Exits are natural part of private equity business

Thomas Lanyi, Investment Director of Mekong Capital

Year to date, the stock market has remained volatile given the economic uncertainty, with the VN-Index shedding about 5%. Foreign funds have found it hard to raise capital here in the domestic stock market as a result. The Saigon Times Daily had an email exchange with Thomas Lanyi, investment director of Mekong Capital, over the outlook of the market. Excerpts:

The Saigon Times Daily: The stock market has been fluctuating since 2008. How long will this situation last given the current macro economy of Vietnam?
- Thomas Lanyi: How long the market’s volatility will last is hard to predict. Sensitivity of the local and foreign investor to macro-economic developments, whether it be inflation, interest rates or currency devaluation naturally create uncertainty in the near-term and lead to volatility in trading volumes and prices. In the long-run however, as the Vietnamese economy stabilizes, so will the stock markets.
Vietnam’s price per earning ratio (PE) is lower than in regional countries. What do you comment on this comparison considering policy and foreign exchange risks in Vietnam?
- A certain risk premium for Vietnamese companies in comparison with more developed and arguably safer investment environments is justified and priced into equities. However, remember that the higher risks of investing in Vietnam are mirrored by substantially higher growth in earnings of the Vietnamese companies. Vietnamese equities are attractively priced on a PE to growth (PEG ratio) basis, in both absolute and comparative terms.
Many fund management firms planned to launch new funds from early 2010 but none of them have translated into reality. Is Vietnam’s economic instability the cause?
- More importantly, capital has become more selective, which has made fund raising more difficult to some. An enormous amount of capital was destroyed in the recent financial crisis, reducing substantial excess liquidity in the global financial system. As funds are returning to the region, investors are more selective in choosing their investment managers. The current fund raising environment clearly favors the best players in the field.
Are the current Vietnamese economic conditions to blame for making it hard for private equity funds like Mekong Capital to raise funds and invest?
- A complete track record (based on realized exits), a proven post-investment value creation program, an elite investment team, and access to solid deal flow are crucial components for successful private equity fund raising these days. Mekong Capital is among few investment firms in Vietnam that have those components in place on Thursday. As such, we are confident we will raise our next fund (MEF III) successfully when we come to market.

The life spans of many investment funds almost come to an end. Do you think the recent exits will affect the capital market in Vietnam? Will the investment management firms leave Vietnam forever after their exits?
- While, our funds have 10-year life times, we hold our portfolio companies for 5 years on average. During that time, our team works closely with the companies’ management teams to fulfill their long-term visions and business objectives. Exits are a natural part of the private equity business model and are a positive for the local capital market. Our companies are often market leading businesses, fast growing and complying with highest corporate governance standards. Introducing them to the local stock market during exit catalyses liquidity, and raises the standards and potentially overall perception of the local capital markets in the international investor’s view. Alternatively, selling a portfolio company to a strategic investor, often foreign, may attract more capital into Vietnam in future, and enhances Vietnam’s reputation as a destination for foreign investment.

The Saigon Times Daily

Posted in: Business