(Luận văn thạc sĩ) private equity investmentframework and prospect for vietnam

V IE T N A M N A T IO N A L U N IV E R S IT Y , H A N O I S C H O O L O F B U S IN E S S N gu yen D uc H PRIVATE EQUITY INVESTMENT: FRAMEWORK AND PROSPECT FOR VIETNAM Major: Business Administration Code: 60 34 05 M A S T E R O F B U S IN E S S A D M IN IS T R A T IO N T H E S IS SUPERVISORS: H anoi - 2008 DR NGUYEN VAN DINH HA NGUYEN, MBA TABLE OF CONTENTS ACKNOW LEDGEM ENTS i ABSTRACT ii T Ó M T Ẩ T iii LIST OF ABBREVIATIONS vi LIST OF TABLES .vii LIST OF FIGURES viii INTRODUCTION 1 The problems 2.Objectives and A im s Research questions Scope of w ork .2 Data sources Methods Significance Limitation Expected results 10 O utline CHAPTER - LITERATURE REV IEW 1.1 The concept of private equity .5 1.2 Type of Private Equity 1.2.1 Venture Capital 1.2.2 Buyout .7 1.3 Investing Structure 1.4 Size ranking 11 IV 1.5 Private Equity Performance 12 1.5.1 J-curve 12 1.5.2 Expected return 12 1.5.3 Real IRR o f Private Equity 13 1.6 Private Equity in emerging m arket 15 1.6.1 Private equity in investment p o o ls 15 1.6.2 Emerging m arket .17 CHAPTER -PRIVATE EQUITY IN VIETN A M 23 2.1 Vietnam Investment C ontext 23 2.1.1 Robust growth r a te .23 2.1.2 Bright prospective 24 2.1.3 Young and grow labor force 25 2.2 Private Equity in V ietnam 26 2.2.1 Investment fund industry 26 2.2.2 Private equity market snapshot 30 2.2.3 Mekong C apital 33 CHAPTER -LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM .47 3.1 Lessons from natural characteristic of private equity investm ent .47 3.2 Lessons for investors who are considering allocate his assets to private equity funds 48 3.3 Lesson for fund managers who are considering allocate his fund capital to private equity 51 BIBLIOGRAPHY 56 A PPEN DIX 58 L IST O F A B B R E V IA T IO N S PEI Private Equity Investment EVCA EVCA - European Private Equity and Venture Capital Association was established in 1983 and is based in Brussels EVCA represents the European private equity sector and promotes the asset class both within Europe and throughout the world EMPEA EMPEA - Emerging Markets Private Equity Association EMPEA is a broad-based membership organization founded in 2004 to focus on the emerging private equity markets of Africa, Asia, Central and Eastern Europe, Russia, Latin America, the Middle East, and Russia EMPEA is comprised primarily o f private equity fund managers, but also includes institutional investors, service providers and others with an interest in the asset class EM Emerging market CEE Central and Eastern Europe IRR Internal rate o f return vi LIST O F T A B L E S Table 1-1 Beta, Standard deviation and Expected return 12 Table 1-2 Growth in Fund Raised 2005 - 2007 17 Table 1-3 Distribution of Fund sizes for Funds with final closes in 2007 18 Table 2-1 Mekong's typical investee com panies 39 Table 4-1 Investment Fund results 61 vii LIST OF FIGURES Figure 1.1 Venture InvestmentS tages Figure 1.2 An Overview of alternative investment Figure 1.3 Principal means of investing in Private Equity .9 Figure 1.4 The J-curve 12 Figure 1.5 Private Equity performance 14 Figure 1.6 Performance of upper and lower quartile 15 Figure 1.7 Total investable Capital market- December,2006 16 Figure 1.8 Emerging markets Private Equity Fundraising Totals, 2003-2007 17 Figure 1.9 Stage of funds with final closes in 2007 .19 Figure 1.10 Sector focus among funds with closes in 2007 20 Figure 1.11 Distribution o f EM PE Fundraising by Region, 2003 - 2007 ($US mn) 21 Figure 1.12 Emerging marketsprivate equity fundraising totals by region, 2003 2007 ($US m n) 21 Figure 1.13 Fundraising by country 22 Figure 2.1 The real GDP growth in 2006 23 Figure 2.2 Growth rate compare 24 Figure 2.3 GDP & inflation rate 25 Figure 2.4 Population growth 25 Figure 2.5 Vietnam's Demographic structure (% total population) 26 Figure 2.6 Fundraising in Vietnam 28 Figure 2.7 Fund type & strategy 28 Figure 2.8 Private equity fundraising in Vietnam 31 Figure 2.9 Mekong Fundraising, 2002 - 2007 33 Figure 2.10 Mekong enterprise fund performance, 2002 - 1H2008 36 Figure 2.11 Mekong Enterprise Fund, % capital allocation stag e 37 IX INTRODUCTION 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 o f 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 o f operation o f 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? • How did PEI perform? • 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 the fact research, this thesis will study and describe the PEI industry through study its associations operation reports and also inherit research results from some institutions who deeply study about this Private Equity Industry 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 