When Vietnamese short-term interest rates spiked over 15% in 2012, companies were distressed and most foreign investors were leaving the country in droves. Eric Solberg decided the time was right to back a luxury property developer.
He met around 27 Vietnamese developers and picked one. His private equity firm, EXS Capital, invested $38 million in 2013 in the mezzanine debt of Sonkim Land.
“We smelled opportunity,” Solberg, EXS Capital’s founder and CEO, said in an interview with FinanceAsia.
Now EXS Capital and Sonkim are raising another $100 million and preparing for the next wave of investment from Japanese and Korean corporates looking to sell to Vietnam’s burgeoning middle class.
They have already gathered $46 million and brought in a new Japanese investor, ACA Investments, which is backed by Sumitomo Corp.
The next wave
Southeast Asian countries, such as Vietnam, are winning over manufacturers, such as Samsung, Nokia and Intel, who are moving work to the country from China due to lower costs, rising domestic consumption and improving infrastructure.
As a result, Vietnam’s share of world exports has nearly doubled to 1.2% in 2016 from 0.7% in 2013.
“The property market will remain strong as manufacturers are very very interested in Vietnam as an alternative from China,” Trang Le, head of research in Vietnam for JLL, told FinanceAsia.
The country's improving competitiveness and reform impetus have supported net foreign direct investment (FDI) inflows averaging 5.2% of GDP between 2014 and 2016.
“Now Vietnam is becoming a target for Japanese consumer and retail firms, as disposable incomes are picking up,” said ACA Investments’ Hiroyuki Ono.
Japan’s AEON is targeting 20 malls in Vietnam by 2020 and the upmarket retailer, Takashimaya, opened its first Ho Chi Minh City department store in 2016.
Credit rating agency Moody's revised its outlook for the Government of Vietnam to positive from stable in April, based on its expectation that strong FDI inflows, fostered by ongoing economic reform, will continue to diversify the economy and enhance economic performance away from a strong reliance on apparel.
The Sonkim group grew out of family-run clothing manufacturer, based in Southern Vietnam. Over the last couple of dacades the Nguyen family has been expanding into property. Since 2013, SonKim has grown rapidly, launching several luxury properties in Ho Chi Minh City including Gateway Thao Dien and The Nassim. These properties are both joint ventures with Hamon Developments and Hongkong Land respectively.
With its additional fundraising, SonKim Land aims to continue to develop its pipeline of developments across Vietnam, including luxury residential and commercial developments in Ho Chi Minh City.
“Commercial and office segments will remain particularly strong while residential is slowing down a little bit. We think the residential market already peaked in 2015-2016,” said JLL’s Trang le.
Sonkim is seeking to balance its business between residential property for sale, which does well when markets are hot, and commercial service apartments for lease, which is a fall back for when markets sag.
Timing
“Crisis investing works in Asia,” said Solberg, “you only find the very best deals when you find these very challenging market conditions,”
Solberg asked institutional investors to come in with him in 2012, but most could not get approval from their investment committees. Instead he wrangled a club of over 50 Japanese high-net-worth investors together to back his idea.
Solberg was formerly the head of Japan for CVC International Asia, Citigroup’s proprietary private equity group for Asia, and has been visiting the country since he was 18 years old.
A few of EXS Capital’s investors have since taken some capital out at an internal rate of return (IRR) of over 20% and the remainder, Solberg expects, will have an IRR of 30% to 40% by the time the company lists on the Vietnam stock exchange in two or three years' time if all goes to plan.
During such risky times as 2012, deals are often structured to afford maximum protection to the investor. EXS Capital’s first investment into Sonkim was structured as convertible debt with land as security and a coupon of 10% in a mix of cash and payment-in-kind.
The latest $100 million investment will have a similar structure but at a lower cost of capital for Sonkim now that the property market has recovered dramatically.
It has a lower coupon and a higher conversion price, but still offers a projected IRR in the 20s or 30s.
