Continuation of the Company

RNS Number : 6641H

VinaCapital Vietnam Opp. Fund Ld

24 June 2013

 



 24 June 2013                                                                          FOR IMMEDIATE RELEASE

VINACAPITAL VIETNAM OPPORTUNITY FUND LIMITED

("VOF" or the "Company")

Continuation of the Company

The Company has today published a Circular to Shareholders and a notice convening an Extraordinary General Meeting for Monday, 22 July 2013.

The Circular sets out the recommendations of the Board with regard to the continuation of the Company together with the changes that will be implemented should Shareholders support the continuation of the Company for a further five years.  

The Board believes that, taken together, the changes described in the circular are in the best interests of Shareholders as a whole.  

Summary

·      The Board recommends that Shareholders vote AGAINST the Resolution "that the Company cease to continue as currently constituted", ensuring that the Company will continue for a further five years;

·      The Board believes that the investment case for Vietnam remains attractive, that the investment approach offered by the Investment Manager remains appropriate and that the Company provides the best way for Shareholders and investors to benefit from the investment opportunities available in Vietnam;

·      The Board is proposing to introduce significant enhancements to Shareholder rights through changes to the Company's corporate governance arrangements;

·      Conditionally upon the rejection of the Resolution at the EGM, the Company has entered into the Amended and Restated Investment Management Agreement which reduces the base investment management and incentive fees by 25 per cent. and restructures the incentive fee to better align the interests of the Investment Manager with those of Shareholders;

·      The Board is committed to using share buybacks to control the discount at which the Shares trade in relation to the NAV per Share.  Without setting out a specific target, the Board and the Investment Manager believe that the current level of discount does not reflect the underlying value of the Company's assets and is committed to narrowing the discount further on a sustainable basis; and

·      Shareholders representing approximately 18 per cent. of the Company's outstanding Shares have indicated that they will support the Board's recommendation to vote against the discontinuation of the Company.

Further details on the Company and the changes being implemented are set out in the Circular and are summarised below.

Enquiries:

Steven Bates (Chairman)

VinaCapital Vietnam Opportunity Fund Limited

[phone]

David Dropsey

VinaCapital Investment Management Limited

Investor Relations/Communications

[phone]

[e-mail]

Philip Secrett

Grant Thornton UK LLP, Nominated Adviser

[phone]

[e-mail]

William Marle / Hiroshi Funaki

LCF Edmond de Rothschild Securities, Broker and Financial Adviser

[phone]

[e-mail]

Hugh Jonathan / David Benda

Numis Securities Limited, Broker

[phone]

1.                Introduction

The Company has today published a Circular to Shareholders and a notice convening an Extraordinary General Meeting for Monday, 22 July 2013.

The EGM has been convened to satisfy the commitment set out in the Admission Document that every five years the Shareholders shall have the opportunity to consider the future of the Company and whether it should continue for a further five year period.  In advance of convening the EGM, the Board has consulted widely with Shareholders about the continuation of the Company and the other changes that the Board will be implementing, conditionally upon the outcome of the EGM.

In accordance with the commitment made in the Admission Document, Shareholders will be asked to consider the following Resolution:

THAT the Company cease to continue as currently constituted

The Directors unanimously recommend that the Company continues for a further five years and accordingly recommend that Shareholders vote AGAINST the Resolution at the EGM.

2.                Background

The Company was formed and admitted to AIM in 2003 with the principal investment objective of achieving capital appreciation as well as generating regular income by investing principally in Vietnam. At its launch, the Company raised net proceeds of US$9.5 million from investors and since that time has grown and developed into the leading investment fund focused on Vietnam.  As at 31 May 2013, the Company's net assets totalled approximately US$793 million and its growth has been partly a function of capital appreciation and partly due to additional monies raised from Shareholders as international investors focused increasingly on the potential investment returns available in Vietnam. 

