Page 1 Vietnam Investment Funds Review of Private Equity exits Grant Thornton Vietnam January 2011 Introduction There is a perception by many in the market that Vietnam’s private equity focussed investment funds have difficulties in achieving exits from their investments. With the tightening of capital markets following the global financial crisis it is through exits that fund managers have been able continue to make new investments without raising additional capital. As a result, the level of exits that have been actually achieved by the fund managers is of significant importance to the industry. Grant Thornton Vietnam sought to bring clarity to the true level of exit activity being achieved by surveying the leading fund managers. Although participation in the survey was voluntary, the fund managers that participated provide a representative sample of the leading managers, most with a well established track record. The survey was conducted in December 2010, and includes data up to 30 November 2010. Questions covered investments made, exits achieved, method of exits and the length of time that investments were held. For the purposes of the survey, a “private equity” transaction has been defined as an investment in the equity of a company in Vietnam, which is not listed or in the process of listing, and where a minority ownership position exists. This will often include minority protection for investors and board positions, however this will depend on each individual investment. Summary Survey results show that the participating fund managers have invested more than USD1.8 billion in private equity investments in Vietnam since 2003, in almost 200 companies. 2007 saw the largest number of investments made, both in value and in number, with a substantial decrease seen in the following years. During 2003 - 2010, the period covered by the survey, 150 full and partial exits have been achieved by participating fund managers in Vietnam. The average holding period was approximately three years for each full and partial exit achieved. The average holding period has been trending upwards over the survey period, with exits in 2010 taking, on average, between four and five years. Stock exchange listings have continued to be the predominant method used by fund managers for exiting from their investments, accounting for over 60% of all exits. Fund Manager First year established Active investment funds Funds managed (USD millions) Dragon Capital 1995 8 1,000 Indochina Capital 1999 8 545 Mekong Capital 2002 3 150 Prudential Vietnam 2002 3 1,300 VinaCapital 2003 6 1,730 BankInvest 2007 2 250 AIM Capital Management 2009 2 18 Participating Fund Manage rs Page 2 0 100 200 300 400 500 600 700 800 2003 & prior 2004 2005 2006 2007 2008 2009 2010 YTD $million 0 10 20 30 40 50 60 Total value of PE investments made ($millions) No. of PE investments made Vietnam Investment Funds – Review of private equity exits Value and number of private equity Investments The value of private equity investments made by the survey participants between 2003 and 2010 exceeded USD1.8 billion, accounting for almost 200 individual investments. The peak year for investments was in 2007, where more than USD750 million was placed into private equity investments, 2.5 times the value than in any other year in the survey period. Following the 2007 peak, we have seen a dramatic drop-off in the value and volume in private equity investments made. This is a reflection of the constraints in the capital markets in raising funds following the global financial crisis and domestic market issues that arose in Vietnam following the global slowdown. With recoveries in global markets and the continued strong domestic growth in Vietnam, fund managers have been actively promoting their new investment funds to global investors. They appear poised to have fresh capital to underpin an upswing in private equity investments in the near term. Exits Fund managers have achieved an equal spread between the number of full and partial exits since 2003. 