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Fund plans to stave off liquidation
Indochina Capital published information last month on a possible division of the company’s portfolio into a continuation portfolio and a realisation portfolio. The director of Indochina Capital Group’s investment department, Beat Schuerch, spoke to Viet Nam News on this and other new investment management plans.
How does Indochina Capital Viet Nam fit into the Indochina Capital Group?
Indochina Capital Group manages five funds: three real estate funds and two equity funds, including Indochina Capital Viet Nam, which is a London main board-listed fund owned by investors from around the world. The ICV is managed by Indochina Capital Advisors, an affiliate of the Indochina Capital Group specialising in managing equities.
With a net asset value of US$243 million as of June 30, it represents about a third of the assets under management by the Indochina Capital Group. The three real estate funds are not listed and have over $450 million in committed capital from large financial institutions, including sovereign wealth funds, pension funds, endowments and family foundations.
What’s the purpose for dividing the Indochina Capital Viet Nam holdings into two portfolios?
Due to the extraordinary developments in the global financial markets starting in mid-2008, the ICV, like all Viet Nam-focused investment funds, experienced a dramatic widening of the discount in the share-price-to-net-asset-value ratio. Whereas the discount never exceeded 15 per cent before June 2008, the discount exceeded 65 per cent at the end of November 2008.
Given the abnormally steep discount and, most importantly, the large proportion of cash and fixed income at the time (conservatively retained for capital preservation purposes in a declining equities market environment), the ICV drew unwelcome attention from arbitrage hedge funds specialising in exploiting such anomalies. Those arbitrage hedge funds aggressively bought into the ICV beginning in late September 2008 and have since acquired a significant proportion of ICV shares. As a result, the ICV has a divided shareholder base with one group seeking to exit to earn a short-term profit and the other group wanting to remain invested to participate in Viet Nam’s long-term growth.
In order to resolve the stalemate between the two shareholder groups who are both large enough to block each other, the ICV board and Indochina Capital Advisors have been in extensive discussions with a significant proportion of the shareholders over the past eight months. These efforts have led to a solution which is a revised proposal for a portfolio split allowing those who wish to exit to realise their shares at a 15 per cent discount to net asset value whilst those who wish to remain invested can continue to hold ICV shares.
Why will the revised portfolio split satisfy both shareholder groups?
Those electing for continuation will rollover into a fully invested fund and benefit from an immediate increase in net-asset-value-per-share as a result of the portfolio split. Further, there are unlikely to remain any shareholders in the continuation portfolio seeking a short-term exit, which should allow a narrowing of the discount to net asset value for the continuation portfolio.
Last but not least, the recent re-valuation of the private equity holdings and the listings of Vietcombank and Bao Viet Holdings at the end of June mean that, in aggregate, the continuation portfolio will be comprised of around 70 per cent listed securities and 30 per cent private equity and over-the-counter stocks, thereby providing an improved liquidity profile and enhancing the overall transparency of the portfolio.
Will splitting the fund in this way negatively affect Viet Nam’s stock market?
While the revised proposal for a portfolio split foresees the possibility of a complete liquidation in the event that more than 65 per cent of shareholders elect for realisation, we don’t see this as a likely event, based on feedback from a significant proportion of our shareholders.
Given the present portfolio, we do not anticipate that the ICV will be forced to sell any meaningful quantities of stocks, if any, to redeem realisation shares. We therefore believe that the creation of such a portfolio split should not have a negative effect on Vietnamese stock prices.
What would Dragon Capital’s role be in the management of the continuation portfolio?
Management of the continuation portfolio would be carried out through a 50/50 joint venture between Dragon Capital and Indochina Capital Advisors. Dragon Capital will assume responsibility for providing investment management services to the ICV while lndochina Capital Advisors will continue to be in charge of fund accounting, compliance, investor relations and other operational matters.
This joint venture, if confirmed by the shareholders, would continue fulfilling ICV’s investment mandate, which is to generate medium- to long-term capital appreciation.
Why did you select Dragon Capital?
The universe of experienced equities fund managers in Viet Nam is small. And very few of those can offer a proven track record in a broad range of asset classes (e.g., public equities, private equity and fixed income) with a particular strength in public equities. Dragon Capital is one of the most experienced equities fund managers in Viet Nam.
In addition, their existing business has the smallest overlap with our business (unlike those of some of the other fund managers, which overlap significantly more). Equally important, we have been joint investors together with Dragon Capital in some projects and have come to know them as highly professionals with similar interests.
Given the complementary strengths and our existing working relationship with Dragon Capital, we felt most comfortable to pursue this collaboration with them.
In addition, after being competitors for a long time, Dragon Capital and Indochina Capital Advisors agreed to combine forces to fight off the threat of liquidation of the ICV that was brought about by the arbitrage hedge funds on ICV’s share register. In other words, the joint venture has been proposed to give the ICV the best possible management for a Vietnamese focused fund and providing continuity of operations. We have communicated with the shareholders and believe this joint venture will encourage long-term shareholders to maintain their holding in the fund, thereby avoiding liquidation of the ICV fund.
A liquidation would be negative for Viet Nam’s equities market and the country’s fund management industry, so the joint venture has been proposed with much broader and wider interests than our own in mind. Once these arrangements are implemented, Indochina Capital Group will be managing four funds independently (i.e., three real estate funds and one equities fund), while the ICV would be managed by the joint venture with Dragon Capital.
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