o f 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 o f Private Equity Investment in Vietnam, so few academicals reviews have been applied and Droved The other limit is from case study method This method cannot cover all the heoretical issues of Private Equity Investment Thus, later this case, this hesis only studies the overall performance o f PEI Expected results The thesis expects to give the systematical theory in Private Equity nvestment, and give some principals guideline for investors 10 Outline Excluding introduction, conclusion and reference part, this thesis includes hree parts as follows: CHAPTER - LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM As long as there is an international agreement about the private sector’s essential role in the development process, alternative financing techniques such as private equity must remain on center stage Globalization, with its emphasis on open markets, lower barriers to trade and investment, and crossborder competition, will strengthen this trend by fostering intense struggle among both countries and firms for scarce financial resources Some governments already are responding by passing legislation to better protect the rights of minority shareholders and by liberalizing burdensome tax regulations that discourage foreign investors This new environment also favors so-called new economy companies, with managers who are less resistant to third-party investors and more accepting of international standards of corporate governance Thus, despite some early setbacks, there are encouraging signs that a private equity rebound in emerging markets is not only desirable but credible However, the key players must make innovative adjustments that reflect the realities surrounding this type of investing With a different approach, the promise o f private equity will begin to be realized 3.1 Lessons from natural characteristic of private equity investment PEI is illiquidity - Invest to PEI directly usually require a long term holding with term of 5-10 or more years under the limited partnership form There are no markets for these partnership interests and they cannot be liquidated or easily transferred The illiquid nature of Private Equity is reflected in the fact that the average 47 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 Results Dependent on Management - The ultimate level of returns received by investors is highly dependent on the skill of the fund-of-funds manager and their access to good investment partnerships and the competence of partnership management is the core energy to acquire profit for PEI Information Access - the access information is crucial component o f 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 o f 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.” 3.2 Lessons for investors who are considering allocate his assets to private equity funds The ways of investing in private equity The investor can invest to private equity through: Private equity fu n d : such focus private equity funds as Mekong capital, Bank invest (PENM), ID G etc are specialized in investing to private 48 equity Becoming shareholders o f these funds, the investors will receive quarterly reports and monitor what entrepreneurs funds invest in period? Size o f investment? The business activities report? Performance o f these investm ents etc Fund o f funds : In other emerging markets, the government allows to set up fund o f fund (FOF) type which is permitted to invest to other fund like private equity fund The investor can buy share o f FOF, the FOF then buy share o f PE fund which specialize in investing to private equity Investment mix funds: Some funds with investment mix strategy will invest a portion o f its capital to private equity If investor are interested in these vehicles they can invest to these funds Directly invest to private company : for those who are capable competence in managing their investment by their own Private equity funds Investors ■ 11 11■ # Fund of Funds PE funds Company Company Company Investment mix funds Company Expectation return The expected return is the relevant assumption from the point o f view o f a long term investor It is the return that the asset will experience over the long­ term 49 The investment in Private Equity is not h|,i done at once like for a classic stock The i' 1,11,v ri * investor has generally a negative cash­ flow during the first years of the l | l l | J - investment and then starts to get his return This is illustrated in beside figure Challenges: liquidity and flow of information The development o f 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 o f the future management fees payable to the PE fund managers While the