Transparent and Ethical

SAM 11th November, 2008

Vietnam Economic Times- How do SAM and its two funds- Vietnam Equity Holding (VEH) and Vietnam Property Holding (VPH) – differentiate themselves from other funds and fund management companies?

We are different from other Vietnam focused funds in the following ways:

First, our business model comprises of a union between a foreign fund manager (SAM) and a domestic fund manager (Hanoi Fund Management or HFM). When I left VinaCapital to start a new fund in early 2007, I wanted to solve several points that foreign fund managers face in Vietnam, including, 1) Some of the investment entry costs for foreign players are questionably higher than for local entry, 2) Foreign funds are subject to limitations on ownership of a listed company (49 percent) and a private company (30 percent) or limitation or conditions in various attractive industries such as telecoms, media, banking and energy. A true collaboration between the foreign manger and domestic manager, meaning the sharing of fees and profits and not merely a handshake, can offer more flexibility in investment opportunities in accordance with the laws of Vietnam. Also, collaboration with foreign managers enables the domestic manager to increase capital, gain experience and develop an additional track record. The use of the “nominee system” by some existing foreign fund managers, meaning they have a local entity represent their interests in investments, may be legally questionable in Vietnam and represent a risk to foreign investors.

Second, we work hard to make sure our key people are properly rewarded for their work and have the best interest of the company and investors at heart over the long term. Outside of a competitive salary and benefits, SAM’s investment team are rewarded by a clear percentage of the performance bonus, also known as the “carried interest”, which represents no set dollar ceiling, while other Vietnam-focused funds may reward their investment team by cash only, with no clear sharing of the performance bonus, meaning they are at the mercy of a few individuals at the top of the company. In the investment management business, the performance bonus/carried interest represents approximately 20 percent of the profit and can be substantial. We believe this transparent system of profit sharing, which is more widely used in the US, properly rewards and retains SAM’s key employees over the long term, which benefits everyone, including our investors.

Third, we are proud to hold one of the highest ethical standards in Vietnam. To prevent any professional misconduct by the investment team, such as receiving incentives on the side from deal making (which may be a practice in some emerging economies), all of SAM’s employees adhere to and have signed a clearly defined code of ethics, which have sever consequences for any violators, including the CEO. This system is independently monitored and strictly enforced, and protects or investors and our integrity and reputation over the long run.

How would you characterize the investment/management style that governs the two funds?

I would describe it as a system of clear processes and procedures, with rigorous checks and balances as well as fortified internal controls, without slowing down the investment as we move very quickly with decisions. All potential investments are carefully sourced and screened. The investment committee makes the final decision. The investment committee’s composition is weighted more heavily on the foreign side to ensure our foreign investors are properly represented and protected.

What are the key challenges and opportunities associated with investing in your focus market and how are they managed?

While attractive, it’s extremely challenging to invest in Vietnam. For listed public deals, it’s a matter of being able to get in with the volume and liquidity available, or the ability to negotiate a private placement directly with the target, which won’t be as simple as the fund manager has to prove they can add intrinsic value to the company outside of capital and their name. For private equity deals, it’s a matter of finding a sizable, growing, and leading private company, convincing the seller to come down to earth with their valuation, being able to get audited financial statements from the seller and having a realistic exit strategy. For real estate deals, it’s who you know, as attractive land deals are mostly government and corporate controlled, then determining a reasonable valuation from the seller plus what the buyer brings to the party as value add will be subject of many interesting conversations.

Your two funds pursue investment opportunities across public and private markets, but does it offer any diversification? How does their performance compare to the VN-Index?

In other developed and mature economics, it may be wise to concentrate on specific industries or sectors in order to be focused and competitive. Vietnam is still at the early stage of being an emerging economy, so diversification carries great importance. Our VEH fund concentrates on the market leaders in Vietnam’s darling industries, such as banking, energy, transportation, utilities, chemicals and food and beverages. It is very consumer oriented, as this plays to an 85-million strong population that is also the youngest in the world. Our VPH fund concentrates on prime downtown locations, premium residential and resort style units, industrial parks, and townships, as well as infrastructure projects, including bridges, roads, ports, railways and tunnels.

We have not been focusing on private equity investments recently, as the listed market commands better valuation and liquidity.

As for the Net Asset Value (NAV) performance of the funds, VEH is currently ranked as the number one Vietnam-focused equity fund, according to LCF Rothschild. VPH is ranked number three. Both funds outperformed the VN-Index by a wide margin.

Why are most Vietnam-focused funds listed in a European market and closed-end? How do you benchmark your fund’s performance?

Most Vietnam funds are closed-ended and publicly traded. The reason for this is because early fund investors in Vietnam traditionally have been high net worth European individuals or private banking groups that prefer and demand liquidity, compared to larger institutional, private equity investors, who prefer less volatility and may stick with the manager in the long term. Perhaps this is the reason why most Vietnam-listed funds are deeply underwater in both share price as well as NAV.

The performance of closed-ended listed funds, similar to hedge funds, is measured by Net Asset Value. As mentioned previously, VEH and VPH are within the top performing funds in Vietnam.

What is your outlook for Vietnam in the near and medium terms?

We are waiting for the 2008 annual financial results from banks in Vietnam, which will be available in the first quarter of 2009. At that point we can determine how severe the impact of real estate loans and non-performing loans (NPLs) will be. Regardless of good or bad news, SAM will have ample cash and may raise additional funds to deploy and capitalise on various undervalued and distressed situations taking place between now and subsequent to the 2008 reports.

In the medium to long term we stay bullish with Vietnam but will take cautious steps. The fundamentals in the country remain unchanged as one of the most attractive emerging markets in the world.