The connection between ESG and value creation

Ruari Sinclair, Director, BDA Partners, shares his insights with Morrison Foerster and AVCJ in the Asia Funds ESG Report 2023.

To what extent do investors regard ESG as a driver of value creation?

Value creation and superior returns on exits are widely considered globally, and now in Asia, as the critical driver for ESG initiatives with financial sponsors. We see ESG being integrated more and more into the post-acquisition value creation plans. However, we also see differences in ESG approach and maturity across the region by different financial sponsors, industries and portfolio companies. There is still a lot of work to do in Asia for ESG, but it is certainly gaining momentum.

How do you demonstrate the ESG value?

This is a key question that we get asked regularly. The reality is the ESG valuation premium is specific to each company and exit process. It remains challenging to give even a ballpark estimate for the IRR or multiple uplift from successful ESG initiatives, let alone a precise one. However, through various factors such as measurable ESG data, financial analysis, benchmarking and good leadership, we believe a premium valuation can be achieved on exit. Finally, ESG is now a recurring cost (or investment) of operating and owning a business. You can’t ignore ESG because if you do, you may lose your competitive advantage, fall on the wrong side of the increasing regulatory requirements and greenwashing risk. ESG improvements and value creation takes time and requires significant expertise and resources to create value.

Where is value most likely to come from?

There is a range of ESG factors now responsible for creating value on an exit, but we need to identify these on a case-by-case basis. As companies strive to have more sustainable business models, they focus on new product development, entering new markets, developing cleaner manufacturing processes, supply chain improvements, etc. Focusing on the ESG value factors, which are most material to the company and the industry, will yield the highest returns on an exit. We are currently working on a sale process for an Asian sponsor for its European consumer portfolio company. The company is facing increased product sustainability regulation changes in the coming years. They have invested significant resources and leadership to create a more sustainable product which will create significant environmental benefits for customers and employees, along with improving profitability from the new products and a cleaner manufacturing process. We believe communicating the ESG equity story will support the investment thesis for the company being a market leader, commanding a premium valuation on exit. Finally, further value from ESG initiatives will start becoming more prominent with wider use of sustainability-linked financing where the interest rate of the credit facility will be linked to agreed targets, such as reduction in greenhouse gas emissions (GHG) and gender diversity.

How does BDA approach ESG in an M&A sales process?

BDA has established an ESG Transaction Advisory team where we work with clients to better understand the material ESG initiatives, opportunities and risks relevant to their portfolio company.

ESG is now more integrated into both selland buy-side due diligence, especially for financial sponsors and how they look at acquisitions at various stages through the acquisition process with their investment committees. Consequently, this needs to be communicated early in a sales process to avoid sponsors rejecting an opportunity for not being able to address key ESG questions.

The BDA ESG Transaction Advisory team follows three steps during the M&A sales process.

First, we communicate in our sell-side marketing materials the company’s successful ESG initiatives to date, the stage of the company’s ESG journey and future ESG strategy.

Secondly, we are recommending to our clients to include ESG vendor due diligence (VDD) along with other VDD reports. ESG VDD can also be connected with the commercial and financial VDD reports to help evidence the financial and commercial drivers. To the extent material—and where the data allows—any ESG driven margin improvements, new product launches and capex should be separately identifiable in the financial model to evidence the value creation.

Thirdly, being aware and on the front foot regarding key risk ESG due diligence topics such as GHG and supply chain reporting (especially in Asia) will help preserve value. Supply chain is a particularly important topic for companies in Asia serving customers in the West, where modern slavery, health and safety, and labor rights are gaining increased focus. This became a key diligence topic when we advised on the recent sale of Hop Lun to Platinum Equity. Communicating the ESG value creation story and addressing any risks early in a sales process will help increase buyer interest globally, avoid sale process disruption and maximize returns on exit.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services, Sustainability and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese Government-owned bank with US$150bn of assets. bdapartners.com

Huong Trinh, Partner and Head of Ho Chi Minh City at BDA Partners, shares her insights with Vietnam Investment Review.

With only three months of the year left, how has Vietnam’s M&A for 2023 fared so far?

Over the second and third quarters of 2023, a number of M&A transactions with deal size of over $100 million were announced. Some notable deals are the investment of up to $500 million into Masan Group Corporation led by Bain Capital, the $381 million acquisition of FV Hospital by Thomson Medical Group, and the investment into Xuyen A Hospital by Warburg Pincus. In addition, there are ongoing sizable M&A transactions across the consumer, healthcare and education sectors, which have received strong interest from both strategic and financial investors and are likely to reach the signing stage in the next six months. Even though the total deal volume in 2023 might be impacted, the average transaction value based on recent transactions has increased significantly. The healthy deal flow emphasizes investors’ confidence in the market’s long-term growth potential.

As local businesses are struggling amid a challenging economic outlook, do you see foreign investors stepping up their M&A transactions here?

Despite various macroeconomic challenges, Vietnam is expected to achieve a GDP growth rate of 5-6 per cent in 2023. The macroeconomic environment and consumer demand are expected to start to recover in the first half of 2024. Foreign investors, despite the market’s weakening performance in 2023, continue to source and monitor the investment opportunities in Vietnam. There has been a long-term view that Vietnam is one of the most attractive markets for investment in Southeast Asia thanks to its favourable demographics, resilience, as well as government efforts in improving the investment environment.

