On 1 April 2011, ADB, the Netherlands' development organization SNV and the Viet Nam Ministry of Planning and Investment jointly organized an investment forum to explore opportunities for establishing an inclusive business (IB) investment fund for Viet Nam.

The forum

The one-day forum was very well organized by SNV, which continued to show itself as a highly professional organization committed to this joint initiative. The Forum was attended by 73 participants, including

• 27 representatives and country chief executive officers from private sector companies potentially interested in receiving support from the IB fund;
• 14 representatives and CEOs of investment funds interested in participating in the project as sponsors or fund managers;
• 7 representatives of bilateral development agencies;
• 4 representatives from government and public institutions;
• 6 journalists from the media, as well as SNV and ADB.

Representatives from donor agencies and development banks (including, DFID, DANIDA, KfW, FMO, government of Netherlands, and others) attending the Forum showed interest in working with ADB on the design features of the project – especially the poverty impact assessment tool, as well as potentially investing in the Fund and collaborating with ADB or even cofinancing the TA facility.

The forum also provided an overview of complementary grant financed programs in Viet Nam, such as the ADB-DFID supported Markets for the Poor Program, SNV's inclusive business program, and DANIDA's Global Competitiveness Facility for Viet Nam. Both support development of smaller enterprises that – once upscaled with DFID/DANIDA assistance – could apply for further – more market oriented - support through the proposed fund for helping business establishing ventures that include the poor at the Base of the Pyramid (BoP).

Government support

The meeting confirmed that the Government places a high priority on establishing a private sector driven inclusive business fund for Viet Nam, focusing on viable and sustainable employment generation in rural areas. Such a fund would fit well within the government's strategy of creating a market economy with socialist orientation moving toward middle income status by 2020.

The government further stated that with the encouraging results of the M4P project implemented by ADB and co-financed by DFID, various SME development projects, and the new IB Fund, ADB is seen as having multiple instruments with a coherent approach for promoting inclusive growth at the base of the pyramid. MPI representatives also indicated that the fund would nicely complement a proposed sovereign SME development fund of $25 million through which MPI provides preferential credits, guarantees, credit and partial grants to small enterprises. MPI also expressed interest in working with ADB on establishing the criteria for assessing poverty impact, which could also be adapted to its own SME fund.

The preliminary fund parameters

The forum confirmed great interest by all stakeholders in the creation of an Inclusive Business (IB) Fund for Viet Nam, and the importance of identifying the poverty reduction impact of private sector investments. Finding the fund manager and fund supporters was highlighted as an important step. Discussions led to the following suggestions regarding the fund parameters:

SME fund with BoP dimensions. The fund needs to establish a compelling reason for its existence in relation to clearly defined social returns and investment criteria related to SME development. To this end, risk capital should mainly be invested for BoP innovative growing and larger companies with specific social returns and potential for upscaling. Care should be exercised with regards to companies whose business model is for start ups, restructuring, innovations, and “turn-arounds.” At such point that the fund is largely invested and it appears that the minimum target return will be achieved, the fund may consider start ups on a highly selective basis, but given the risk profile related to such transactions, they will generally be avoided.

Poverty and social impact assessment. Before setting up the fund, social and poverty related investment criteria need to be defined by ADB and its partners. In addition, a methodology needs to be developed to assess possible deals based on social indicators. The ex-ante impact assessment tool should provide quantifiable indicators for the fund manager to decide on proposed investments.1 Rather than limiting investments to particular sectors, the investment criteria should emphasize key impediments for making business more inclusive such as access, affordability, quality, employment and wages, as well as specific inclusive business characteristics.2 To this end the fund manger would also need social impact assessment expertise for which capacity building – as part of the supplementing technical assistance (TA) project – is needed.

Country funds. Given the need to be close to the market, it is advisable to establish such fund as a country-specific fund, and not as a multi-country one. However ADB may consider clustering the Viet Nam fund with other country funds, once proof of concept is provided through the creation of the Viet Nam (and perhaps an India) fund. In the case of Viet Nam, consideration could be given to the fund making selective investments in the Lao People's Democratic Republic and Cambodia, especially when Vietnamese firms have sourcing arrangements with business activities in one of those neighboring countries.

