Where does Chinese money go?

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.

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

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

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

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

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

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

Huong Trinh, Partner and Head of Ho Chi Minh City at BDA Partners, shares insights on Vietnam F&B sector in M&A on VIR.

Vietnam Investment Review

How do you see the trend of M&As in Vietnam’s F&B post-COVID? Do you see a slowdown in this area?

Post-Covid, we are still observing continuing interests from both strategic and financial investors, especially ones from Japan, Korea, and Southeast Asia for F&B companies in Vietnam. The total value of M&A transactions in Vietnam’s consumer sector reached US$1.2bn in 10M2022, an increase of nearly 40% yoy from US$871m in 10M2021. Meanwhile, it is worth noting that in recent months in 2H 2022, consumer confidence has been impacted by ongoing macro factors (e.g., surging inflation and interest rates). Nevertheless, going forward, we still expect a buoyant F&B market outlook, as Vietnam remains as one of the most attractive F&B markets in the region with robust market fundamentals and a strong socioeconomic backbone thanks to (i) a fast-growing market with 100 million consumers, propelled by robust economic growth and rising income, (ii) a young and dynamic population increasing propensity to spend, and (iii) rising demands for e-commerce and modern retail driven by rapid urbanization. These are the key factors driving M&A activities in the Vietnam’s F&B sector.

Filipino food company Jollibee Food Corporation is reportedly seeking to sell a minority stake in Vietnamese coffee chain Highlands Coffee. The sale could lead to an IPO launch for the coffee chain, which Jollibee has been considering for several years. What are the opportunities for foreign companies to conduct M&As in Vietnam’s F&B market? What are some major F&B deals in Vietnam in 2022?

We believe there remain many opportunities for foreign investors looking for potential targets for M&A of F&B companies in Vietnam, given the strong growth prospects. Strategic investors will be on the hunt for Vietnamese F&B companies to expand their product portfolio, manufacturing capacity and distribution network in the country. Such investments will also provide strategic investors quick access to a highly potential F&B market with 100 million consumers with rapidly growing disposable income. This attractive market outlook will also appeal to financial sponsors, especially ones with strong track record of operational expertise in the sector.

Additionally, in Vietnam, there is generally no restriction/limit on foreign ownership applicable to F&B companies. This opens various opportunities for foreign investors to penetrate Vietnam market via M&A, especially for those who prefer to seek controlling stakes in the target companies.

From our discussions with investors within our network, sub-segments in the F&B sector that we continue to see strong interests from foreign investors are food service, food ingredients and additives, and F&B retail. Vietnam F&B companies with (i) strong brand equity and awareness, (ii) extensive portfolio of staple products that are less directly affected by market fluctuations, (iii) nationwide distribution network, (iv) healthy financial performance, and (v) clearly defined business plans with attractive growth initiatives will present compelling investment opportunities for foreign investors.

Some remarkable F&B transactions in 2022 include:

Masan Group’s acquisition of a majority stake in Phuc Long
Swire Pacific’s acquisition of Coca-Cola bottling operations in Vietnam and Cambodia for c.US$1bn
Golden Gate minority equity stake sale to a group of investors led by Temasek
Navis invested over US$100mn in Dan-D Foods for the majority stake of the company.
Pan Group has bought 39.9% stake in Bibica for US$22.6mn to increase its total ownership to 98.3%.
Cool Japan Fund’s minority stake investment into Pizza 4P’s, following the successful divestment of Mekong Capital

Vietnam Dairy Products JSC (Vinamilk) and Kido Group JSC have just announced the suspension and dissolution of the joint venture Vibev. Could you comment on the dissolution of the F&B joint venture? What are challenges for F&B players to restructure their M&A strategies post-COVID?

The current regional and local macro situations may impact corporate considerations and decisions on business plans, including what should be the strategic focus for 2023 and onwards. These are also mentioned in Kido and Vinamilk’s statements regarding the dissolution of their JV. There are various aspects that F&B companies should carefully consider, so that their M&A activities (i) can be aligned with corporate strategies, and (ii) can add long-term synergistic value to the Company and stakeholders.