Inbound M&As remain vibrant in banking, healthcare, renewables and real estate. Why do these sectors remain a target?

Vietnam’s favourable demographics, stable socioeconomic environment, increasing disposable income, and improving investment environment remain key factors that underpin the inbound investments into the banking sector, such as the $1.5 billion acquisition of a 15 per cent stake in VPBank by Sumitomo Mitsui Banking Corporation, and the $850 million acquisition of 15 per cent stake in BIDV by KEB Hana Bank. Notable deals in the healthcare sector are the acquisition of FV Hospital by Thomson Medical Group, the investment into Xuyen A Hospital by Warburg Pincus, AIH by Raffles Medical Group as well as Singapore’s sovereign wealth fund GIC’s investment into Nhi Dong 315, a Vietnamese pediatric clinic operator. In the renewable energy sector, Vietnam witnessed the $165 million acquisition of a 49 per cent stake in Vietnam solar platform Solar NT from Super Energy Corporation by AC Energy Corporation, and the $108 million acquisition of a 35 per cent stake in Gia Lai Electricity by JERA. Regarding real estate sector, there is the $250 million investment into Novaland led by Warburg Pincus, along with the $650 million investment into Vinhomes by KKR. We expect that M&A activities in these sectors will continue to increase in the future.

Do you expect any shift in investor interest in emerging fields in Vietnam, such as electronics, semiconductors, and electric vehicles?

Yes, we have seen increasing interest in these areas as a result of Vietnam’s unique positioning – strategic location, skilled workforce, cost advantages, and stable socioeconomic environment. Following the supply chain diversification which started during the pandemic, and increasing global demand for these products, Vietnam continues to invest in infrastructure and technology to become a major industrial hub in Asia. The government has taken a proactive approach in developing these new sectors. In August 2023, the Ministry of Transport submitted its proposal on special incentives for electric vehicle (EV) producers and users to a deputy prime minister. These incentives included preferential special consumption tax, exemption of licence plate issuance fees, preferential import tariffs on equipment, production lines and components for the production and assembly of EVs and batteries, and a $1,000 incentive for each EV purchases. As for semiconductors, while it is not a new area as foreign players, Samsung, Amkor Technology, and Hana Micron have already established presence in Vietnam. Such moves have been in the spotlight recently, being a key topic of discussion at the Vietnam – US Summit in September 2023. The Vietnam – US comprehensive strategic partnership and the government support will help Vietnam’s semiconductor industry to develop further.

About BDA Partners

BDA Partners has significant experience across the water M&A spectrum and is actively engaged on multiple on-going mandates in the sector. We take this opportunity to provide you with a deep dive into the water landscape, including:

Contextualization of why there is a boom in global demand for water and wastewater treatment solutions, signifying why water pressures will result in new investment and M&A activity
An overview of distinct investible water technology propositions that solve some of the water challenges across respective geographical locations
Recent water M&A activity, as well as our views on the valuation landscape
An exclusive Q&A with BlueTech Research, the global leading water commercial due diligence provider, for additional proprietary market insights

Please reach out to our dedicated Sustainability team to discuss further.

Download the full report

Sources: (1) NASA; (2) The Guardian; (3) United Nations; (4) Borgen Magazine; (5) The Guardian; (6) EWG; (7) Financial Times; (8) US Water Alliance; (9) The Guardian; (10) Carbon Brief; (11) US Water Alliance; (12) Desalination Latin America; (13) Water.org; (14) Umweltbundesamt; (15) European Commission; (16) Global Citizen; (17) The National News; (18) Asian Development Bank ; (19) United Nations; (20) China Dialogue; (21) Japan International Cooperation Agency; Financial valuation metrics and M&A activity from CapitalIQ, Mergermarket and BDA transactions

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

Anthony Siu, Partner and Co-Head of China at BDA Partners, was interviewed by Wancheng Hu, a reporter at South Reviews. The publication is a political and economics magazine published under the Guangzhou Daily Press Group in Southern China. The following is a translated version of the article published on June 5, 2023.

China’s outbound M&A volume dropped to its lowest point last year. According to PricewaterhouseCoopers, the total value of M&A transactions in China fell to US$485bn in 2022, representing an 80% decline from the peak in 2016, and is comparable to 2009 when investment activities plummeted in the wake of the global financial crisis.

The Covid-19 pandemic and increasing geopolitical tensions led to varying degrees of restrictions on capital flow. Combined with stringent national security reviews, China’s outbound M&A has suffered a dramatic slowdown in recent years.

As the pandemic came to an end in early 2023, investment activities gradually picked up again. China’s outbound investment policies have not changed significantly, and the central government’s focus remains on encouraging foreign direct investments in healthcare, technology, advanced manufacturing, energy, and resources.

In the first half of 2023, the M&A market is back on a recovery path, with domestic transactions dominating China’s M&A. Cross-border M&A will likely see a pick-up in the second half of 2023, with Asia Pacific and the Middle East becoming the preferred markets for Chinese acquirers.

Amid early signs of an increase in activities, China’s outbound M&A will face challenges as well as opportunities in the near term. The following are key factors to consider for China’s outbound M&A:

1. Impact of increasing regulations on cross-border M&A

BDA Partners specialises in cross-border M&A advisory and has been the top-ranked investment bank for cross-border M&A (enterprise value up to US$1bn) in Asia since 2016.

