Private equity meeting infrastructure financing needs-
The lack of depth in the capital markets and institutional financing provides a significant role for private equity (PE) funding in the infrastructure sector of Vietnam, Cambodia and Myanmar. Though deal sizes and numbers are currently limited, Vietnam and Cambodia’s power sectors have had some experience with PE deals, while the pace is still picking up in Myanmar. Thus far, only a few PE deals have been made in the infrastructure space of the “frontier markets” of Southeast Asia. They constitute a small fraction of the estimated annual requirement of $60 billion needed for infrastructure financing in the region.
Southeast Asia Infrastructure analyses the PE funding scenario in the aforementioned countries…
Vietnam: Poised to pick up pace
In the recent past, the availability of capital in Vietnam was limited. The country’s debt markets have been largely unaffordable or inaccessible, while the illiquid stock market has left public equity markets as an unreliable source of funding for Vietnamese corporations. Consequently, the alternative source of funding, namely, through PE deals, was able to gain a foothold. Furthermore, the privatisation of state-owned enterprises from July 2011 onwards has made the country even more attractive to PE players.
It would seem as though global PE firms were warming up to Vietnam: they accounted for the bulk of the investment of $535 million flowing into the country during the first half of 2013. However, of the total fund flow, only a single deal, constituting one-fifth of the total flow, was made in the infrastructure sector, specifically the telecommunications sector. CDH Investments, an international alternative asset fund manager, together with other investors, paid a total of $110 million for a 20 per cent stake in Mobile World, Vietnam’s largest mobile phone retailer. The investors acquired the shares from Mekong Capital, a Vietnam-focused PE firm. The deal reportedly resulted in a return multiple of 11x exit for Mekong.
At present, the key PE firms in Vietnam include VinaCapital, Vietnam Asset Management Limited (VAML), and IDG Ventures Vietnam. Of these firms, VinaCapital has a dedicated fund called the Vietnam Infrastructure Limited (VNI) that was launched in July 2007. Launched as a closed-ended fund, it is traded on the London Stock Exchange’s Alternative Investment Market (AIM). VNI aims for medium-term capital gains with some recurring income through investments in infrastructure sectors such as energy, transport, telecommunications, and water utilities.
VAML’s two key funds – Vietnam Emerging Market Fund (VEMF) and Hong Leong Vietnam Strategic Fund (HVSF) – have investments across infrastructure sectors such as transportation, utilities and energy; most of its funds are parked in the transportation segment. IDG Ventures Vietnam, on the other hand, has two telecommunication firms in its portfolio: Mobile Solution Services JSC and Mobivox.
With regard to the expected returns, given the present economic scenario of the country, PE investors expect a return multiple of 5x to 10x (revealed in a survey conducted by Grand Thornton) on average. These returns are largely based on the budding businesses that are in need of capital and the increasingly deregulated financial markets that offer easy and attractive exit options. Moreover, the country will continue to offer attractive mid- to long-term growth potential for PE investments. In terms of the exit mechanism, the most common route is trade exits. While exiting through an initial public offering (IPO) is currently not a feasible option as the Vietnamese financial markets have yet to develop deep roots, secondary sale is the next most favoured exit strategy of investors.
While country-specific risks, such as corruption, unrealistic pricing expectations, currency instability, and high taxation, remain a concern, industry insiders suggest that Vietnam’s investment scenario is about to get a boost from the PE industry. In addition, fund management companies are seeking to establish open-ended funds, thereby allowing domestic investors to participate in trading and increasing liquidity across asset classes. This type of set-up is seen in the developed countries. After the adoption of this set-up, local, typically retail, investors of the country will be allowed to purchase shares in the fund directly.
At present, many Vietnam-based funds targeting PE deals are closed-ended. For example, local Vietnamese are restricted from trading in VinaCapital’s PE fund of about $80 million, launched in 2003, as the vehicle’s shares are traded on London’s AIM. This may also be one of the key reasons that have led to the low volume of PE deals in the infrastructure sector. In the coming years, industry experts are of the view that sectors such as construction will offer key opportunities for PE investors.