sale o f 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 so has certainly contributed to the somewhat heightened skepticism that investors display towards PE fund today The use o f freedom of information legislation, to demand increased public disclosure by limited partners (LPs) o f the details o f their private equity investments, has caused a growing number o f GPs to require investors to enter into non-disclosure agreements that limit the ability of their LPs to distribute information In the PE fund industry this trend has caused a decline 50 in the comprehensiveness and detail of reporting information and thus reduced the benefit o f information sharing and market insights that investors might otherwise have received as a result o f their PE fund relationships 3.3 Lesson for fund managers who are considering allocate his fund capital to private equity The key success of fund managers to private equity investment is the synergy o f fund capital, active consultant with entrepreneurs’ spirit and expertise Trend and source o f fundraising: the trend o f fundraising determine action plan of investment fund managers, with the significant growth o f 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 o f private fund are 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 o f 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: Add value The management role o f the private equity investor in emerging 51 markets is even more important than in developed countries, given the unusual challenges of creating a feasible exit opportunity Fund managers must re-think the professional expertise required for these tasks, recognizing that the analytical and negotiating skills required to make an investment are not similar as those required to improve corporate value during the post­ investment phase Initially, the industry relied too heavily on ex- investment bankers educated to “do deals,” collect their fee, and move on to the next transaction They badly underestimated the amount o f practical time required to monitor portfolio company performance Attending periodic board meetings, reading financial reports, and observing performance from afar is not sufficient Instead, professionals must take on the difficult and timeconsuming tasks of strengthening corporate governance practices, restructuring management, and positioning the company for a profitable exit More discerning deal selection Funds are becoming more proactive in deal selection, rather than waiting for business proposals to land on their desks or for investment bankers to make a pitch on behalf o f a client “The best deals are ones we create In our most successful transaction, we proactively approached the company once we had decided that we wanted to be in the sector We looked for an attractive company where we would not be in a bidding auction.” - as an expert said Good deals must fit the skill set and industry knowledge of the fund manager, and offer identifiable opportunities for enhancing 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 o f the expected uncertainties about an event that will not occur for at least three to 52 five years thus, there is increasing rigor applied to the exercise o f 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 o f 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 o f directors 53 C O N C LU SIO N 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 usually in the form o f limited partnerships, with terms of 10 or more years There are no markets for these partnership interests and they cannot be liquidated or easily transferred Private capital investments appear to be more stable in price than they actually are because most assets are valued at cost until a measurable event occurs Its ultimate level o f returns received by investors is highly dependent on the skill o f the fund-of-funds manager and their access to good 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 o f large opportunities to assort the capital from the ventures For investors who are interested in allocating a part o f his asset to private equity investment, they should prepare knowledge and focus much on very natural characteristic o f private equity investment such as: Illiq u id ity : commitment holding period o f 5-10 or more years; R e s u lts d e p e n d e n t o n m anagem ent - its ultimate level o f returns is highly dependent on the corporate management; I n fo r m a tio n A c c e s s : the information is limited; V o la tility -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 o f their asset to private 54 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 o f 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 o f 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 