Mr. Siu moved to Shanghai from Hong Kong in 2008 and has been engaging in Chinese M&A advisory ever since. Having witnessed a long period of unprecedented growth of Chinese M&A, he was apprehensive about the recent downturn.

Siu said “For M&A practitioners, a lot has changed in recent years. The number of Chinese companies looking to engage in outbound M&A has shrunk significantly. The combined impact of the pandemic and the geopolitical tensions have led to a dramatic decline in M&A volume.”

While he believes that the pandemic impact is temporary, the geopolitical impact on cross-border M&A will be longer-lasting. In particular, the heavy regulatory scrutiny on China’s outbound M&A transactions is likely to stay for some time.

Among the affected regions, the US has been impacted the most. In January 2020, the US Treasury published new regulations based on the Foreign Investment Risk Review Modernization Act that significantly expanded the scope of the Committee on Foreign Investment in the United States (CFIUS).

“When a non-US company wants to acquire a US company, it needs to go through CFIUS review. The review will take a long time if the target’s industry is considered sensitive and involves national security concerns” said Siu, “although many transactions were not vetoed, they did not receive CFIUS approval and therefore were unable to close.”

In addition, countries that were previously considered to be open to foreign investments are moving toward increasingly stringent FDI reviews.

Germany, for instance, the country with the largest number of Chinese investments in the EU, had promulgated the Foreign Trade and Payments Act, imposing strict review measures for investments by non-EU countries and expanding the scope of mandatory filing obligations involving “critical infrastructure” and “critical technology.” Industry practitioners say that a large number of transactions were abandoned due to a slim chance of passing FDI or anti-monopoly review.

“Obtaining regulatory approval is a common concern for companies involved in cross-border M&A. If a Chinese state-owned enterprise (SOE) decides to conduct a transaction overseas, it requires approval from the State-owned Assets Supervision and Administration Commission (SASAC). Moreover, when the transaction amount exceeds US$300m, further approval is required from the China National Development and Reform Commission (NDRC). These approvals will typically take time to go through,” said Siu.

The aforementioned includes only the approval procedures required from the Chinese side, while each country has its own jurisdiction and approval procedures, which further complicates the closing of a transaction. A few high-profile cases involving SOE acquirers over the years include:

In 2005, China National Offshore Oil Corporation (CNOOC) attempted to acquire Unocal Corporation in the US, but the transaction was blocked as it did not pass a national security review
In 2009, Aluminum Corporation of China’s planned acquisition of Australia’s Rio Tinto was terminated because stakeholders reckoned that the terms were biased toward the buyer
In 2020, Shandong Gold Mining’s acquisition of Canadian gold miner TMAC Resources was blocked by the regulatory authorities due to national security reasons

In addition to national security considerations, Chinese acquirers face increased scrutiny in areas such as information transparency, financing sources, and shareholding structure.

2. Where will the China capital go?

Despite some challenges, outbound M&A activities are showing signs of recovery.

Countries around the world are welcoming investments in industries that are deemed important to the country’s economic development. In addition, industries that have been hit hard by the pandemic, including transportation and logistics, tourism and hospitality, basic materials, and consumer goods, are recovering, giving acquirers renewed confidence in investing in the future upside of these industries.

Siu is bullish on the China outbound M&A market. The resumption of international air travel and the normalization of business activities will allow Chinese acquirers to become more active in engaging in outbound M&A activities. However, he believes that this wave of outbound M&A will be different from the past. Rather than focusing on the U.S. and Europe, Chinese acquirers will be shifting their focus to new markets such as Southeast Asia, the Middle East, and Africa.

“China today is playing a role similar to the US in the 1990s and early 2000s,” said Siu.

During those periods, US companies, facing a saturating domestic market, expanded their international footprint to high-growth emerging markets via M&A.

China is doing something similar now. In the past, the focus was on acquiring Western technologies and know-how to bring them to the Chinese market. This coming wave will be about investing in opportunities that allow Chinese acquirers to export self-developed technologies and products to the international markets. Instead of facing head-on competition in a crowded domestic market, they go abroad to look for new growth opportunities. Companies in the technology, media and telecom (TMT) space and the electric vehicle (EV) sector are among those industries with growth potential.

Southeast Asia, due to its close geographical proximity to China, has been a favourite destination for China’s outbound investments. Indonesia is one such example.

Indonesia has the world’s fourth-largest population with 274 million people and a young labour force. In 2022, investments made by Chinese companies in Indonesia reached US$8.2bn the second largest source of FDI in Indonesia. Today, Chinese investments are present in e-commerce, ride-hailing services, online food delivery, digital financial services, and online gaming sectors in Indonesia.

“Unlike trading and manufacturing companies that have gone to the West in the early days, Chinese high-tech and smart manufacturing companies looking to expand overseas now select Southeast Asia, the Middle East, and Africa as their priority markets to enter,” said Siu.

However, with benefits also come challenges. Just like many foreign companies find it difficult to adapt to the Chinese market, many Chinese companies that entered new markets have encountered challenges in working with local management, understanding the local culture, and dealing with workers that are not accustomed to long working hours.

The above are all common problems encountered by Chinese acquirers in outbound investments. Essentially, it is the lack of attention and effort paid to post-acquisition integration and understanding of cultural differences that hinder the acquirer’s success. For example, Chinese companies often lack experience in managing employees under a union-led workforce. If appointed Chinese executives attempt to impose a top-down culture, employees are likely to express dissatisfaction. Over time, a growing estrangement will develop between the local employees and the Chinese executives.