Cambodia: Financing continues to pose a challenge
In Cambodia, securing finance for infrastructure projects has not been easy. The typical major lenders – commercial banks – require borrowers to pledge land as the loan collateral and then the banks will offer 30–50 per cent of the land’s assessed value as a loan. While this approach has helped to keep the banking system solvent, it has deterred many businesses from securing project financing, or working capital, from banks. Moreover, in the absence of well-developed equities or bond markets, the PE route has stood out as one of the viable and flexible funding solutions.
The country’s first, largest, and the most experienced PE group, Leopard Capital (Leopard), launched Leopard Cambodia Fund in April 2008. It raised over $34 million during the global financial crisis of 2008–09. Since then, the fund has invested in infrastructure sectors, such as telecommunications, municipal water, power transmission, and hydropower generation, among others, in Cambodia, Thailand, and Laos.
Leopard’s key deals in the Cambodian infrastructure space include its investment in CamGSM, a mobile telecommunications operator and leading internet service provider in the country, and the Phnom Penh Water Supply Authority (through its IPO). When it exited from CamGSM in 2011, Leopard reaped an internal rate of return of 26 per cent; in the case of the Phnom Penh Water Supply Authority, its exit produced a gain of 42 per cent.
Leopard’s current investments include a stake in Greenside Holdings – a rural power transmission and distribution system in Kampong Cham province. Going forward, Leopard plans to increase its investments in the infrastructure sector, particularly in the country’s energy and telecommunications segments. Further, it is planning to exit either through self-liquidating instruments, or secondary sales including private sales to strategic investors, co-investors, or other investment funds.
Industry experts believe that the returns on PE investments in Cambodia will gain buoyancy with time. The untapped markets of Cambodia offer an enormous opportunity for future capital gains. With the integration in the Greater Mekong region picking up pace, the country will become an attractive destination for PE transactions in the near future. However, factors such as the low confidence in the judicial system, the lack of credit information, and the general opacity of the business environment, will still need to be tackled.
Myanmar: A brand-new PE investment destination
Myanmar’s rapid shift to democracy and economic reforms in early 2012 marked its “openness” to the rest of the world. Isolated for decades, the country has opened itself up to foreign capital, thereby providing a wealth of investment opportunities. At present, Myanmar is lacking in roads and power infrastructure. According to industry experts, the resource-rich country is likely to experience a significant surge in investments, particularly in its unexplored oil and gas sector in the near future.
Investment opportunities for PE investors are immense in the country, primarily due to untapped markets and the nascent stage of other sources of finance. In fact, most of the transactions are still conducted in cash, as the banking system is still immature.
Identifying the investment pockets, Bagan Capital, a Burmese firm, has set up the Myanmar Transition Fund with a target corpus of $75 million; it is the first PE fund dedicated to the country. Within the infrastructure space, the fund plans to invest in Myanmar’s telecommunications and power sectors. According to Bagan Capital, the Fund has elicited interest largely from Asian and European investors to date. The operationalisation of the fund will mark the start of PE investments in the country, which will be a boon for the infrastructure segments.
Some investors, however, are sceptical about investing in the country; in their view, the political and economic risks in Myanmar are still too big, with asset prices surging beyond reasonable levels. Moreover, questions about legal protection for foreign investors remain. It is uncertain as to how investors can make their exits from their investments (even if they do well). Furthermore, the country lacks a developed banking system, a corporate bond market, and a stock exchange, thus limiting investors’ ability to cash out of their investments through local markets. Finally, the price of a key input of infrastructure projects – land – is highly elevated. Thus, it remains to be seen how PE investors can wade through such challenges in order to capitalise on the void in the country’s infrastructure sector, while making profits.
Overdue opportunity for PE
The rise in Southeast Asia’s PE activity has been a long time coming. In countries like Vietnam and Cambodia, significant market potential remains to be tapped. In the absence of other stable and reliable sources of funding, due to the immaturity of the financial sector, funding through PE plays a pivotal role. However, the nascent stages of the financial markets in these countries do limit exit options for potential PE investors. In this light, the role of the respective governments will prove crucial. In Myanmar, which is just emerging from decades of isolation, there is also a plethora of PE opportunites in the infrastructure sector awaiting to be explored.
