Dragon Capital co-launches $250 million Indochina fund

Dragon Capital Group, Vietnam’s biggest foreign investment company, is looking westward for opportunities in neighbouring Cambodia and Laos with the launch of a $250 million private equity fund in collaboration with Frontier Investment and Development Partners (FIDP).

The Indochina Opportunities Fund will target Vietnam’s consumer sector, while seeking out commodities, infrastructure and energy deals in Cambodia and Laos with a targeted internal rate of return of 30-40%.

Vietnam investments will comprise up to 60% of the fund capital, with as much as 50% directed at Cambodia and about 10-20% to Laos.

“In Cambodia, you can do [investments in] commodities and resources,” says Bill Stoops, chief investment officer at Dragon Capital and managing partner of the Indochina Opportunities Fund. “It’s the same type of mix you can get in Indonesia, but at much cheaper valuations.”

Dragon Capital is a 60% stakeholder in the fund’s general partner, Indochina Investment and Development Partners, with the remaining 40% held by Phnom Penh-based FIDP, a frontier markets investment firm set up in 2008.

Dragon Capital has invested $10 million in the fund, while International Finance Corporation – an investment arm of the World Bank – has committed $15 million. A first close of the fund at $50 million is targeted by early next year, with a second close at $250 million by end-2012.

Capital is expected to come from development finance institutions, institutional investors, ultra-high-net-worth individuals, endowments and family offices located mostly in Asia, with some commitments anticipated from the UK and Europe, says Stoops.

Deal exits are expected to come largely from trade sales, particularly as the first stock exchanges in Laos and Cambodia were only launched this year, with trading delayed on the latter until the first domestic companies are ready to list in 2012.

Taking portfolio companies public on regional stock exchanges – such as those in Hong Kong and Singapore – will also be considered, says Marvin Yeo, FIDP founder and managing director of Indochina Opportunities Fund.

Yeo is a former senior financing specialist at the Asian Development Bank, where he oversaw debt syndications and the structuring and pricing of ADB’s corporate and infrastructure transactions in the region. It was then that he noticed developing markets that were below the sights of investors but where “perceived risk is higher than actual risk”.

He views Cambodia and Laos as politically stable countries with governments that welcome foreign investment as a path to economic development.

While the two countries are relatively small in Asia in terms of population and GDP, Stoops notes that “little countries can yield huge projects in the agricultural and commodities sectors, or in the mining space”.

A pipeline of $350 million in potential deals has been identified, such as agriculture and mining opportunities in Cambodia and Laos. Prospective investments in the consumer products and services arena – including consumer finance – have been earmarked in Vietnam, which is in the midst of a market slump following the bursting of an economic bubble that was fuelled by government stimulus spending.

The resulting lag in foreign direct investment in Vietnam has helped to lower deal valuations that are comparatively cheaper to other Asian emerging markets, such as China and Thailand, says Stoops.

He is optimistic that the Vietnamese economy will pick up in 2012 – an outcome that would also bode well for Dragon Capital’s other products, which include closed-end funds and principal investments focused on the country, with about $1 billion in total AUM.