Some key challenges/considerations for F&B players regarding their M&A strategies include:

Challenges	Mitigations and opportunities
For sellers
How to align and balance the value from long-term M&A strategies with current business requirements	In some cases, shareholders or companies may have to choose between long-term strategic value and immediate capital needs. Nevertheless, F&B companies should always carefully consider such synergistic values that an investor may contribute to the development and expansion of the business (other than capital), when it comes to selecting the right strategic partner for M&A. Those values can be global best practices in corporate governance, know-hows in operations, network relationships or product portfolio expansion, etc.
Business performance can be impacted by macro factors (e.g., higher inflation and interest rates, which may impact valuation)	Valuation can be based on future performance or normalized current performance rather than current accounting performance. In such case, companies need to have a clear explanation for its performance during COVID period and a normalized level of performance. Companies with clearly defined business plans and well-established growth initiatives will be able to deliver more attractive growth stories and will be more likely to solicit better valuation/terms from investors. Companies should also keep in mind about the timing for M&A, so that investors may have sufficient time to understand and appreciate the business and growth potentials, before making an investment decision. Professional M&A sell-side advisors may help shareholders and the Company with fine-tuning the equity story and articulating growth prospects to potential investors to maximize value.
How to be well prepared to maximize value from M&A transactions	It can be time-consuming to prepare for an M&A transaction. To fully appreciate the business, investors will need to review an extensive level of company’s information, including historical and forecast financials, and detailed business plan. As such, companies should be well prepared in terms of available information that can be shared with investors before going to market for M&A.
For buyers
How to identify and select the right targets for acquisition, and how to integrate long-term growth directions with M&A strategies amidst recent market fluctuations	Both strategic investors and financial sponsors should maintain a clear pipeline of potential targets in the wishlist and be prepared to have sufficient funding for prompt deployment when good opportunities become available (which usually involve strong competition).
Portfolio performance review and non-core business considerations	Companies should constantly review performance of portfolio companies and identify under-performing or non-core businesses for further action. This is to ensure that M&A activities actually bring value to the group business, and that most (if not all) investments align with the company’s strategic directions. Divestment of under-performing or non-core may be considered.

About BDA Partners

Huong Trinh, Partner and Head of Ho Chi Minh City at BDA Partners, shares insights on the real estate and logistics market in M&A on DealStreetAsia.

DealStreetAsia

“Accumulated dry powder and pent-up dealmaking lead to increased demand across all segments of the real estate market, with residential and industrial properties and projects attracting the most interest in 2022.”

“There is still ample headroom for development and investment opportunities in the segment, as Vietnam still needs to fill the demand of foreign corporations for the modernisation of industrial facilities to catch up with global standards and the introduction and integration of tech-enabled supply chain and logistics networks throughout the country,” said Trinh of BDA Partners.

In the short-term, M&A in real estate in Vietnam will be impacted by overall uncertainty in the macroeconomic environment and tightening of liquidity in the market, as the “easy money” period has come to a temporary halt, said Trinh of BDA Partners.

“Given tight liquidity available in the local banking and corporate bond system, we believe that there are opportunities for regional private credit funds, which have not been popular in Vietnam in the past, to penetrate the market,” she said.

Investors, Trinh went on, will require higher interest rates and more liquid assets to be used as collateral, reflecting the downgraded market outlook.

According to BDA Partners, foreign investors will continue to hunt for investments in both real estate projects and developers, driven by clear opportunities to capitalize on incumbent market potential in Vietnam’s fast-growing and transforming economy.

About BDA Partners

The FinTech sector in Southeast Asia (SEA) has been flourishing in recent years, with ever-increasing capital flowing into the region from global investors and market leaders. In our latest insight, we take a closer look at the key trends that make SEA an attractive FinTech market, the dynamics within key FinTech verticals, and how we expect financing activity to evolve.

Key takeaways:

State of the Tech markets

Global equities are experiencing high volatility and have been roiled over inflation fears, rising geopolitical tensions, and escalating interest rates
High-growth companies are witnessing the greatest share price declines (>50%) as cash flows far out into the future are discounted harder, amid rate hikes
While public Tech valuations appear to have plummeted, they have in fact eased down to the 10-year historical baseline
The pace of private capital deployment may have moderated relative to 2021, but remains vigorous and surpasses that of all preceding years
All-time high dry powder in 2022 is expected to fuel continued deal velocity

SEA FinTech landscape and exit thoughts

SEA is one of the most vibrant Tech ecosystems globally with a booming FinTech sector
Singapore and Indonesia account for two-thirds of SEA FinTech deals
Payments and lending drive more than half the region’s FinTech deals by value; crypto/web3 companies have been gaining traction among earlier-stage investors amid growing institutional awareness
Mounting unrealised value at a time when public listings/SPACs have lost their shine as a viable, attractive exit route
Private financing rounds/M&A are expected to intensify over the longer term as the ecosystem matures and more investors flock to SEA to tap into the region’s growth, talent, and disruptive business models

Download the full report

About BDA Partners

Although COVID-19 did not completely hamper M&A deal flow in Vietnam, travel restrictions and a strict lockdown in the second half of 2021 posed major challenges for buyers and sellers alike. With the gradual unwinding of COVID-related restrictions and the resumption of international flights in October 2021, M&A activity has accelerated. The economy has recovered quickly and the outlook for dealmaking is positive.

