PRIVATE EQUITY INVESTMENT: FRAMEWORK AND PROSPECT FOR VIETNAM

FRAMEWORK AND PROSPECT

VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS

 

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

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i
ABSTRACT ii
TÓM TẮT iii
LIST OF ABBREVIATIONS vi
LIST OF TABLES vii
LIST OF FIGURES viii
INTRODUCTION 1
1. The problems 1
2. Objectives and Aims 1
3. Research questions 1
4. Scope of work 2
5. Data sources 2
6. Methods 2
7. Significance 3
8. Limitation 3
9. Expected results 3
10. Outline 3

CHAPTER 1 – LITERATURE REVIEW 5

10.1 The concept of private equity 5
10.2 Type of Private Equity 6
10.2.1 Venture Capital 7
10.2.2 Buyout 7
10.3 Investing Structure 9
10.4 Size ranking 11
10.5 Private Equity Performance 12
10.5.1 J-curve 12
10.5.2 Expected return 12
10.5.3 Real IRR of Private Equity 13
10.6 Private Equity in emerging market 15
10.6.1 Private equity in investment pools 15
10.6.2 Emerging market 17

CHAPTER 2 –PRIVATE EQUITY IN VIETNAM 23

2.1 Vietnam Investment Context 23
2.1.1 Robust growth rate 23
2.1.2 Bright prospective 24
2.1.3 Young and grow labor force 25
2.2 Private Equity in Vietnam 26
2.2.1 Investment fund industry 26
2.2.2 Private equity market snapshot 30
2.2.3 Mekong Capital 33

CHAPTER 3 –LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM 47

3.1 Lessons from natural characteristic of private equity investment 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
APPENDIX 58

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

 

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 39
Table 4-1. Investment Fund results 61

 

LIST OF FIGURES

 

Figure 1.1 Venture Investment Stages 7
Figure 1.2 An Overview of alternative investment 9
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 of EM PE Fundraising by Region, 2003 – 2007 ($US mn) 21
Figure 1.12 Emerging markets private equity fundraising totals by region, 2003 – 2007 ($US mn) 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 stage 37

INTRODUCTION

 

1. 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

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.

3. 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?

 

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.

5. 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.

6. 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 of interest was treated the interviewer followed a manual with the key subjects.

 

7. 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.

8. 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.

9. Expected results
The thesis expects to give the systematical theory in Private Equity Investment, and give some principals guideline for investors.

10. Outline
Excluding introduction, conclusion and reference part, this thesis includes three parts as follows:

CHAPTER 1 – LITERATURE REVIEW CHAPTER 2 –PRIVATE EQUITY
CHAPTER 3 – LESSONS FOR PRIVATE EQUITY INVESTMENT IN VIETNAM

FRAMEWORK AND PROSPECT

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.
1.1 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.

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