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Vietnam Is Hot. Don't Get Burned


Even by Ho Chi Minh City's increasingly hedonistic standards, it was a pretty good bash. In late March more than 200 guests thronged the ballroom of the five-star Caravelle Hotel, downing champagne and feasting on smoked salmon, banana flower salad, and the Vietnamese soup called pho. The occasion? The inauguration by International Data Group Inc. of its $100 million IDG Ventures Vietnam (IDGVV) private-equity fund and the unveiling of its first two investments in local software enterprises.

"The Timing is Right"

IDG isn't the only group that has recently rediscovered Vietnam. In the past 18 months, a gusher of new money has flowed into that country. The Dublin-listed Vietnam Growth Fund, managed by Ho Chi Minh City-based Dragon Capital Ltd., raised $60 million late last year, which means it now has $200 million to spend on Vietnam investments. It has sunk its money into commercial banks, milk producer Vinamilk, and Vinh Son, Vietnam's first private power producer. The London-listed Vietnam Opportunity Fund (VOF) has raised $37 million since 2003 and is on a road show to the U.S. and Europe to drum up as much as $45 million more. "The timing is right today for the fund investor," says Don Lam, managing partner of VinaCapital Investment Management Ltd., which runs the fund and whose net asset value increased 21.5% last year.

Could this be the latest Vietnam bubble? Back in the mid-'90s, when the country's communist government first made noises about opening up to foreign investment, private-equity and pension-fund managers couldn't wait to put their money down. Half a dozen funds raised nearly $400 million. Then, when it became clear that reform would be slow or nonexistent, most pulled their money out. Even Franklin Templeton Investments emerging-market guru Mark Mobius couldn't make things work, and his $117 million Vietnam Opportunities Fund reinvented itself as a pan-Asian Fund.

Investors say that this time things are different -- though skeptics still abound. The government has removed the shackles from the private sector, streamlined some regulations, and is moving ahead with privatization. The economy has seen annual growth of more than 7% for the past four years, while per-capita income has doubled, to $540, in the past decade.

Last year, Vietnam granted foreign companies licenses to invest $4.2 billion in the country -- which, calculated as a percentage of gross domestic product, puts Vietnam on a par with China in foreign direct investment. Exports to the U.S., including coffee, seafood, Nike shoes, and garments, have quadrupled, to nearly $7 billion a year, since a bilateral trade agreement took effect in 2001, and growth could accelerate once Vietnam joins the World Trade Organization, which it wants to do by the end of this year. "The basic drivers of an emerging market are firing more evenly, predictably, and strongly," says Dominic Scriven, managing director of Dragon Capital.

While most of the investment in Vietnam right now is private equity, the government is moving toward creation of a broader capital market. Until now, the Ho Chi Minh City securities trading center, launched in 2000, has been a bit of a joke. It boasts listings of 28 tiny, mostly illiquid companies with a market capitalization of about $270 million. But investors will begin to take the exchange more seriously with several new listings scheduled for this year. The listing of three companies alone -- state-owned dairy Vinamilk and banks Sacombank and Asia Commercial Bank -- could quadruple the market's size. "That will push us over the magic figure of $1 billion," says Jonathan Waugh, director of PXP Vietnam Asset Management Ltd., a closed-end fund with $10 million to invest. "It will encourage larger companies to list and, in turn, stimulate more foreign investors into the market."

In the next two years, the government is also expected to auction off Vietcombank, which has equity capital of $450 million, and Vinaphone, the No. 2 mobile-phone network operator. Meanwhile, private-equity funds are active traders in Vietnam's flourishing informal curb market in shares, which has a market capitalization of about $2 billion.

Eyebrows Rising

But even at this early stage in Vietnam's revival, some are worried that investors' enthusiasm has outrun their good judgment. "We are again approaching a bubble stage where people's expectations are getting unrealistic," says Chris Freund, formerly with the Templeton Vietnam fund and now manager of the privately held $18.5 million Mekong Enterprise Fund, which invests in unlisted manufacturing companies. "Investors incorrectly assume that GDP growth is correlated with high returns."

One investment that raised eyebrows was in Sacombank, Vietnam's largest private bank. When it invited a strategic buyer to take a 10% private stake, Australia's ANZ National Bank outbid Citigroup (C) and HSBC (HBC) by shelling out $27 million, a hefty 28 times earnings, based on Sacombank's 2004 profit of $9.6 million. ANZ Group Managing Director for Asia Pacific Elmer Funke Kupper admits the price was high but says it was fair: "There are few banks to partner with, so there's a scarcity value to it, and the absolute size of the investment is small." The bidding wars for companies like Sacombank will be all the more fierce, given Vietnam's 30% ceiling on foreign ownership in listed companies.

Meanwhile, Vietnam is hardly an Eden for capitalists. The country's legendary bureaucracy is as labyrinthine as ever, and its legal system opaque, with separate laws for foreign and domestic investors. Corruption remains as big a problem as in the past. And taxes are very high and subjectively applied. One longtime investor, Martin Adams, wound up his Vietnam Fund in 2004, 13 years after its launch, and says investors who bought in the beginning broke even. He now manages the 10-year-old Beta Viet Nam Fund but says while performance has improved, early investors in that fund are still losing money. Every Vietnam investment fund should carry a "health warning," says Adams. The message: Buyer beware.

By Frederik Balfour in Ho Chi Minh City


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