3. Focus on building up M&A expertise and acquiring talent

Having worked on M&A for over two decades, Siu has witnessed many successful acquisitions, while others failed and had to go through a difficult period of restructuring.

He observed that the issue faced by Chinese acquirers is usually caused by a breakdown in communication. When a Chinese acquirer becomes the controlling shareholder, the target’s management is often concerned about how the new owner will affect its corporate culture and management style, soft issues that are often overlooked by the Chinese acquirers. If these problems are not handled properly, the target’s management team will ultimately choose to leave.

These kinds of issues can often be mitigated if the acquirer has already established a presence in the target’s region, along with a team that understands the local system and culture. If the acquirer can understand the target company’s pain points, it can address these issues upfront more effectively, and the chance of a successful integration will increase.

Siu pointed out as an example a cross-border transaction that BDA and its strategic partner, William Blair, served as the sell-side advisors for Summa Equity, a Finnish private equity firm, on the sale of its portfolio company, HyTest, to China’s Mindray for €532m in 2021.

HyTest is a leading global supplier of in vitro diagnostic (IVD) raw materials, with in-house R&D and production capabilities for high-quality antigens and antibodies. This acquisition has helped Mindray broaden its international footprint and strengthen its value chain coverage while fulfilling the need for top-graded IVD upstream raw materials in China.

Simeng Zhang, Director at BDA Partners and the project lead for the sale of HyTest, stated “compared to other companies, Mindray has a professional in-house M&A team composed of talent with prior experience at accounting firms, law firms, and investment banks. Having this talent on the team made the due diligence, negotiation management, and decision-making process much smoother.”

She also mentioned that Mindray and HyTest had already established a good level of trust in prior business relationships. “In the past few years, more than half of HyTest’s revenue came from the China market, and with Mindray’s globalization strategy, the acquisition of HyTest became particularly attractive to Mindray.”

Though BDA Partners often takes on the role of a sell-side advisor, when the transaction involves a Chinese buyer, BDA Partners will also take the initiative to coordinate with the buyer to elaborate thoughts from the seller’s side, including management’s concerns on the transaction and key transaction terms.

Siu believes that the days of relying on the China growth story to win over the seller’s and target’s management are gone. Chinese acquirers should have a clear plan for globalising the target’s business beyond just China. “We are actively working with our clients to search for quality investment targets on a global scale to help them expand their international footprint,” said Siu.

The history of globalisation proved that successful M&A transactions can generate higher shareholder returns and help global players strengthen their competencies and maintain their market-leading position.

Being able to survive the pandemic will make a company stronger, while others facing challenges will become more open to being acquired. “For ambitious Chinese companies, now is a good time for M&A,” said Siu.

However, overseas competitors will not just sit back and wait. To grasp the opportunity and secure a meaningful position among global leaders, Chinese acquirers should further enhance their in-house M&A capabilities and attract talent with international experience and M&A expertise.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

In recent years, many companies have re-evaluated the potential of their businesses and are now considering divesting their non-core assets. This enables the firms to focus on assets providing long-term value, whilst at the same time, presenting M&A opportunities for well-funded companies.

Key considerations and drivers

The post COVID world has seen greater strains on supply chain security, inflation in wages, labour scarcity and heightened commodity volatility. Geopolitical tensions, increasing trade friction, and renewed interest in industrial strategy are all accelerating non-core divestment considerations.

Today, boardrooms are consumed with the topic of supply chain de-risking, in particular with reference to China. De-risking- as opposed to economic decoupling- is a nuanced view that sees global trade and investment as deep-rooted. Solutions include diversification and avoidance of excessive concentration by country and industry. Connected to this trend of de-risking is nearshoring. A Buck Consultants survey, published in February 2022, found more than 60% of European companies are looking to on-shore or re-shore Asian production in the next three years, with the main winners being Central and Eastern Europe, including Turkey.

These megatrends of de-risking and nearshoring are combining to spur further divestments. Below we explore additional factors that are prompting non-core disposals:

Governance of international assets has become increasingly fraught

Regulatory changes and local compliance: trends continue to favour local management and a deep local presence. The ability of foreign owners to respond to international changes is becoming ever more costly and challenging
Prioritization of domestic factors: Foreign brands and companies are at a strategic disadvantage (e.g. consumer preferences, trade policies)
Opportunity cost relative to home market: In a fragmenting world with increasing cross-border barriers, home market advantage can lead to increased profitability and/or simpler forms of control and management structure
Risk appetite: Increasingly, asset owners must decide on multi-year, global strategies. A decline in risk appetite is leading to a flight to safety
Variation by sector: Industrial strategy has focused on politically sensitive sectors that affect employment or security; however some sectors such as healthcare and outsourced technology services have been less impacted.

M&A considerations:

Slowing global GDP growth will accelerate divestments: Weaker growth and fragmented regional assets will accelerate non-core, international divestments
De-risking and divestments flow in both directions: Asset owners in both Asia and the West are actively reviewing and pursuing non-core divestments in respective foreign markets
Challenges in interfacing with local management: Differences abound in governance styles which are often exacerbated by the de-prioritisation of local operations
Local assets are often at risk of underperformance: Lack of oversight and investment can lead to relative underperformance and therefore valuation expectation mismatches upon sale
Lack of buyer knowledge and relationships: Lack of local knowledge restricts and impedes optimal divestment to a local buyer
Sale process requires a bridge between local management and foreign owner: Few M&A practitioners have the reach and expertise to help navigate international non-core divestments successfully.