Fund size. Given that the inclusive business ventures are more difficult to identify and manage, it was suggested to limit the fund size in its initial phase to not more than $50 million and to form a closed-ended fund with a life span of 10 years. It is expected that in the initial phase (2-3 years) only initial capital (including what is provided by ADB) is raised for the fund. It is expected that those interested in the Viet Nam country fund would be multinational development banks and other development finance institutions, foundations and, possibly high net worth individuals and family offices that have particular linkages with Viet Nam. In a possible follow-on fund, private sector sources could be sought to complement public source of capital.

Deal sizes and coverage. The fund would perhaps comprise 10-15 deals during a 4-year investment period with 2 one-year extension options, and a 10-year life span of the fund. Deals could be made with local and international companies of any size, with deals in the $500,000 to $5 million range preferred. As there are currently large disparities in US Dollar and Dong returns - and some entrepreneurs would need US Dollars – consideration should be given to the possibility of making investments in both currencies. Deals could, in theory, use any financial instrument (debt, equity, others).

Exit strategies could include sale to strategic buyers or management buy out or – less likely - initial public offering given the small size of the fund.

Returns and commercial viability. There was general agreement that all projects need to be commercially viable. While conventional fund managers would target returns of 20-25% in USD terms, the IB-Fund could have a lower return due to its development dividend and nature: IB ventures may be relatively small, potentially risky investments, often in markets with higher inflation and subject to adverse currency fluctuation. In addition, investments can be in the form of debt or equity. The use of debt instruments is likely to lower the fund's return while balancing the risk exposure. Fund returns would concentrate on equity investments to generate adequate rates of return. Such equity investments would target more inclusive participation by labor, for example employee share ownership programs. This inclusive participation facilitates the alignment of interest between labor and external capital providers, and supports professional management to focus on the development of a sustainable business, whether export oriented or domestically targeted. The financial success of the business directly benefits both labor and the investors and ownership would contribute to capacity building. Returns in the funds can be further enhanced through sound cash management, investment in export-orientated businesses generating foreign exchange and so on. However a rate of return substantially lower than the market rate would not create sufficient appetite in the market to invest. The true determinant of the fund's success will be whether such sustainable commercial investments have made positive changes in the lives of poor people.

Fund management and fee. Forum discussions confirmed that four to six fund managers could have an interest in bidding for the Viet Nam IB Fund. Standard management fees on private equity and debt funds of this nature are 2% per annum plus 20% of the carried interest of the fund. Given the BOP targets associated with the fund, ADB will work with its advisers on this project along with the selected fund manager to explore innovative incentive schemes to ensure that the poverty impact of the investments is maximized.

Based on the initial SNV study and a local study financed by ADB, the capital market expert hired under the TA to help ADB doing further due diligence for the proposed IB Funds is holding follow up discussions with possible fund managers.

The TA facility

The forum confirmed that a TA facility would be needed to provide grant support for:

The Government of the Netherlands has expressed interest in co-financing the TA, but further discussions are needed on country coverage and prioritization of fund-related activities. The facility could be organized as a regional technical assistance project with country-specific orientations. While the TA would closely work with the fund manager, it would ideally be implemented separately. Given the large expectations for the TA, it is estimated that it would require at least $5 million in financing. Representatives of DANIDA and DFID expressed openness to discussing support for the TA.

Next steps:

After agreeing on the initial criteria for inclusiveness, a concept paper will be prepared for establishing a BoP Investment Fund in Viet Nam. This will then be shared with possible investors such as FMO and KfW – among others, and further revised. Thereafter a request for proposals to set up such IB Fund in Viet Nam will be sent to possible fund managers, and their expression of interest will be received hopefully by early December. After further due diligence work the fund could then be established perhaps by March 2012. Further initial assessments on preparing IB funds will be done in the Philippines and India (June-August 2011), Indonesia, Pakistan and Bangladesh (September-December 2011), and possibly also Sri Lanka and Thailand.

• capacity building towards enterprises promoting inclusive business ventures;
• the conduct of poverty impact assessments for the fund manager's investment decisions;
• government actions that support inclusive business through public policy dialogue and advice;
• monitoring and reporting to the fund investors and other concerned parties; and
• investment brokering and partnerships with agencies outside of the fund.

The Government of the Netherlands has expressed interest in co-financing the TA, but further discussions are needed on country coverage and prioritization of fund-related activities. The facility could be organized as a regional technical assistance project with country-specific orientations. While the TA would closely work with the fund manager, it would ideally be implemented separately. Given the large expectations for the TA, it is estimated that it would require at least $5 million in financing. Representatives of DANIDA and DFID expressed openness to discussing support for the TA.