When the global economic crisis first developed in 2008/9, the Vietnamese economy was adversely affected along with most other countries around the world.  However, from a low in late February 2009 the Vietnamese securities markets have recovered and the Company, in particular, has seen its NAV per Share rise by 64.4 per cent., an increase from US$1.77 to US$2.91 from 1 March 2009 to 31 May 2013, with the VN Index rising 111.0 per cent. over the same period.  The Company's Share price performance has been even stronger, increasing 176.6 per cent from US$0.77 to US$2.13 per Share in this same period.  At the same time, the discount to NAV per Share at which the Shares were trading fell from 56.5 per cent. to 26.8 per cent.  It is against this performance backdrop that the Board is recommending to Shareholders that the Company continue for a further five year period.

3.                Discount Control

The Board has been conscious over the last several years of the wide discount to NAV per Share at which the Shares have been trading.  In response, the Board sought and obtained Shareholder approval to implement a share buyback programme.  From November 2011 to June 2013, a total of approximately 57 million Shares were bought back, a return of capital to Shareholders of approximately US$100 million, which in turn has had a number of positive effects for Shareholders:

·      The discount to NAV at which the Shares trade has narrowed considerably from a high of approximately 40 per cent. at the commencement of the buyback programme in November 2011 to approximately 25.2 per cent. as at 21 June 2013, the latest practicable date prior to the posting of the circular;

·      The NAV per Share has been materially enhanced by approximately US$0.18 per Share from these buybacks, representing approximately 8 per cent. of the Company's NAV per Share as at 31 May 2013; and

·      The volatility of the Share price has fallen to 4.3 per cent. from 18.4 per cent. since November 2011 (source: Bloomberg).

The Board remains determined to continue to operate the share buyback programme on a long-term basis, in an effort to ensure that the Company's Share price more closely reflects the underlying NAV per Share and that NAV per Share continues to be enhanced.  While no public announcement has been made in terms of the target percentage discount or the volume of funds to be allocated to buybacks, the Board considers the current discount to be too high.

The Board will continue to retain responsibility for setting the parameters for the discount management policy, for overseeing the management of the buyback programme and for ensuring that its policy is implemented. The Board intends to continue to seek to narrow the discount through the continued use of share buybacks and will consider using other means of addressing the discount level should it persist at the current wide level.  The Board's objective is to achieve a narrowing of the discount in a manner that is sustainable over the longer term. The Board and the Investment Manager intend to consult regularly with Shareholders with a view to assessing and improving the effectiveness of the buyback programme.

4.                The Outlook for Vietnam

The Board believes that Vietnam remains an attractive destination for investment in Asia. The macroeconomic features that supported the launch of the Company in 2003 continue to form an attractive backdrop to Vietnam today, underpinning the case for continued investment in the country. GDP growth is expected by the International Monetary Fund to average between 5 per cent. and 6 per cent. per annum over the next five years as the country continues both to restructure state-owned enterprises and attract foreign direct investment into sectors where Vietnam has significant advantages over other regional economies as described below.

The Vietnamese economy has continued to grow at attractive rates despite the fallout of the global economic crisis and the slowdown in demand for Vietnamese products from developed economies. Underpinning the projected attractive rates of growth in Vietnam are: the compelling demographic profile; firmer control of inflation (which has been a problem in the past, however the Government of Vietnam has shown a willingness to use monetary policy aggressively to manage this issue); a more stable currency outlook; further economic reform and liberalisation consistent with Vietnam's World Trade Organisation commitments; and continuing opportunities to develop natural resources.

Whilst broad macro-economic stability and a consistent trend of relatively high economic growth have been achieved over the past ten years, as with any developing country, problems and challenges remain. The Investment Manager remains concerned with the proportion of non-performing loans in the Vietnamese banking system, although the State Bank of Vietnam has provided information to show that the situation is manageable. The Investment Manager also expects that measures will be taken to restructure the financial sector, in particular those parts which remain state-owned. The Government of Vietnam has acknowledged other areas of weakness and shown promising signs that they are priorities for improvement including tackling corruption and patronage, poor infrastructure and bureaucratic inertia, all of which hold Vietnam back from reaching its full potential.

The Board and the Investment Manager believe that, on balance, the opportunities in Vietnam outweigh the problems and that the valuations and rates of growth visible in the country's asset and capital markets are very attractive. Vietnam's continued integration into the global economic system will provide many opportunities from which the Company will be well positioned to benefit over the next five years.

