Andy Ho, the CIO of VinaCapital, was a recent guest on the WTFinance podcast, where he discussed his new book “Crossing the Street –  How to Make a Success of Investing in Vietnam.” Some notes are below (these are for personal reference only, any mistakes in transcription are my own).

• Why did he write the book: he has been based in Vietnam since 2004, first moved there with Prudential and then moved over to VinaCapital in 2007. Over the years, they have made a lot of investments and he has found a lot of his investors are curious about how they go about investing in Vietnam, what are the challenges and issues they face etc. He often found himself discussing these same topics on hundreds of roadshow trips they do in the US, UK and Europe. He wanted to put some of these thoughts on paper. Another inspiration for the book was Tim Clissold’s Mr. China. He read that book when he first came to Vietnam and he now encourages all the people on his investment team to read it. Discussed the many ways which businesses can go wrong and that investors have to be cognizant of these challenges. His book is written along similar lines, wanted to share with the reader some of the challenges they face investing in Vietnam.  
• Why he thinks Vietnam is unique versus other emerging markets: his answer is slightly biased as he is Vietnamese. He grew up in the US, got the opportunity to work at several multinational companies, including Dell and E&Y, across different markets. He and his wife eventually felt they could add more value being in Vietnam rather than the US or the UK. Vietnam has been growing quite significantly over the 10-15 years and this has created a tremendous amount of opportunities to invest in various sectors including infrastructure, healthcare, banks, FMCG etc. When he first came to Vietnam, there were 26 companies on the stock market, now there are over 750 companies. US$74m total market cap back then versus US$207bn today. There are always lots of risks that come with investing in frontier/emerging markets. But you need to prioritize the risks and also look at what are the returns that you can earn accepting such risks. Over the last 15 years, they have delivered an 18.9% IRR on all their private equity investments (64 in total).
• Other cultural differences people should be aware of when investing in Vietnam: the ratio of female leadership is very high. Many of the top companies in Vietnam today are led by women. This is the result of a couple of things – in part the age of these women (now in their 60s); when they first got married, their husbands were part of the war and did not make it through, women had to take on more of a leadership role across society. The younger generation of women in Vietnam have in turn benefited from having female role models and mentorship in their careers. The other thing he has found that also partly explains their success is that most of the women leaders they have worked with tend to stay very focused, whereas the men often become less focused as they become more successful. 
• On the entrepreneurial culture in Vietnam today: there have been different phases and types of entrepreneurship. What got Vietnam going in the early days was trading. Over the last 10-20 years, they started producing basic goods and services for the domestic economy. Now moving to the third phase – producing goods for export to the world. For example, Samsung now produces >50% of their smartphones from Vietnam. They are sourcing many of the components and parts from companies in Vietnam. This third phase often requires a lot of handholding. When you leave the borders of Vietnam, you have to deal with banking policy, regulatory issues, dealing with FTA requirements etc.; this is something they can help their companies with as they expand globally. On the issue of talent, they found it very difficult initially, but quality has improved over time. The younger generations of Vietnamese have now typically worked with MNCs in Vietnam. After 10-15 years of experience, they can leave the safety net and move into more entrepreneurial roles.
• His rules for investing in Vietnam: 4 broad categories (fundamentals, nevers, trust but verify, getting out). Discussed in more detail in the book. The rules basically came about because they fumbled, tripped up many times. Looked back to see what they could learn from their mistakes so they don’t repeat them. One example was when they felt confident about building a hotel but vastly underestimated the cost, time, regulatory hurdles to get things approved. Found it was cheaper to buy it than build it. Same with a hospital they tried to build – the machines that were approved initially weren’t available 2 years later, the Ministry of Health started to increase the operating standards so they had to make changes to design after it was built etc.
• Areas of focus for investors: they look at the sectors that benefit from the growth of the domestic economy – as individuals become wealthier, they want access to basic things like medical services, banking, property, F&B etc. That gives them the basic sectors they want to focus on. Then they have 2 choices: find the best player in the sector, but you have to be confident they will win out all other competitors in the long run. The second option is look at a company further down the list (e.g. their investment in HPG). They invested back in 2008, when HPG were bringing in scrap metal and melting it to create construction steel. They were the 11th largest player. They put money in and worked closely with management, helped them build a fully integrated steel complex, so the end product cost was much less than what came out of scrap metal. They are now the #1 player in Vietnam – have gone from 2m to 8m tons of capacity annually, second company in Vietnam to surpass the US$1bn profit after tax mark.
• Why they generally don’t like export-driven businesses: the working capital requirements are extremely high – you have the raw material coming in, sitting in the factory, work in progress, then finished goods that get shipped out. Get paid on accounts receivable. Problem is the cost of capital in Vietnam is really high. They also find that these businesses are fine when small, but as they become bigger, have to compete with larger players from other markets. Exports are only interesting in 2 scenarios: where you own the brand, or some sort of IP that no one else can copy. The other issue is that the labor cost today is low, but as more MNCs come to Vietnam, it will increase and this might not be a competitive location to export from anymore. Vietnam may have to face that reality in 5-10 years.
• Inflation: if you look at what has driven inflation historically, there were two factors: credit growth and the trade deficit where, as the local currency devalued against the USD, you were effectively importing inflation. The trade deficit doesn’t exist anymore, Vietnam is now a trade surplus economy. The local currency is now appreciating against the USD. The State Bank of Vietnam has also learned from the past where high rates of credit growth led to inflation, they have now put caps at 11-12%. He thinks investors should build a 3-4% inflation assumption into their IRRs. If your target return is 20% p.a. over 5 years, if inflation is 3%, you are down to 17%, but ideally the business you are investing in can also counter inflation by raising prices + you have a currency that is appreciating.