its start acting as a substitute for banks, which had become increasingly risk-averse following the global financial crisis.
Kuala Lumpur-based Creador will soon launch its No. 4 fund worth $500 million. "Our strength is the localization [in ASEAN markets]," said founder and CEO Brahmal Vasudevan.
Mekong Capital, meanwhile, has been working to introduce Western-style business principles and attitudes into socialist Vietnam by bringing in executives from overseas to serve on company boards.
While their bigger U.S. rivals focus on growth rates and market reforms, Asian private equity firms like these are relying on their intimate knowledge of local business practices and their ability to sniff out and nurture promising companies.
Japanese private equity firms are going on the offensive, too. In mid-May, independent private equity firm Advantage Partners set up a $380 million Asia fund and announced that it would buy Malaysian plastic packaging maker Plastic Center.
Polaris Capital is preparing to launch an Asian investment fund worth about 14 billion yen ($130 million). "We want to boost the value of our investment by connecting Japanese and Asian companies," President and CEO Yuji Kimura said.
With U.S., Japanese and local private equity companies pouring money into Southeast Asia, there is vast potential for growth -- but also trouble.
The amount of "dry powder" -- money raised but not yet invested -- has reached a record $1 trillion worldwide.
An investment manager of a leading ASEAN sovereign wealth fund warned of a possible worst-case scenario: "If all this money that can't be used in developing countries came flooding in, it could lead to chaos in Asia's markets."