After a recent correction, Vietnam’s equity market has bounced back and so has capital-raising for new funds. The latest to tap the markets are PXP Vietnam Asset Management and Mekong Capital. Both managers have successful track records investing in Vietnamese equities yet both are raising new funds to expand into new investment areas.
PXP, with three existing funds investing in listed and pre-listed Vietnamese equities, is seeking $150 million for its PXP Qudos Vietnam Property Fund, a development fund to be run in partnership with Qudos Asia and HBP Group, both established property businesses in Vietnam.
Mekong, which is well known for its focus on early stage private equity investments through its existing two funds, expects to close the $100 million Vietnam Azalea Fund by the end of May, which will invest in state-owned privatization companies listing on the local stock market.
It is tempting to observe that the launch of these new funds offers evidence of an overheated market, given the managers’ diversification into new investment areas in which they do not have a direct track record. However, both managers rebut this view.
"Having said we’d never do a property fund because we don’t understand it, here we are launching one," says Kevin Snowball, chief representative at PXP. "But we’re doing this with people with a solid track record in property development. Unlike many of the other property funds, which seem to be land-banking plays, our fund will be pure development."
Chris Freund, managing director of Mekong, says that his new offering is a natural extension of his previous two funds.
"We’re trying to get as close as possible to the early stages of the privatization process," he says. "We’ll be looking to negotiate private placements with selected candidates after their first auctions, which tend to be dominated by local investors. That’s the only way to negotiate shareholder rights."
Despite the new investment areas, neither manager appears to be having difficulty raising capital.
"We’re marketing already," says Snowball. "We’ve got indications of $200 million but I won’t bank on anything until it’s in the account. We’re raising sufficient money for projects that are ready to go or at the later stage of negotiation and want to deploy within two to three years. We don’t like sitting on cash."
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Vietnam market capitalisation and Asia comparables |
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As a percentage of GDP, as at March 2007 |
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Source: CEIC and Morgan Stanley |
On closing, the PXP fund will immediately purchase a portfolio of properties, including 14 leased luxury apartments, a resort development project and negotiation rights on several commercial and resort developments.
Help from friends
Freund says that Mekong has not done much fund-raising so far but already has all the investors lined up.
"We don’t do much marketing ourselves. Indochina Capital, Vina Capital and Dragon Capital [three of the largest local fund managers] do a lot and when investors come to Vietnam, they tend to see everyone. That has helped us."
Mekong’s new fund is targeting investments of between $5 million and $10 million in around a dozen companies. Rather than adopting a sector focus, the fund will target privatizing companies that are also undergoing management transition, with communist-era teams giving way to younger management, often with international experience. "Most of the really interesting privatizations are just starting," says Freund. "Our experience has consistently been that the quality of management determines everything. That’s a clear pattern across our funds and we want to leverage our existing approach as much as possible."
That sounds like an intelligent approach but it might be hard to implement in practice without a correction in valuations. PXP estimates that there is more than $2 billion of fresh capital raised by Vietnam-dedicated funds looking for a home, some of it waiting for valuations to drop.
Whether that happens or not is difficult to call but the launch in May by Citi and FTSE Group of the FTSE Vietnam Accessible Index might have some bearing on the matter.
Touted as the first Vietnam equity index for foreign institutional investors, the FTSE index will take the top 80% of Saigon-listed stocks by full market capitalization and adjust for foreign ownership restrictions to provide a "highly investible and representative index to meet international investor needs," according to Citi and FTSE.
According to Snowball, the new index is likely to have an entirely different effect on the market.
"I’m not convinced it’s a great idea," he says. "They’ll have to rebase it so often for new listings and foreign ownership changes. If people decide they want Vietnam and this is the way they play it, it’ll be the same problems all over again, with everyone buying the same liquid stocks and pushing the index higher."
With Citi intending to launch an index tracker fund off the new index, Snowball sees other unintended uses for the new index.
"This could be interesting from the short side," he says. "With most country funds now trading below NaV, invested in the same stocks and the index at a premium, pushed up by foreign buying, why wouldn’t you short that? Before the Vietnam Opportunities Fund, at a 50% to 60% premium to NaV was the hedge. With Citi’s new ETF coming, we’ll be able to use that."
With the Vietnamese market still nowhere close to being representative of the general economy such anomalies will persist. The government clearly needs to address supply and demand imbalances as a matter of urgency.