5.                The Prospects for the Company

Given the economic and market backdrop, the Board believes that the Company remains the best investment vehicle for investing in Vietnam.  The Company offers investors access to a diversified portfolio of assets encompassing most major sectors of the Vietnamese economy - consumer goods, real estate, agriculture, hospitality, financial services, industrials, healthcare and education. Further, VinaCapital has a long established track record of successful investment across all sectors in Vietnam and has built significant in-house research and execution expertise and, as a result, has become the largest asset management business in the country. 

As VinaCapital's flagship fund, the Company is able to take advantage of the resources and skills provided by the Investment Manager to invest in listed securities, private equity and direct real estate. VinaCapital is also able to re-weight the Company's investments towards those areas that represent the most attractive investment opportunities at any given point, subject to liquidity considerations and limits established by the Board. This diversified approach to investment across different asset classes has resulted in attractive returns to the Company in the past at comparatively low levels of risk for a frontier market. For the next five years, the Investment Manager and the Board propose to continue with this diversified approach in order to seek to generate attractive returns over the medium term.

Over the past five years, the Company has made 11 major divestments each valued at more than US$10 million, delivering a weighted average gross IRR of 32.5 per cent.  The capital markets segment of the portfolio, including listed equities and OTC stocks, along with private equity investments has been the major contributor to returns over the last five years. The real estate segment of the portfolio has been largely managed and developed in-house by VinaCapital as there has been very limited professional third party real estate expertise available in the Vietnamese market.  This part of the portfolio has declined in value over the past five years, reflecting falls in the local real estate market.

At present, the investment strategy, relative to current weightings, is as follows:

·      The listed equities portfolio represents almost 50 per cent. of NAV.  The Investment Manager expects to reduce the exposure to listed equities somewhat over the next two years in response to higher levels of valuation. The proceeds are expected to be reinvested into private equity and OTC investment opportunities, including participating in the privatisation of state owned enterprises ("SOEs"), and continuing with the share buyback programme;

·      As a result, over the next two years, the private equity and OTC weightings in the portfolio are expected to increase substantially from the current 15 per cent. weighting.  The Investment Manager will seek attractive investment opportunities in high-growth businesses that are supported by strong and experienced management teams. The Investment Manager believes that the Government of Vietnam will continue the privatisation of medium to large SOEs to support the reduction in the current budget deficit, allowing SOE management teams to participate in this process, thereby aligning interests and management to increase efficiencies in these businesses; and

·      The Investment Manager expects to rebalance the existing direct real estate holdings through the sale of a number of these assets over the next two years.  The extent to which the proceeds are reinvested in real estate assets will depend on the outlook for real estate markets at the time new investment opportunities arise.  The Investment Manager will also consider the reinvestment of these sale proceeds into real estate companies listed on the capital markets.

6.                Corporate Governance

In early 2012, the Board undertook a comprehensive review to ensure that the Company continued to offer to Shareholders the best way to invest in Vietnam.  This review included an analysis of the Company's corporate governance structure in the light of developments in international standards and practices since the Company was established in 2003.  As a first step, in order to ensure that the appropriate mix of experience continued to be available to the Company, a number of changes were made to the Board:

·      Steven Bates was appointed as a director and subsequently as Chairman;

·      Martin Adams was appointed to the Board;

·      William Vanderfelt stood down after eight years as a director, and five years as Chairman; and

·      Horst Geike, a founding partner of VinaCapital and a non-independent director also stood down after almost nine years as a director.

Steven Bates

Steven Bates is a veteran investor in emerging markets, spending most of his career with the Robert Fleming group and its successor JP Morgan Asset Management, where he led the emerging markets team.  Over the past 10 years Mr. Bates has continued to manage investments across the emerging world for Zephyr Management and has added a number of non-executive roles in investment companies.

Martin Adams

Martin Adams has over 30 years investment and banking experience in emerging markets (including Vietnam) and has forged a career serving as an independent director on listed and unlisted funds. He is currently chairman of Eastern European Property Fund, Kubera Cross Border Fund, Trading Emissions, Trinity Capital and Vietnam Resources Investments and a non-executive director of a number of other funds.

