VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS Nguyen Duc Hai PRIVATE EQUITY INVESTMENT: FRAMEWORK AND PROSPECT FOR VIETNAM Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS SUPERVISORS: DR. NGUYEN VAN DINH HA NGUYEN, MBA Hanoi – 2008 ACKNOWLEDGEMENTS During my study, I have received many helps from my supervisors, my family, my colleagues and my classmate Firstly, I would like to express my sincerely thanks to Mr. Nguyen Hai Ha, Mekong Capital’ ex-investment manager, and my boss now, for his suggestions and supports. I also would like to thank to other colleagues at Vietnam Equity Holding fund for their advices and contributions to my thesis.
To my supervisors, I would like to give my deeply thanks to Mr. Ha Nguyen for his time to instruct me and give me valuable suggestions. I also would like to offer my special thanks to Dr. Nguyen Van Dinh for his encouragement to complete the thesis.
I also would like to thank Ms. Nguyen Hong Ha, Ms. Nguyen Thu Trang and others HSB faculty members for their helps and supports. Finally, I would like to send my heartfelt thanks to my family members, my classmates for their supports and encouragements.
i ABSTRACT PRIVATE EQUITY FUND: FRAMEWORK AND PROSPECT FOR VIETNAM Nguyen Duc Hai MBA Candidate, 2005 – 2007 School of Business Vietnam National University, Hanoi Supervisor: Nguyen Van Dinh, Assoc.,PhD Ha Nguyen, MBA My thesis aims to answer the question: how Private Equity Fund invests and to provide some frameworks & guidelines for who are interesting in this investment vehicle. First, the author illustrates the Private Equity industry, its structure, its researched framework and its activities in emerging countries Second, the thesis will study and research the fact of Private Equity industry in Vietnam. The author also chooses Mekong Capital as a snapshot to know what a typical private equity fund in Vietnam does and then withdraw some operational experiences from its experts. 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 a part of fund assets to Private Equity, investors who are considering to invest to private equity fund.
ii TÓM TẮT QUỸ ĐẦU TƯ TƯ NHẤN: CẤU TRÚC KHUNG VÀ TRIỂN VỌNG CHO THỊ TRƯỜNG VIỆT NAM Nguyễn Đức Hải Khoa Quản trị kinh doanh – Đại học Quốc gia Hà nội Người hướng dẫn: PGS.TS Nguyễn Văn Định ThS. Hà Nguyên Tháng 10 năm 2008, 70 trang Luận văn này nhằm giải đáp cho câu hỏi: quỹ đầu tư tư nhân đầu tư như thế nào và cung cấp một vài khung và một số chỉ dẫn cho những ai quan tâm tới loại hình đầu tư này. Đầu tiên, tác giả mô tả minh họa về ngành đầu tư tư nhân, cấu trúc, các nghiên cứu khung và các hoạt động của nó ở các thị trường mới nổi. Sau đó, bài viết sẽ tiến hành nghiên cứu thực tế về ngành quản lý đầu tư tư nhân ở Việt nam.
Người viết cũng chọn Mekong capital làm một bức tranh cụ thể để nghiên cứu và rút ra thêm các bài học kinh nghiệm về quản lý quỹ đầu tư tư nhân ở Việt nam Cuối cùng, bài viết sẽ liệt kê một số bài học có thể ứng dụng cho loại hình đầu tư tư nhân ở Việt nam cho các nhà quản lý đầu tư, những người đang quản lý các quỹ đầu tư và đang có ý định đầu tư vào loại hình đầu tư tư nhân và những nhà đầu tư, những người đang muốn đầu tư vào các quỹ đầu tư tư nhân. iii TABLE OF CONTENTS ACKNOWLEDGEMENTS. iii LIST OF ABBREVIATIONS. vi LIST OF TABLES.
vii LIST OF FIGURES. Objectives and Aims. Scope of work. 3 CHAPTER 1 – LITERATURE REVIEW .1 The concept of private equity .2 Type of Private Equity .5 Private Equity Performance.3 Real IRR of Private Equity .6 Private Equity in emerging market .1 Private equity in investment pools.
17 CHAPTER 2 –PRIVATE EQUITY IN VIETNAM.1 Vietnam Investment Context .1 Robust growth rate .3 Young and grow labor force .2 Private Equity in Vietnam .1 Investment fund industry.2 Private equity market snapshot. 33 CHAPTER 3 –LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM .1 Lessons from natural characteristic of private equity investment .2 Lessons for investors who are considering allocate his assets to private equity funds.3 Lesson for fund managers who are considering allocate his fund capital to private equity. 58 v LIST OF ABBREVIATIONS 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 of 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 of return vi LIST OF TABLES 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 companies. Investment Fund results. 61 vii LIST OF FIGURES Figure 1.1 Venture Investment Stages.2 An Overview of alternative investment. Principal means of investing in Private Equity.
Private Equity performance. Performance of upper and lower quartile. Total investable Capital market- December, 2006.8 Emerging markets Private Equity Fundraising Totals, 2003-2007.9 Stage of funds with final closes in 2007.10 Sector focus among funds with closes in 2007.11 Distribution of EM PE Fundraising by Region, 2003 - 2007 ($US mn).12 Emerging markets private equity fundraising totals by region, 2003 - 2007 ($US mn).13 Fundraising by country. The real GDP growth in 2006.
Growth rate compare.3 GDP & inflation rate. Vietnam's Demographic structure (% total population).6 Fundraising in Vietnam.7 Fund type & strategy.8 Private equity fundraising in Vietnam.10 Mekong enterprise fund performance, 2002 - 1H2008.11 Mekong Enterprise Fund, % capital allocation stage. 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. 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 2.
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: 1 • 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? 4. 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 2 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. The other limit is from case study method.
This method cannot cover all the theoretical issues of Private Equity Investment. Thus, later this case, this thesis only studies the overall performance of PEI. 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: 3 CHAPTER 1 – LITERATURE REVIEW CHAPTER 2 –PRIVATE EQUITY CHAPTER 3 – LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM 4 CHAPTER 1 – LITERATURE REVIEW We start this paper by looking at the Private Equity asset class.
First, we give a definition, type and investing structure in Private Equity. Then, we look at some research result of its performance. Finally, we will see how it impact in emerging market.1 The concept of private equity Private equity is a small part of the investment world, but is growing strongly. After a sharp decline in capital committed following the bursting of the telecommunications and technology bubble, private equity has seen an increase in capital commitments in recent periods.
The definition of private equity is as follows:1 • A form of financing that typically entails entrepreneurial funding, business expansion, business acquisitions, balance sheet restructuring or the privatizing of a public company • Conducted generally outside the public securities markets • Encompasses a profit participation by the general partner • Often comes in the form of a limited partnership The definition of private equity illustrates that the asset class is very different than marketable securities. Due to this fact, there are certain risks and considerations that need to be evaluated before an investment is made, and on an on-going basis after an allocation has been implemented. - Illiquidity – Commitments to private market investments are usually in the form of limited partnerships, with terms of 10 or more years. There 1 Source: VentureXpert definition 5 are no markets for these partnership interests and they cannot be liquidated or easily transferred.
This is a true long-term commitment. - 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.