BDA’s view

With changing market conditions, corporates are re-evaluating their operations with a view to exiting certain business lines to focus on long-term core business areas. We anticipate an important increase in ownership rationalisation driven by risk mitigation, regional compliance and a focus on domestic comparative advantage.

BDA is well placed to support our clients as they confront these opportunities and challenges by virtue of our global presence and significant experience in corporate carveout and cross-border divestments.

Recent selected BDA examples of cross-border divestments between Asia and the West:

December-2022: Sale of Korean-owned but U.K.-based Doosan Enpure to SKion Water
December-2022: Sale of Italian-owned but Indian-based business of the Lavazza Group to Culinary Brands
August-2022: Sale of Chinese-owned but U.S.-based Clearon to Solenis
May-2022: Sale of Korean-owned but U.K.-based Doosan Babcock to Altrad
May-2022: Sale of U.S.-owned but Japan-based PEARL iZUMI to United Sports Brands and Bregal Partners
February-2022: Sale of Japanese-owned but Italy-based Toshiba Transmission & Distribution Europe to Mutares

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

The private equity (PE) landscape in Vietnam is becoming increasingly attractive to global investors due to improvements in regulations, governance and corporate profiles. In the early 2000s and before, there was very limited PE activity in Vietnam, a market characterized by a shortage of private enterprises and unclear regulatory framework on private investments. It was not until the 2005 Enterprise Law came into effect that Vietnam first established a common legal framework for the establishment and management of both State Owned Enterprises (SOEs) and private enterprises, boosting investors’ confidence for investments in private companies.

Along with the rapid growth of Vietnam’s economy, PE activity has soared since the second half of the 2000s. This can be attributed to a number of factors:

Integration with the global economy: Vietnam became a member of the World Trade Organization in 2007, committing to one of the world’s most progressive market access programs. This made Vietnam appear on more PE investors’ radar – in fact, some of the earliest notable transactions involving PE investors in Vietnam occurred in 2007, such as Temasek-Minh Phu and PENM Partners-Eurowindow. Since then, Vietnam has continued to participate in more free trade agreements to become an important node in the global economy.
Development of the domestic stock exchanges: The launch and development of HOSE and HNX in the early 2000s provided additional comfort to institutional investors in their consideration to include Vietnam as a part of their mandate. As Vietnam gradually becomes one of the most closely watched frontier markets and is on track to reach emerging market status, the country has continued to draw attention from global PE investors.
Easing of foreign ownership restrictions: There has been significant progress in unlocking market access for foreign investors since the early 2000s. Market access restrictions for specific sectors, once challenging to navigate in the past, are now clarified by the 2020 Law on Investment, which officially classifies restricted and conditional sectors in one consolidated source. Foreign ownership limits, once kept at 20%-30% for most sectors, now can be extended or have clear path to be extended to up to 100% for non-conditional, non-restricted business lines.
Improvement in corporate profiles: In the earlier days, many private enterprises in Vietnam were small founder-owned, family-run businesses, which lacked both corporate governance of international standards and experience in working with foreign investors. Nowadays, sizable, well-managed private companies are more common – these firms will now consider investments from PE investors as a strategic option in their growth trajectory and have also become more educated in M&A processes.
Regulatory landscape improvement: Local authorities have continuously provided clearer guidelines for M&A, as evidenced in various revisions of the Law on Enterprises, Law on Competition, and Law on Investment. For example, the latest 2020 Law on Investment has further addressed the ambiguity of existing regulations and clarified when M&A approval is required – a concern previously highlighted by many PE investors.

From the quiet days when there was only a handful of small value deals in the early 2000s, PE investors have been gradually playing a much bigger role in Vietnam’s M&A market. Larger deals involving PE investors have become more common – there were more than 30 deals valued at US$100m or higher over the last five years[1], while the top ten largest PE transactions of all time in Vietnam all occurred during this period. For Vietnamese businesses, PE funding brings in not only much needed capital for growth or additional liquidity for shareholders, but also important corporate governance guidelines and operational know-how of international standards for optimal value generation. Institutional presence among the cap table would also highlight the legitimacy and sustainability of the business models of local enterprises, which in turn enhance their attractiveness to more global investors.

Date	Investor	Target	Sector	Value (US$m)	Stake
Jun-20	KKR’s consortium	Vinhomes	Real Estate	651	6%
Oct-18	SK Investments	Masan Group	Consumer	474	9%
Aug-18	Hanwha Asset Management	Vingroup	Diversified	403	Undisc.
May-21	Alibaba, BPEA	The CrownX	Consumer	400	6%
Dec-18	Warburg Pincus	Techcombank	Financial Services	370	4%
Dec-21	TPG, Temasek, ADIA	The CrownX	Consumer	350	5%
Jul-19	GIC, Softbank	VNPay	Technology	300	Undisc.
Jan-19	GIC, Mizuho	Vietcombank	Financial Services	264	3%
Jun-22	Warburg Pincus	Novaland	Real Estate	250	Undisc.
Jul-21	General Atlantic, Dragoneer	VNPay	Technology	250	Undisc.