Further Board appointments will be considered from time to time with a view to supplementing the experience currently available to the Company.

The review of the Company's corporate governance has resulted in the following changes which, subject to the continuation of the Company, the Board will propose to Shareholders at an AGM to be held following the release of the Company's financial statements for the year ended 30 June 2013. The key corporate governance changes are:

·      An AGM will be held each year to receive and adopt the Company's financial statements.  It is expected that the AGM will be held within six months of the end of each financial year and the first such AGM will be held in the fourth quarter of 2013.

·      Each Director, except any non-independent Director, will in future offer himself for re-election at the AGM on a rotating basis whereby each Director will seek re-election at least every three years, commencing at the 2013 AGM.

·      A non-independent director will in future offer himself for re-election annually at the AGM, commencing at the 2013 AGM with Mr Don Lam who is not independent by virtue of his position as the chief executive officer of VinaCapital.

·      The appointment of new Directors will be subject to re-election at the next AGM following their appointment.

·      The Company to adopt new Articles to reflect current investor expectations and governance standards.  Specifically, the Board intends that the Articles will be amended to reduce the threshold at which Shareholders can require that the Board convene an extraordinary general meeting from 25 per cent. to 10 per cent. of the Company's outstanding Shares.

7.                Amended and Restated Investment Management Agreement

The commitment in the Admission Document that Shareholders will have the opportunity to consider the future of the Company provided an appropriate opportunity to conduct a full review of the current Investment Management Agreement. To this end there have been extensive discussions with the Investment Manager to agree the Amended and Restated Investment Management Agreement, in particular concerning the appropriateness of the terms in the light of current best practices and the level of investment management and incentive fees payable.

The base management and incentive fees currently charged date back to changes which were made to the Investment Management Agreement in 2006 when the current portfolio value based incentive fee was adopted along with a reduction in the incentive fee hurdle rate from 10 per cent. to 8 per cent. and a reduction in the base management fee from 2.5 per cent. to 2 per cent.  Since that time, fees in general in the investment management industry have fallen. The Board has sought to agree a revised investment management fee structure with the Investment Manager which is in line with that which a new fund might charge if it were investing across a diversified set of asset classes in a single frontier market.  In agreeing these terms with the Investment Manager, the Board believes that the new arrangements are sufficiently robust to endure at least until the next scheduled discontinuation vote in 2018.

The current incentive fee arrangements are considered to be of particular concern as, following the global economic crisis, they failed to fulfil the function for which they were originally designed (due to the fact that the trigger point for a payment is so far above the current NAV), and yet contain provisions which are, in the Board's view, excessively generous to the Investment Manager should that trigger point be reached. If the trigger point is reached, the Investment Manager would receive 100 per cent. of the increase in NAV until such time as the gain in the NAV accruing to Shareholders and the fee paid to the Investment Manager achieve an 80:20 ratio. Given the growth in the Vietnamese economy and in corporate profits, as well as the underlying volatility of the Vietnamese capital markets, it is not unrealistic that the 'catch-up' provisions might come into play before the next continuation vote in 2018, which the Board does not believe would be in the best interests of Shareholders as a whole.  Consultations with Shareholders have been undertaken and a consensus has emerged in support of the Board's broad approach. Shareholders should note that the Company does not expect to have to pay an incentive fee under the current arrangements in respect of the financial year ending 30 June 2013.

The Company and the Investment Manager have, conditionally upon the rejection of Resolution at the EGM, entered into the Amended and Restated Investment Management Agreement which, amongst other things, amends the fees payable to the Investment Manager.

A summary of the key terms of the Amended and Restated Investment Management Agreement is set out in Part 2 of the circular to Shareholders.  The key changes to the investment management and incentive fees, which will come into effect from 1 July 2013, subject to the confirmation at the EGM that the Company is to continue in its present form until the next vote in 2018, include:

·      a 25 per cent. reduction in the annual management fee from 2 per cent. of NAV  to 1.5 per cent. of NAV; and

·      a 25 per cent. reduction in the incentive fee from 20 per cent. to 15 per cent. and a restructuring of this fee, details of which are summarised below. 