2007 was the largest year for exits, with USD292 million in value and 40 exits achieved. The number of exits, when compared with the number of investments made, show that there is a build up of private equity investments that are still seeking an exit opportunity, and particularly those requiring a full exit, in Vietnam. Private equity investments made in 2007, the peak year, are only now being readied for exits by many fund managers. The survey shows an average holding period of approximately three years. Current trends show this is moving towards an average holding period of four to five years. Therefore we would expect that 2011 and 2012 will result in larger values and volumes of exits by fund managers. Year No. of investments made Total value of investments ($millions) 2003 & prior 31 281 2004 14 71 2005 30 207 2006 35 220 2007 55 752 2008 16 197 2009 8 60 2010 (Nov) 8 71 Year No. of full exits achieved No. of partial exits achieved Total value of exits achieved ($millions) 2003 & prior 1 0 3 2004 1 4 47 2005 7 4 47 2006 5 7 135 2007 18 22 292 2008 13 14 230 2009 18 16 242 2010 (Nov) 12 9 150 Total value vs. number of PE investments Value and number of PE investments made Value an d number of PE exits Total value vs. number of PE exits 0 50 100 150 200 250 300 350 2003 & prior 2004 2005 2006 2007 2008 2009 2010 YTD $million 0 5 10 15 20 25 Total v alue of ex its achiev ed ($millions) No. of full ex its achiev ed No. of partial exits achiev ed Page 3 0% 20% 40% 60% 80% 100% 2003 2004 2005 2006 2007 2008 2009 2010 YTD Listing Trade Sale Secondary Sale Sell back to Sponsors Wind down / liquidation Other 0 10 20 30 40 50 60 70 80 2003 & prior 2004 2005 2006 2007 2008 2009 2010 YTD months Average length of time invested (months) for each partial exit Average length of time invested (months) for each full exit Vietnam Investment Funds – Review of private equity exits Exit methods Stock exchange listings are certainly the most favoured method of achieving an exit for fund managers in Vietnam. They account for almost twice the number of exits compared to all other methods since 2003. Each of the other methods of achieving exists have generally remained relatively insignificant, other than for a few spikes in 2005 and 2006. In 2010 we saw an increase in the number of secondary sales (sales to other fund managers). Especially as new entrants sought to take a cautious path and invest in targets that had already been vetted and invested in by experienced fund managers. We also saw trade sales drop off completely in 2010. This presents fund managers with a challenge, as trade buyers traditionally make up a large portion of buyers for private equity exits in a global context. Listings will likely continue to be the preferred exit method for private equity investments in Vietnam. This is due to the relatively lower barriers to list and the less onerous compliance requirements for listed companies in Vietnam. Length of time invested for each exit Survey data shows that the average length of time that the investment funds remain invested in a company prior to an exit (full or partial) has been trending upwards in Vietnam. The 2010 data indicates an average holding period of around four to five years. Over the full survey period the average length of time that investments have been held is three years. The data suggests that the length of time an investment is held is not significantly different between partial and full exits. It is often argued that investments take time to mature in Vietnam, supporting the relatively equal number of partial to full exits recorded. Partial exits, in this context, appear to be used to free up investment capital whilst the investment is still maturing. Based upon the large number of investments made in 2007, the next two years should result in a large number of investment exits by the fund managers. Year Average length of time invested (months) for each partial exit Average length of time invested (months) for each full exit 2003 & prior 0 73.0 2004 28.4 2.0 2005 7.5 47.9 2006 36.9 51.8 2007 38.1 33.6 2008 26.6 45.7 2009 44.4 37.8 2010 (Nov) 52.3 65.5 Exit methods Average length of time invested Average length of time invested Page 4 Vietnam Investment Funds – Review of private equity exits Case studies – successful exits from participating fund managers Mekong Enterprise Fund invested in Saigon Gas in November 2005, the first consumer-focused investment by Mekong. At the time, one of the attractions was that Saigon Gas’ business model, LPG distribution and branding, was a model which had an extensive track record of M&A and industry consolidation in most Asian countries. Typically the industry begins highly fragmented, but eventually through M&A 2-3 leaders consolidate the industry and enjoy the scale advantages of doing so. Mekong achieved a gross return multiple of 2.0x and a gross IRR of 25.9% on the investment Mekong Enterprise Fund II invested in Golden Gate in April 2008, at