Figure 1: Top ten all-time largest PE transactions in Vietnam

Emerging trends

1. Rising competition in dealmaking from global funds: In the earlier days, most PE transactions in Vietnam involved local funds given their advantages in familiarity with the investment landscape, with examples such as Indochina Capital-Hoang Quan (2006)[2], Mekong Capital-MobileWorld (2007)[3], and VinaCapital-PNJ (2008)[4]. Over time, more and more global PE firms have established local presence in Vietnam, with dedicated investment teams and network of advisors on the ground to start building their track record in the country. While local funds remain active in the market, global funds, with stronger financial capabilities, have been dominating the investment landscape – as evidenced in the list of top ten all-time largest PE transactions in Vietnam

2. Minority vs. control/buyout transactions: Minority transactions are still more popular for PE investors in Vietnam given the lack of onshore deal financing options commonly found in buyout transactions and risk aversion as most funds still have relatively short track record in the country. However, the market has witnessed several buyout transactions in the past, especially in the Healthcare and Education sectors such as CVC-Phuong Chau(2021)[5], BPEA-Vietnam USA Society English Centers (2019)[6], TPG-Vietnam Australia International School (2017)[7], and Navis-Hanoi French Hospital (2016)[8]. From our recent interactions with regional PEs, we understand that there is a growing appetite for control/buyout deals in Vietnam, driven by both record levels of dry powder and the maturation of the investment landscape.

3. Growing importance of ESG topics : ESG topics are no longer considered as a matter of compliance but have become opportunities to unlock value and present key selling points to potential investors. More investors have been appointing specialized ESG advisors for due diligence, while aligning with the target companies on having strong ESG values ingrained in corporate culture as part of deal negotiation and post-deal integration.

Looking ahead – Sectors to watch for PE activity in Vietnam

Consumer

Although consumer confidence is temporarily impacted by the ongoing global macroeconomic turbulence, investors will continue to target Vietnam as one of the most attractive economies in the region.

Healthcare

Rising income level and increased health awareness among Vietnamese people will propel demand for private hospital and clinics, in response to the lack of capacity within the national healthcare system.

Education:

Before the emergence of Covid-19, investors showed significant interest in both local and international private schools.

Financial Services

The shortage of financing and credit solutions among an underbanked population is expected to drive investments in Financial Services.

Logistics:

Tailwinds from high growth in exports, a booming Internet economy, and supply chain shift from China will continue to propel growth in Vietnam’s logistics industry.

Technology

Difficulties caused by the pandemic have accelerated progress in digitalization, driving growth in demand across all industries for technology-related services and digital solutions that help businesses improve functionality.

The PE market in Vietnam has changed drastically since the early 2000’s as we have experienced more favourable conditions. Going forward, we expect not only the number of deals to increase, but the size of deals in Vietnam to grow as PE investors seek opportunities.

[1] Source: Mergermarket

[2] https://vnexpress.net/indochina-capital-mua-cp-hoang-quan-2696691.html

[3] https://www.mekongcapital.com/our-investment/mobile-world/

[4] https://www.investegate.co.uk/vietnam-opp-fund-ltd/rns/investment/200805021205506730T/

[5] https://www.dealstreetasia.com/stories/cvc-capital-phuong-chau-hospital-307941

[6] https://www.globalprivatecapital.org/newsroom/bpea-acquires-majority-stake-in-vus/

[7] https://www.vas.edu.vn/en/news/he-thong-truong-dan-lap-quoc-te-viet-uc-co-nha-dua-tu-chien-luoc-moi

[8] https://www.naviscapital.com/wp-content/uploads/2016/06/Navis-Press-Release-30-June-2016-Acquisition-of-Hanoi-French-Hospital.pdf

[9] https://en.vietnamplus.vn/over-70-of-vietnamese-population-use-internet/231833.vnp

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

As we approach the halfway point in 2023, it’s clear that the luxury goods market in China and Asia is thriving. This growth is fuelled by the opening of borders post-COVID and the region’s increasing affluence. Today, China alone accounts for over one-third of global luxury sales.

As consumers in the region spend more on retail, beauty, food, lifestyle, and luxury items than ever before, BDA sees opportunities for foreign investors and companies to reach an eager and widespread Asian market.

In our latest insights report, we discuss China’s economy and explore opportunities in other Asian markets. We also identify the subsectors in the consumer and retail space which we anticipate will shine.

The key takeaways in this report are:

Asia’s luxury market continues to gain momentum, mainly driven by China
In China, retail sales in March 2023 alone jumped 10.6% YOY, a speed unseen in two years
The share price of some luxury companies have risen 10%-20% this year
A rebound in the Chinese economy, the millennial generation, and changing consumer preferences support the trend
Overall, Asian consumers are spending more on retail, beauty, food, lifestyle, and luxury items than ever before
This increase in demand opens the door to opportunities for foreign investors and companies
BDA has deep industry knowledge and extensive experience in advising clients on transactions in beauty & personal care, lifestyle & entertainment, mother & baby care, apparel & accessories, and the food and beverage industries

Download the full report

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

Solar energy in ASEAN presents a compelling investment opportunity for both financial and strategic investors. This is a result of the recent (and potentially continuing) advances in technology and levelized cost of energy (“LCOE”) and the expected regulatory developments.