Top 10 M&A transactions in Vietnam (October 2021 – August 2022)

Date	Investor	Target	Deal size (US$m)	Stake
Oct-21	SMBC Consumer Finance	FE Credit	1,400	49%
Jul-22	Swire Pacific	Coca-Cola Indochina	1,015	100%
Dec-21	TPG, Temasek, ADIA	The CrownX	350	4%
Nov-21	SK Holdings	The CrownX	345	5%
Dec-21	Mizuho	Momo	200	Undisclosed
Feb-22	AC Energy	Super Energy’s nine solar plants	165	49%
Oct-21	UBS, Mirae, STIC	Tiki	136	Undisclosed
Apr-22	Hana Financial Group	BIDV Securities	118	35%
Aug-22	Masan	Phuc Long	155	34%
Apr-22	Indorama Ventures	Ngoc Nghia Industry	94	98%

Source: Mergermarket

Key drivers propelling post-pandemic deal flow

Vietnam’s economic recovery has proven appealing to investors – it was one of the few countries that recorded two consecutive years of GDP growth in 2020 and 2021 during the height of COVID. According to the General Statistics Office, Vietnam achieved 2.58% GDP growth in 2021 [1], despite experiencing one of the strictest lockdowns in the world during the second half of that year. Looking ahead, the Asian Development Bank is forecasting that Vietnam’s economic growth will recover to 6.5% in 2022[2]. In fact, GDP growth in Q2 2022 was 7.7%, the highest quarterly growth in the last ten years.[3]

Pent-up dealmaking demand is a key driver. Both strategic investors and financial sponsors have a large amount of capital to invest and are keen to identify new opportunities or revive discussions that were on hold. Industry leaders are actively looking for acquisitions to consolidate market share within their verticals, taking advantage perhaps of competitors weakened by COVID and slower to rebound. In addition, many companies are looking to position themselves for recovery in the post-pandemic economy and need new capital injections for internal transformation and further growth in order to remain competitive.

The resumption of international travel is also significant. In-person due diligence and site visits have facilitated many deals that were previously put on hold, especially for asset-heavy industries such as industrials, logistics, and healthcare. Since October 2021, BDA has met with numerous foreign investors who have expressed a strong interest in Vietnam. After a two-year hiatus, BDA organised its annual networking event in Ho Chi Minh City in May 2022 with over 200 participants – mainly investors and corporate shareholders – and all appreciated the opportunity to reconnect in person and discuss the future.

Trends expected to persist post COVID

Domestic investors had an advantage over their foreign counterparts during COVID given their local presence, and this led to an increase in domestic deal flow and volume. Although COVID-related border restrictions have now been lifted, BDA has seen local conglomerates continuing their acquisition spree in a market that has historically been dominated by foreign buyers. For example, in addition to its investment in Phuc Long, Masan also acquired a 25% stake in Trusting Social, a company engaged with credit scoring based on social data, for US$65m in April 2022. This was another transaction in which BDA acted as the exclusive advisor to the target company. Nova Group has been on an acquisition spree, expanding its ecosystem with a focus on Consumer businesses, having acquired and taken over the operations of major F&B establishments such as Jumbo Seafood, Sushi Tei, Crystal Jade, and PhinDeli.

From a deal negotiation perspective, BDA has observed several points that have become particularly important during deal negotiations. With material adverse change (“MAC”) clauses, buyers and sellers now need to acknowledge the risk of a significant downturn in the business as a result of COVID. MAC provisions typically exclude market-wide macroeconomic impact, but since COVID has different effects on different industries, the negotiation of specific triggers in MAC clauses needs to be scrutinised. Earn-outs have become more common by bridging valuation gaps under scenarios of temporary uncertainty, while also enabling sellers to share in the upside of long-term growth. Warranty and indemnity (“W&I”) insurance, a rare option in Vietnam deals in the past, is also being used more frequently, as both buyers and sellers appreciate the benefit of a smoother and faster signing and closing process.