The incentive fee is also to be split into two parts: one part focused on the Company's direct real estate and hospitality holdings (but excluding any securities held by the Company in VinaLand Limited and any other publicly quoted or traded securities), the "Direct Real Estate Portfolio", (which represented approximately 22.6 per cent. of NAV as at 31 May 2013); and the other part focused on the remainder of the investments (which includes any securities held by the Company in VinaLand Limited), the "Capital Markets Portfolio".  The two Portfolios will have similar incentive fee arrangements but any incentive fees attributable to the Direct Real Estate Portfolio will only become payable following actual asset realisations whereas any entitlement to incentive fees attributable to the Capital Markets Portfolio will be based upon the increase in the NAV per Share of the Capital Markets Portfolio over the Company's financial year.

As a further benefit to the Company, to prevent excessive incentive fees being paid due to market volatility, the amount of incentive fees paid in any single financial year will be limited to 1.5 per cent. of the applicable closing net asset value of the Portfolio from which the incentive fee was earned.  The Investment Manager will have the opportunity to receive the unpaid incentive fee (above the 1.5 per cent. cap) in subsequent years, providing that the net asset value of the relevant Portfolio remains above the applicable Portfolio hurdle rate.

As part of this overall reduction in the quantum of the incentive fee that can be paid (reducing from 20 per cent. to 15 per cent. and capping the amount of incentive fees at 1.5 per cent. per annum of the applicable closing net asset value of the Portfolio), the Board has agreed to re-set the high water mark (the "High Water Mark") above which the incentive fee will be payable from approximately US$4.09 per Share to the higher of, (i) 30 June 2013 NAV per Share plus 5 per cent. or (ii) US$3.037. For the first year of operation of the new incentive fee arrangement, the NAV per Share will need to increase to at least US$3.28 (US$3.037 increased by the 8 per cent. hurdle rate) by 30 June 2014, which is equivalent to the last NAV per Share upon which an incentive fee was paid) before any future incentive fee can be earned.  This compares to a current NAV per Share of US$2.91 as at 31 May 2013. 

The revised High Water Mark will be apportioned to the Direct Real Estate Portfolio and the Capital Markets Portfolio according to the split of the assets between the Portfolios as at 30 June 2013.  If that split had been undertaken as at 31 May 2013, based upon the Company's NAV as at that date, the respective percentage of the High Water Mark per Share of each Portfolio would have been: Direct Real Estate Portfolio 22.6% and Capital Markets Portfolio 77.4%.  The Board recognises that the incentive fees for each Portfolio will operate independently in any year with the effect that an incentive fee might be earned on only one Portfolio but not the other due to the splitting of the Company's assets into the two Portfolios. The Board also recognises that there is a remote chance that an incentive fee might be paid if the aggregate NAV per Share is less than US$3.28 on 30 June 2014.

The rationale for the reduction in the High Water Mark is to increase the alignment between the interests of the Shareholders and the Investment Manager while at the same time adjusting the terms of the incentive fee structure to ensure that there are appropriate limits on the scale of the fees payable.

The final change agreed with the Investment Manager is to calculate all fees on a per Share basis, as opposed to a total funds basis.  The Board considers this change to be important both in terms of conforming with common market practice and ensuring that the interests of Shareholders and the Investment Manager are aligned with respect to share buybacks.

The table below summarises the key changes in the incentive fee arrangements:

	Current Incentive Fee	Revised Incentive Fee
High Water Mark	US$4.09	At least US$3.28 as at 30 June 2014
Share of performance over hurdle paid to Investment Manager	20 per cent.	15 per cent.
Hurdle rate per annum (based on US$ performance)	8 per cent.	8 per cent.
Incentive fee cap in any one year	No	Yes, as applicable. 1.5 per cent. of net asset value of each Portfolio annually
Catch up provision once incentive fee payable	Yes	No
Fee payable on unrealised appreciation of direct real estate assets	Yes	No

The termination notice period under the Amended and Restated Investment Management Agreement will remain six months.

The Amended and Restated Investment Management Agreement has also been revised to reflect what the Board believes to be current best practice for investment management agreements.  Further details of the Amended and Restated Investment Management Agreement are set out in Part 2 of the circular to Shareholders.