o f boards o f 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 55 B IBLIO G R A PH Y Deutsche Bank, Investment Report 26 July 2007 - 'U n d e r s ta n d in g V ietn a m , page 3-15 EM PE, 2007 - E m e r g in g m a r k e t P r iv a te E q u ity 0 F u n d r a is in g R e v iew , E m e r g in g m a r k e t P r iv a te E q u ity A s s o c ia tio n , Page - Ennisknupp, updated January 2008 - E N N IS K N U P P c a p ita l m a rk e ts m o d e lin g a s su m p tio n , page 1-10 Ennisknupp, updated July 2005 - E N N I S K N U P P c a p ita l m a r k e ts m o d e lin g a s su m p tio n , page 1-10 E V C A - A n n u a l r e p o r t 0 -2 0 , Global Economics Paper No 165 - V ietn a m : T h e N e x t A s ia n T ig e r In th e M a k in g , page - LCF Rothschild, March 2008 - C o u n tr y F u n d s R e s e a r c h , page Ludovic Phalippou and Maurizio Zollo, 2005 - T h e P e r fo r m a n c e o f P r iv a te E q u ity F u n d s, Sasa Djokic Marc Kilbert, January 2006 - P r iv a te E q u ity In v e stm e n t 10 Standard & Poor’s 2007 - S & P L I S T E D P R IV A T E E Q U I T Y I N D E X 11 Interviewers: Mr Nguyen Hai Ha, ex Investment Manager o f Mekong Capital, CFO o f Hanoi Fund Management Mr Nguyen Due Hung, Investment manager of Mekong Capital 56 Mrs Tran Kim Cuong, portfolio manager o f Manulife 57 A P P E N D IX Investment funds - Sample research: Funds Start year Initial Fund type Strategy Capital ($'mn) 2006 80 PE investment generalist 2002 31 PE investment generalist 2006 50 PE investment generalist Ban Viet Pharmacy Focus Fund 2008 30 PE investment pharmacy IDG Venture's IDG Vietnam Ventures 2004 100 Technology technology Bank Invest’s Private Equity New Markets (PENM) M ekong Capital's M ekong Enterprise Fund, Ltd M ekong Capital's M ekong Enterprise Fund 11, Ltd venture Fund 2007 VinaCapital’s DFJ-VinaCapital LP 25 Technology technology venture 2007 50 real-estate property 2007 250 real-estate property 2007 300 real-estate property 2007 340 real-estate property VinaCapital's VinaLand 2006 790 real-estate property Anpha C apital’s Vietnam Equity Holding 2007 80 equity mix generalist 2006 30 equity mix generalist 2006 200 equity mix generalist 2006 100 equity mix generalist Anpha Capital’s Vietnam Property Holding (VPH) Dragon Capital’s Vietnam Resource Investments Indochina Capital's Indochina Land Holdings VinaC apital’s Vietnam Infrastructure Limited (VNI) (VEH) Bao Viet Fund M anagem ent C o.’s Bao Viet Investm ent Fund Blackhorse Asset M anagement's Blackhorse Enhanced Vietnam Inc BIDV-Vietnam Partners' Vietnam 58 Investment Fund Deutsche Bank's DWS Vietnam Fund 2007486 equity mix generalist Dragon Capital M anagement's Vietnam 1995525 equity mix generalist Enterprise Investments Ltd (VEIL) Dragon Capital Management's Vietnam 2004 330 equity mix generalist 2005 200 equity mix generalist 2007 50 equity mix generalist Growth Fund Limited Dragon Capital M anagement's Vietnam Dragon Fund Golden Bridge Financial Group's Vina Blue Ocean Fund Hanoi Fund M anagem ent’s Hanoi Fund 2006120 equity mix generalist Indochina Capital's Indochina Capital 1999785 equity mix generalist Vietnam Holdings 2007 M anulife Vietnam Fund M anagement Co Ltd’s M anulife Progressive Fund 13 equity mix generalist ¡1i11b1 (M APF1) M ekong Capital's Vietnam Azalea Fund 2007 100 equity mix generalist Prudential Vietnam Fund M anagement 2007 30 equity mix generalist 2007 50 equity mix generalist 2007 50 equity mix generalist 2007 50 equity mix generalist 2007 50 equity mix generalist 2005 30 equity mix generalist Co.’s Prudential Balanced Fund Prudential Vietnam Securities - Vietnam Segregated Portfolio Fund PXP Vietnam Asset M anagem ent’s Vietnam Lotus Fund PXP Vietnam Asset M anagement's PXP Vietnam Fund Ltd PXP Vietnam Asset M anagement's Vietnam Em erging Equity Fund Thanh Viet Corporation’s Saigon Securities Investm ent Fund A l (SFA1) Vina Capital - Vietnam Opportunity Fund 2003662 Viet Capital Fund M anagem ent’s Viet 200730 equity mix generalist equity mix generalist 61 generalist Capital Fund (VCF) 2004 VietFund M anagem ent’s Viet Fund (V F l) 59 equity mix 2008 VietFund M anagem ent’s Viet Fund 48 equity mix generalist 120 equity mix generalist (VF2) 2006 V ietcom bank Fund M anagement (VCBF)fs V ietcom bank Partners Fund (VPF1) 2006 Vietnam A sset M anagement (VAM)'s Vietnam Em erging Market Fund (VEMF) 60 45 equity mix generalist Table 4-1 Investment Fund Performance Results N et A s s e t V a lu e Fund N am « [Reuters Co de] M id P rice D ffd «NAV P u b 'd NAV A s of D ilu te d D is c o u n t/P re m iu m Freq Currant 52 w k avg (%) 52 wk s.d N A V P e rfo rm a n c e R is k L iq u id ity S ize U S $ Total R e tu rn s (%) Volrel toi