Energy demand in the ASEAN region:

Back in 2018, Singapore’s Prime Minister Lee Hsien Loong stated, “ASEAN will become the fourth-largest economy in the world by 2030, after the US, China, and the European Union”
This step change means the associated evolution in energy demand in ASEAN has global implications
From 2012 to 2021, the region’s growth in power demand actually outpaced that of GDP by a factor of 1.2x
This trend is set to continue, with regional electricity demand growth expected to surpass global average power growth by 1.5x from 2022 to 2031

Investment opportunities:

ASEAN countries have laid out clear renewable energy capacity targets to reach the goals set out in the Paris Agreement and the associated Nationally Determined Contributions (“NDCs”)
By 2025, these nations aim to have 23% of their primary energy supplied by renewable energy
To meet this objective, annual investments in the ASEAN renewables sector are expected to at least double from current levels
Thanks to regulatory developments and the falling relative LCOE, solar is emerging as the predominant renewable technology for ASEAN
BDA expects private sector investment and corporate activity to accelerate and support the sector’s already rapid growth

Download the full report

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

China’s private equity (“PE”) industry faced strong headwinds in 2022 due to factors including a slowing economy, Covid-19 restrictions, increased regulatory scrutiny, and higher prevailing interest rates globally which weighed on public market valuations. PE exits and fundraising had been challenging during the past year.

However, the China market underwent a dramatic change in recent months as the country’s Zero-Covid policy was relaxed and borders were reopened. The Chinese government implemented measures to boost the economy and private sector investments. This report provides our perspectives on how these changes may impact PE activities and China M&A market in 2023.

The key takeaways in this report are:

The unwinding of Zero-Covid policies will benefit sectors such as consumer, tourism, and property. China’s growth story will be back in focus and investor confidence in the Chinese economy will likely revive. Looking ahead, consumer & retail, manufacturing, energy & resources, life science & healthcare, and logistics & supply chain industries will likely attract the most attention

China M&A market involving Financial Sponsors will be dominated by China GP’s investments in domestic targets. We also expect to see an increase in GP outbound investments in 2023 to diversify their portfolio outside of China

Trade sales and IPOs were difficult in 2022, leading to delays in portfolio company exits and fundraising for PEs. In 2023, we expect to see a greater number of portfolio company exits, with more quality assets coming to the market. We expect tightened regulations and the long backlog for public listings will continue to pose difficulties for IPO exits, and mean trade sale will be a more prominent exit route for PEs in 2023

PEs will likely focus on returning capital to LPs through portfolio company exits in 2023. We expect that fundraising will remain relatively subdued this year, followed by more fundraising activity from 2024 onwards as PEs complete more exits – and need to replenish their capital for new investments

Download the full report

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

A rapidly expanding middle class with increased health awareness post-pandemic will continue to fuel demand for higher standards in all aspects of healthcare in Vietnam, making the country a favorite investment destination. At BDA Partners, we have seen strong interest from both financial sponsors and strategic investors to gain exposure to the sector, and we believe that there remains an abundance of M&A opportunities across various healthcare verticals.

Healthcare services – Key M&A volume driver

Historically, transactions involving private hospitals and clinics have driven deal volume in Vietnam, and this theme is expected to persist given favorable market dynamics. Vietnam’s aging population with increased health awareness and growing income level have created unmet demands for high quality healthcare services. On the supply side, the issue of overcrowding at public hospitals in major cities persist. According to the General Statistics Office[1], Vietnam has 3.1 hospital beds per 1,000 population in 2021, below WHO’s recommended level (5 beds per 1,000 population). This supply-demand imbalance implies significant headroom for the expansion of private healthcare in Vietnam, supported by government policies such as Decision No.20/NQ-TW 2017[2], which sets the target for private hospital beds to account for 10% and 15% of the total number of hospital beds in 2025 and 2030, respectively. As a result, private hospitals and clinics will continue to generate significant interest, especially as patient volume is recovering to pre-pandemic level, while surgeries, complex procedures, and other high-value medical services have been reintroduced.

Notable trends

General hospitals attracting the most interest: The largest transaction in healthcare services in recent years was GIC’s US$204m investment in Vinmec in 2020. Other notable transactions include VinaCapital’s investment in Thu Cuc in 2020, Quadria Capital’s investment in FV Hospital in 2017, and Navis’s investment in Hanoi French Hospital in 2016. Both strategic and financial investors have been looking for sizable transactions involving private general hospitals in Vietnam, many of which boast strong profit margins, healthy cash flow, and high occupancy rates. Notably, assets in the upper-mid and premium segments with service quality comparable to international standards have the potential to capture demand from the growing number of Vietnamese patients who would otherwise be traveling abroad for treatment.
Growing emphasis on specialty assets: Regional healthcare platforms are looking for bolt-on acquisitions to add more specialties to their networks, following Heliconia’s investment in the ophthalmology network Mat Sai Gon and TPG’s investment in Hung Viet Oncology Hospital in 2019. Specialty clinics have also started to gain traction, as evidenced by the successful capital raises of Kim Dental from ABC World (a transaction in which BDA served as the exclusive financial advisor to Kim Dental) and Nhi Dong 315, a pediatrics and maternity chain, both of which having extensive, fast-growing networks of locations in HCMC.
New focus on Tier 2 / Tier 3 cities: Foreign investors have demonstrated increased appetite for assets outside major cities, as evidenced by CVC’s acquisition of a 60% stake in Phuong Chau, a network of four hospitals in the Mekong Delta region in 2022 and Kei Mei Kai’s acquisition of Binh Duong-based Hoan Hao Hospital in 2019. Vietnam’s rapid urbanization will create significant demand for high quality healthcare services in Tier 2 / Tier 3 cities, making hospitals / clinics in those regions compelling investment opportunities.
Appetite for healthcare platforms: Investors are on the hunt to scoop up scaled healthcare operators with multiple facilities in Vietnam, which are more attractive from a growth and profitability improvement perspective compared to single-location assets.