During the height of domestic lockdown and border restrictions in 2021, virtual interaction was the only option in most cases for M&A transactions in Vietnam. We expect that for non-key discussions, virtual meetings will continue to be a common option in the future. However, for other key parts of the transaction process such as site visits and due diligence, which were supported by on-the-ground advisors and virtual tours during COVID, and especially for negotiations, in-person participation will still be preferred going forward.

Global slowdown in M&A in 2022 and beyond

Global M&A in H1 2022 is down 21% by value and 17% by volume compared H1 2021[4], partly due to the cooldown in SPAC-related transactions. Inflationary pressure across the supply chain, geopolitical tensions, and a rising interest rate environment have also contributed to the volatility that could become a recurring theme in the M&A market over the next year or so.

Inasmuch as businesses in Vietnam are not immune to these factors, we still believe that 2022 will remain another busy year for Vietnam’s M&A market. Investors have not shown any reduced appetite in dealmaking in Vietnam, as evidenced in their interest in BDA’s ongoing mandates. We believe that there are a lot of high-quality assets that have proven resilient against turbulence brought about by COVID that are now well-positioned for robust growth, and we look forward to a busy period ahead with a long list of current live deals and ongoing opportunities.

Tailwinds for future growth in M&A in Vietnam include:

Strong socio-economic backbone: Vietnam will still benefit from steady economic growth, political stability, and a bourgeoning middle class population. Participation in multiple free trade agreements and open-market policies make Vietnam an attractive destination for foreign investment
Rising importance as a manufacturing hub: More global corporations are expected to relocate to Vietnam, as the country has made significant progress in infrastructure development to catch up with international standards, with major investments from both public and private sectors. The US-China trade war and prolonged COVID restrictions in China have also led to more manufacturers moving operations to Vietnam
Improving regulatory landscape: It is worth noting that with regards to M&A regulation and processes, local authorities have continuously been improving their turn-around time, while working towards clearer guidelines. For example, Decree 155/ND-CP guiding the implementation of the Law on Securities, which took effect in 2021, has provided additional clarification and detailed guidance with regard to the public tender offer process and foreign ownership limits
Growing familiarity with M&A: Local businesses are becoming more professional with strong management teams and better corporate governance. Vietnamese companies are now more familiar with M&A concepts and are open to consider strategic partnerships with foreign investors, who can provide support through best practices in business operations and have extensive experience from global markets

Most attractive sectors in Vietnam for M&A

Consumer

The Consumer sector will continue to be one of the main drivers of transaction volume
Investors will target Vietnam as one of the fastest growing economies in the region, with its growing middle class and a young population with increasing income and propensity to spend

Healthcare

In response to the lack of capacity within the national healthcare system, there has been an ongoing shift in demand towards private care
Private hospitals will continue to attract interest from both strategic and financial investors, especially as patient volumes and occupancy rates are recovering to pre-COVID levels, while more profitable surgeries and procedures are reintroduced

Education

Within private education, both local and international schools received significant interest from investors before COVID emerged
We expect discussions regarding education assets will be restarted in the near future, as the businesses’ performance recover now that students of all levels have returned to the classrooms

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
Assets in warehousing (especially smart logistics) and cold chain will generate strong interest from global investors

Financial Services

An underbanked population with a shortage of financing and credit solutions will spur further investments in financial services
The focus will be on consumer finance / fintech companies that provide solutions to enable access to non-bank credit for both individuals and micro, small, and medium businesses

Renewable Energy

With a rapidly growing economy, Vietnam has been at risk of power shortages due to a lack of power infrastructure.
Capital injections into the development of renewable energy could provide a suitable solution. Attractive feed-in-tariffs and untapped potential in solar and wind power capacity will make Vietnam an attractive destination for investors

[1] https://e.vnexpress.net/news/business/data-speaks/vietnam-finishes-2021-with-2-58-pct-gdp-growth-4409596.html

[2] https://www.adb.org/countries/viet-nam/economy

[3] https://baochinhphu.vn/gdp-quy-ii-2022-tang-truong-772-102220629090231152.htm

[4] https://www.allenovery.com/en-gb/global/news-and-insights/publications/global-ma-transactions-drop-over-20-percent-but-bright-spots-remain