I like to use “Early-Stage PE” here because “Venture Capital” has a connotation of high risk and/or
tech investment that belongs in Boston or Silicon Valley. Coming from the UK, I understand Venture
Capital quite well. I believe the opportunities in Việt Nam do not have to be “high risk” nor “tech” to
achieve the returns generally reserved for Venture Capital investments.
There is a gap in the early-stage investment market in Vietnam. I believe the reasons are twofold.
First, local investors culturally have a short investment horizon, and therefore, lack the patience and
long-term discipline to earn venture-type returns. Second, foreign investors, who have the patience
and discipline but need to invest more money, cannot source the appropriate deals.
The solution, then, is to optimally compromise on the investment horizon as well as investment size.
The goal here is to make smaller deals work. As a result of doing smaller deals, the investment size
over the total number of deals does not necessarily decrease. Moreover, because Vietnam is such a
robust market, doing more deals will not reduce overall performance.
This model doesn’t work economically in the US or other mature markets because labour is too
expensive relative to growth. Consider GDP/capita of US$57,000 and growth of 1.5 per cent yields a
cost of $38,000 for each 1 per cent of growth in the US. In Vietnam, this number is only $350.
Theoretically, because the US is 100x more expensive than Vietnam, we could hire 100x more
people in Việt Nam! Put another way, if we hired five people in Vietnam at double the cost, then
we’d still be operating at a 90 per cent discount than the US. The lower cost of labour in Việt Nam
allows us to do more (smaller) deals, assuming we can source them…
Sourcing deals anywhere is a matter of perspective and access. In Asia in general, and especially in
Việt Nam, it is challenging for foreigners to access local or regional deals. These deals are attractive
because valuations are reasonable and sometimes depressed for no logical reason. Deals that come
to Hà Nội or HCM City typically have a series of brokers, which increases costs. Furthermore, the
array of competing buyers usually drive valuations to levels suitable for western investment markets.
To put everything together in an example, consider mining. Foreign investors usually like larger
mines because investment sizes can be more significant. However, larger mines face more
demanding regulatory requirements, where the majority of the risks lay. Smaller mines are not
attractive due to smaller investment sizes and are usually supported by smaller local investors.
Smaller investors are usually capital constrained and lack the experience to maximise financial gain.
To compromise on both sides, we could invest in a series of small mines at a lower cost than an
equivalent larger mine. As a result, gains would also be higher. We have executed this model and are
currently considering several smaller mines and quarries around the country.
There are many other examples of excellent early-stage private equity investments in diverse
industries, including media, manufacturing, distribution, pharmaceuticals, medical services, IT & data
analytics, energy, etc.
By Brian Spence – HSP Consulting
