Vietnam is hardly a new frontier for foreign investors, but the country is receiving closer scrutiny from private equity specialists as deal valuations in nearby Indonesia appear overheated, says Dennis Nguyen, co-founder of New Asia Partners.

“We’re going to see a cyclical bull-run of about five years starting this year in Vietnam,” predicts Nguyen, co-founder of the private equity group, which is targeting deals in the country.

“We’re very focused on the rise of the middle class. That’s the same investment thesis that we had for China [a decade ago],” says veteran investor Nguyen, whose firm undertook 15 mainland private equity deals between 2002 and 2008.

Other investors appear to have a similar focus, with private equity firms building a presence in Vietnam. Regional PE players – including firms based in Malaysia and Singapore – are on the ground seeking deals, Nguyen tells AsianInvestor.

But the same cannot be said of global PE firms, despite KKR’s $200 million investment in food producer Masan Consumer Corporation and Warburg Pincus’ $200 million deal with real estate operator Vingroup last year. The main reason is scarcity of large deals in the country.

“The deal sizes are quite small,” notes Nguyen, typically ranging between $5 million and $20 million. Global PE firms seek transactions in the $50 million to $100 million range. 

In early January New Asia Partners participated in a $3.5 million round of financing for Huy Vietnam, the country’s largest restaurant chain operator with 24 outlets. It also led a previous $3.5 million round of financing last September. Co-investors in both rounds included high-net-worth individuals and institutions.

Another round of funding is in the works, followed by a planned IPO on Hong Kong’s main board targeted for the first quarter of 2015.

Exiting through an overseas listing enables PE firms to realise their investments through an IPO on bigger and more liquid exchanges than those in Vietnam.

New Asia Partners views this as the most viable exit route, on the grounds that a trade sale to a strategic buyer is not likely given tat the country’s corporate sector is nascent. “The companies are too small,” says Nguyen.

There are only about 300 companies listed on the Ho Chi Minh exchange, which has thin trading volumes compared with neighbouring markets in Southeast Asia. Over the past year, the average daily trading value was 1.8 trillion dong ($85 million), according to government data.

New Asia Partner’s China investments were likewise realised by exits through IPOs on the Hong Kong stock exchange. Its former portfolio companies include Hong Kong-listed Wuyi International Pharmaceutical and Huiyin Household Appliances.

New Asia Partners is applying its previous China investment strategy to Vietnam. "My feeling is that Vietnam is where China was in the late 1990s,” says Nguyen, who is based in Minnesota but makes frequent trips to Asia.

“[Our] investment thesis is the rise of the middle class, which means we’re interested in consumer retail, food and beverage, and health services.”

New Asia Partners is not running a commingled fund, instead investing from its balance sheet and participating in financing rounds with co-investors.

Huy Vietnam is the firm’s sole portfolio company at present, although Nguyen is seeking more investment opportunities in the country. “We have the bandwidth to do two or three deals a year,” he says. “There are a lot of amazing entrepreneurs in Vietnam and they run their businesses well.”

He lists the country’s main advantages as its young population – 65% under the age of 35 – and a 94% literacy rate, according to government statistics. The nation's currency had has also held steady against the dollar recently, although Nguyen concedes it is still susceptible to devaluation.

"The government is opaque and there are issues with the banking system," he admits, highlighting challenges od dealmaking in the country. "The macro economy is still controlled by the government and the currency – even though it has been stable for the last three-to-four years – is still susceptible to devaluation.”

A survey of private equity executives released last November by Grant Thornton Vietnam found 43% of respondents had a positive outlook on Vietnam's economy in the next 12 months, the highest level in the past two years. Some 46% of respondents said they plan to raise their investment allocations to Vietnam, while 44% will maintain current levels.