a time that the company operated around five restaurants under the Ashima brand. Mekong Capital worked closely with the company to align around a five-year vision, develop a plan for achieving that vision, and implement the plan. Within two years, Golden Gate had scaled up to around 30 restaurants under the Ashima and Kichi Kichi brands, while maintaining attractive net profit margins. Golden Gate hired a local advisory firm, TNK Capital, to find potential buyers for a secondary transaction for a minority stake. The deal was completed in October 2010, resulting in a gross return of 3.7x and gross IRR of 72.7%. Vinamilk is the country’s flagship corporate and its leading dairy- products manufacturer. Dragon Capital was involved very early in the equitisation process, having advised on the roadmap for privatisation and listing when the company was still an SOE. Dragon was the first foreign investor in the company, and joined the Vinamilk Board after the IPO. It has been an active Board member since. Recently, Dragon Capital decided to make a partial exit from Vinamilk via an open auction to foreign investors. The exit tranche was about 1% of the company and 12% of its stake. The $19m deal resulted in an exit multiple of 5.1x and an IRR of 39% over six years. In March 2010, Dragon Capital sold its VP Bank stake at a 30% premium to its carrying value. Dragon Capital acquired 10% of VP Bank as a strategic investment in 1996. A partial exit occurred in 2007 when bank valuations soared, and VP Bank shares hit 10x book. The balance of Dragon Capital’s stake was sold in March 2010 at a valuation of approximately 2.5x book. In total, the investment achieved a 2.7x multiple and an IRR of 21%. VP Bank is typical of an investment where Dragon Capital applied hands-on intervention to preserve shareholder value. In July 2006, VinaCapital purchased a 17.5% stake in the Hilton Hanoi, a five-star, 271- room hotel located across from the Hanoi Opera House in the centre of Vietnam’s capital city. Together with a 52.5% stake owned by VinaLand Limited, the two VinaCapital-managed funds held a controlling 70 percent stake in the hotel. The sale of the equity stake resulted in an IRR of 26% over the three years the stake was held. VinaCapital sold its position in Masan Group, a diversified food products company that owns well- known fish, chilli and soy sauce brands such as Chinsu. The sale of the equity stake was at a price 81% above the book value of the position in the VOF portfolio. The sale achieved an IRR of 83% and multiple of 2.8x. VOF had held Masan for 33 months. Page 5 Grant Thornton Vietnam is a full service Auditing and Advisory firm, originally established in Vietnam in 1993. We provide a wide range of services to the fund management sector, including: • Audit and Assurance • Taxation and structuring advice • Transaction advice (including buy-side and sell-side M&A support) • Independent Due Diligence reviews and reports • Strategic and Corporate Governance reviews • Diagnostic and performance reviews • Feasibility studies • Valuations • Internal audits and control reviews For further information or assistance, please contact: Ken Atkinson Managing Partner T +84 8 3910 9100 E ken.atkinson@gt.com.vn Matthew Lourey Advisory Services Director T +84 8 3910 9149 E matthew.lourey@gt.com.vn Nguyen Thi Vinh Ha Ronald Parks Audit Partner Tax Partner T +84 4 2220 2630 T +84 8 3910 9100 E vinha.nguyen@gt.com.vn E ronald.parks@gt.com.vn Alan Dy Audit Partner T +84 8 3910 9191 E alan.dy@gt.com.vn Grant Thornton (Vietnam) Ltd offices: Hanoi 8th Floor Vinaplast-Domus Building 39A Ngo Quyen Street Hoan Kiem District T +84 4 2220 2600 F +84 4 2220 6449 Ho Chi Minh City 28th Floor Saigon Trade Center 37 Ton Duc Thang Street District 1 T +84 8 3910 9100 F +84 8 3914 3748 www.gt.com.vn © 2010 Grant Thronton (Vietnam) Ltd. All rights reserved. Grant Thornton Vietnam is a member firm within Grant Thornton International Ltd (“Grant Thornton International”). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. This publication is general in nature and should not be construed as providing advice. No responsibility is taken for any party acting on the contents of this document. . value of PE investments made ($millions) No. of PE investments made Vietnam Investment Funds – Review of private equity exits Value and number of private. Average length of time invested Average length of time invested Page 4 Vietnam Investment Funds – Review of private equity exits Case studies