Pharmaceuticals – Favorable market conditions propelling strategic M&A partnerships

With no foreign ownership limit for pharmaceutical manufacturing, many local manufacturers have formed partnerships with foreign investors, with examples such as Taisho-DHG, Aska-Hataphar, SK-Imexpharm, and Daewoong-Traphaco. Per Decree No. 54/2017/ND-CP[3], foreign-invested entities cannot directly participate in pharmaceutical distribution in Vietnam, while still being able to distribute their locally produced products. This regulation makes investments in local manufacturers the most efficient way for foreign players to gain exposure to Vietnam’s pharmaceutical market, which is projected to reach US$16.1bn by 2026 per BMI Research[4].

Going forward, as a defensive sector, pharmaceuticals will receive strong interest amidst current global macroeconomic turbulence. The industry is set to benefit from the government’s strategy to promote domestic manufacturing, which aims to increase the share of locally produced pharmaceuticals to 80%[5], in a market historically dominated by imports. To boost competitiveness, local manufacturers will find M&A with foreign strategic investors as a viable strategic option, enabling them to meet global standards through transfers of technology, corporate governance, and management expertise. Meanwhile, investors are targeting manufacturers in Vietnam to capture local market potential and export opportunities through contract manufacturing partnerships.

Others – Emerging verticals with headroom for growth

Healthtech

The decrease in direct interaction due to the pandemic has brought healthtech into the spotlight, given increased demand for virtual healthcare services. Remote medical examinations and digitalization of medical records have been among the key focuses of the Vietnamese government. Meanwhile, in the private sector, healthtech startups serving various verticals of the market such as telehealth (JioHealth, Med247, eDoctor), third party administration (Insmart, South Asia Services), and e-pharmacy (Medici, POC Pharma) have recently successfully raised funding from foreign investors, highlighting the prospect of the nascent healthtech segment in Vietnam. However, healthtech is still trailing other tech-related sectors such as payment or e-commerce in investments and development progress, and there is still ample room for investors to participate in the value creation process.

Diagnostics

The diagnostics market in Vietnam is still highly fragmented, with most players in the market being mom-and-pop labs with limited scale, low volume, and outdated technology. Thus, companies that can create scalable, modern, and tech-enabled networks of diagnostic services to capture market share will appeal to investors as good anchor assets for the creation of pathology platforms, similar to what happened in regional markets such as India and China. In addition to clinical diagnostics, genetic testing has also appeared on investors’ radar, with companies such as Genetica and Gene Solutions having completed their early funding rounds and Gentis being acquired by Eurofins.

Medical equipment

There are still few local manufacturers that meet international standards – more than 90 percent of medical equipment in Vietnam is imported, according to the Ministry of Health[6]. Nevertheless, the recent US$30m investment in 2022 by Eastbridge Partners in USM Healthcare, a local stent manufacturer, signifies that high quality assets in this space will still generate good traction. This sector will be an interesting one to watch, especially in the medical consumables segment (e.g., stents, sutures, etc.), which is more prevalent among local assets.

Looking ahead

From our recent interaction, healthcare regularly features among the key focuses of financial sponsors. Given favorable sector trends, financial sponsors are going to capitalize on and exit their investments, while also remaining as active investors due to accumulated dry powder and pent-up dealmaking demand after the pandemic. On the other hand, strategic investors will continue to closely monitor suitable opportunities to invest in synergistic assets in Vietnam. Investors with existing presence in Vietnam or in markets with similar levels of development will have an advantage through their deep understanding of market intricacies and strong operational know-how, to quickly integrate with potential targets.

In conclusion, we remain confident in the availability of M&A opportunities in Vietnam’s healthcare market going forward, especially now that Covid-related impacts that created valuation gaps and diligence challenges should no longer remain as obstacles. We look forward to a busy period ahead in 2023 with our ongoing live deals and strong pipeline of opportunities in the sector.

[1] https://www.gso.gov.vn/

[2] https://thuvienphapluat.vn/van-ban/The-thao-Y-te/Nghi-quyet-20-NQ-TW-2017-tang-cuong-cong-tac-bao-ve-cham-soc-nang-cao-suc-khoe-nhan-dan-365599.aspx

[3] https://thuvienphapluat.vn/van-ban/The-thao-Y-te/Decree-54-2017-ND-CP-guidelines-for-implementation-of-the-Law-on-Pharmacy-356336.aspx

[4] https://gmp.com.vn/thi-truong-duoc-pham-viet-nam-2021:-trien-vong-han-che-va-nhung-xu-huong-n.html

[5] https://vietnamnews.vn/economy/772550/support-for-domestic-pharmaceutical-industry-to-rise-in-viet-nam.html

[6] https://www.vietnam-briefing.com/news/vietnams-medical-devices-industry-opportunities-for-european-businesses.html/

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul, and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.