The changes to the Amended and Restated Investment Management Agreement fall to be treated as a Rule 13 Related Party Transaction under the AIM Rules for Companies. As such, the Independent Board consider, having consulted with the Nominated Adviser, that the terms of the Amended and Restated Investment Management Agreement are fair and reasonable insofar as the Shareholders are concerned.

8.       Recommendation

The Directors, whose beneficial or controlled holdings collectively total 1,165,859 Shares, will be voting AGAINST the Resolution at the EGM so as to allow the Company to continue as presently constituted.  The Directors consider the continuation of the Company as presently constituted to be in the best interests of the Company and its Shareholders and recommend that Shareholders vote AGAINST the Resolution to be proposed at the EGM.

Shareholders holding approximately 18 per cent. of the Company's outstanding Shares have informed the Company and its advisers that they intend to vote against the Resolution, supporting the continuation of the Company.

If the Resolution is passed (meaning that Shareholders have positively voted to discontinue the Company), the Board will consult with Shareholders and formulate new proposals to be put to Shareholders as soon as reasonably practicable and, in any event, before the end of 2013.

DEFINITIONS

"Admission Document"	the Company's AIM admission document dated 24 September 2003;
"AGM"	an annual general meeting of the Company;
"AIM"	the market of that name operated by the The London Stock Exchange plc;
"AIM Rules for Companies"	the AIM Rules for Companies as published by The London Stock Exchange plc from time-to-time;
"Amended and Restated Investment Management Agreement"	the amended and restated investment management agreement dated 24 June 2013 entered into between the Company and the Investment Manager which, conditionally upon the Resolution being rejected at the EGM, will amend and restate the Investment Management Agreement with effect from the Effective Date;
"Articles"	the articles of association of the Company;
"Board" or "Directors"	the board of directors of the Company;
"Company"	VinaCapital Vietnam Opportunity Fund Limited;
"Direct Real Estate Portfolio"	has the meaning set out in paragraph 7 of this announcement;
"Effective Date"	1 July 2013;
"Extraordinary General Meeting" or "EGM"	the extraordinary general meeting of the Company convened for 22 July 2013;
"GDP"	gross domestic product;
"High Water Mark"	has the meaning set out in paragraph 7 of this announcement;
"Independent Board"	the Board excluding Don Lam;
"Investment Management Agreement"	the investment management agreement dated 24 September 2003 (as novated to the Investment Manager in 2010) between the Company and the Investment Manager;
"Investment Manager" or "VinaCapital"	VinaCapital Investment Management Limited;
"IRR"	internal rate of return;
"NAV"	the net asset value of the Company;
"NAV per Share"	at any point, the NAV divided by the number of Shares in issue (excluding treasury shares);
"Nominated Adviser"	Grant Thornton UK LLP;
"Notice of EGM"	the notice of EGM set out in the circular;
"OTC"	over-the-counter
"Portfolio"	as the context requires either the Direct Real Estate Portfolio or the Capital Markets Portfolio;
"Register"	the Company's register of Shareholders;
"Resolution"	the special resolution as set out in the Notice of EGM;
"Shareholder"	a holder of Shares (or, where Shares are held in Euroclear or Clearstream, the persons otherwise beneficially entitled to such Shares) and "Shareholders" shall be construed accordingly;
"Shares"	ordinary shares of US$0.01 each in the capital of the Company;
"US$"	US dollars, the lawful currency of the United States of America; and
"VN Index"	the Vietnam Stock Index, or VN Index, is a capitalisation-weighted index of all the companies listed on the Ho Chi Minh City Stock Exchange.

Forward-looking statements:

This announcement may contain statements that constitute forward-looking statements.  Undue reliance should not be placed on forward-looking statements.  Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated by the Company and described in the forward-looking statements.  These risks and uncertainties include but are not limited to delays in receipt of payments, and unforeseen changes to general economic and business conditions.  Forward-looking statements are based on the estimates and opinions of the Company and the Investment Manager at the time the statements are made.  The Company and the Investment Manager assume no obligation to update forward-looking statements should circumstances or estimates or opinions change, except as required by law.

 

END

 

 

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