Vietnam's Dragon Capital had planned to first-close its new private-equity fund focused on Indochina early this year,  but now expects to hit the initial target of $50 million by the end of 2012, and $250 million next year.

The Indochina Opportunities Fund had started out as a Vietnam-only strategy, says chief investment officer Bill Stoops, but demand for single-country vehicles has waned, at least for smaller countries – although China, India and Indonesia continue to draw interest.

As a result, Dragon broadened the fund to cover Cambodia and Laos and, when sanctions permit, Myanmar. “We see ourselves as a Southeast Asia frontier markets specialist,” he notes.

The initial round of capital for the Indochina vehicle is coming from development financial institutions (DFIs) and family offices, with more traditional investors, such as funds of funds, expected to come next. (DFIs might include microfinance institutions, community development financial institution and revolving loan funds.)

Although Dragon has not finished marketing the fund, there is an investment infrastructure and office network in place across the target countries and it is doing due-diligence trips on companies and deals now, says Stoops.

“We have all the people on the ground ready to roll with pipeline transactions once capital flows,” he notes. “Usually people do it the other way around – sourcing investor flows first before they set up in-country.”

The firm has a joint venture with Cambodia-based Frontier Investment and Development Partners (FIDP), run by Marvin Yeo, and since mid-2012 there has been an office in Yangon expanding the network and vetting deals. Dragon’s Clean Tech Fund has an office in Thailand.

Their two-man office in Yangon is sourcing deals in industries below the radar screen of many investors. “Rather than hotels, property, natural resources and so on,” says Stoops, “we are looking at unglamorous areas such as logistics, agri-commodities and secondary infrastructure.

"It’s pretty mundane stuff, but can be very lucrative if you know what you’re doing. You can start small, and scale up as things work out – or not, if they don’t.”

The asset manager wants to make more PE-style investments, with a view to diversifying its portfolio further, adds Stoops.

Dragon already makes PE investments through its Mekong-Brahmaputrah Clean Tech Fund, which allocates across, Indochina, Thailand, Sri Lanka, Nepal, Bangladesh and Bhutan. In fact, until the Vietnamese stock exchange “got serious” around 2006, the firm’s only choice was to invest in PE even after the market’s inception in 2000, says Stoops.

Another area Dragon is looking at is microfinance. The fund manager has a 22.5% stake in Cambodian microfinance group Prasac, which is applying for a banking licence. Stoops notes that Cambodia recently put in place an investment code for microfinance.

Meanwhile, he sees domestic open-ended funds being authorised in Vietnam this year, at which point Dragon will have the option to start converting its Viet Fund Management unit’s five funds, totalling $120 million in AUM, to open-ended vehicles.

Closed-end vehicles for offshore investors will “outlive their usefulness” once the market becomes broader and deeper and trades more openly, says Stoops. “But we shall see when that actually happens.”

The firm is looking to use the Ucits structure with a view to selling to Europe, even though it does not really plan to target retail. “There’s so much regulatory change happening in Europe that you really need a Ucits fund [to sell into certain parts of that market],” says Rachel Hill, director at Dragon Capital Markets Europe.

As for which of the firm’s funds are seeing strong inflows or outflows, with closed-end vehicles it is a case of tracking the change in the discounts, she notes.

Vietnam is not as hot as it was pre-2008, but Dragon’s funds have recovered significantly since the low point in 2009, when they were trading at 40-45% discounts, adds Hill. They are currently trading at a 15% discount, whereas before the crisis they were seeing 5-10% premiums.

“There’s not a huge level of interest right now, but it’s enough to keep premiums fairly manageable,” she says. “Capital is probably largely coming from family offices and endowments – very sticky, long-term money.”

Hill says the firm is not seeing fund-of-fund and wealth-management firms trading very much right now – not even specialist investors such as frontier-market – and that is reflective of the markets in general.