“Vietnamese Businesses Seek Alternative Funding Through Private Lending”

Vietnam’s Resolution 68 and the government’s strong commitment to promoting private enterprises aim for 2 million operating businesses by 2030, with 20 businesses per thousand people. This marks a pivotal shift, fostering a more conducive environment for the private sector’s growth.

Beyond regulatory reforms and tax incentives, access to capital is pivotal for small and medium-sized enterprises (SMEs) to thrive. While traditional bank loans and public market fundraising have their limitations, private debt is gaining traction as a viable alternative. Private debt offers credit to businesses or projects outside the realm of conventional capital markets, sourced from private equity funds, credit funds, insurance companies, and other institutional investors.

Global private debt market to reach USD 1.5 trillion by 2024

The private debt market has witnessed significant growth globally over the past decade, particularly after the 2008 financial crisis, when banks tightened their lending. According to Prequin, the global private debt market is estimated to reach approximately USD 1.5 trillion by 2024 and could potentially attain USD 3.5 trillion by 2028.

This form of financing is especially prevalent and successful in developed countries like the United States and Europe. In the US, private debt has gained prominence, with a current share of 67%, focusing on technology, real estate, and healthcare sectors.

Likewise, private debt in Europe has experienced robust growth, notably in the UK, Germany, and France. Private equity funds often invest in SMEs, with private debt constituting 10-25% of these companies’ capital structures, depending on their size and industry.

While this concept is relatively novel in Asia, statistics indicate a growing private debt share in the total corporate debt of economic powerhouses like China and India.

In Vietnam, the private debt market is still in its nascent stages, but the demand for alternative financing options beyond traditional banking is on the rise, presenting opportunities for its development.

Mr. Pham Trong Chinh, a market expert from the Vietnam High-Quality Goods Business Association, shared his insights at a recent seminar: “In reality, over the past five years, many private equity and impact investment funds have wanted to invest in Vietnam but couldn’t find suitable businesses. They tend to favor companies that uphold strong ESG practices, with a particular emphasis on environmental impact.”

Pioneer private debt fund, Beacon, witnesses a near threefold increase in the number of businesses seeking capital

Beacon Fund, Vietnam’s pioneer in private debt investing, is a Singapore-based gender-lens investment fund that made its first close in 2020. It focuses on promoting gender equality and driving positive social impact.

In 2024, Beacon facilitated three notable investments: CAS Energy (led by CEO Nguyen Pham Cam Tu), a pioneer in renewable energy and climate change mitigation in Vietnam; CTCP Tap doan Thuc pham Hoa Sen – Lotus Group, renowned for its Marukame Udon and other popular Japanese restaurant chains; and Bocau Services, a leading telecommunications infrastructure company. Additionally, the fund recently collaborated with the Australian Government to support female leaders in Vietnam through investment initiatives.

As of late 2024, Beacon has invested in prominent Vietnamese companies such as Bocau Services, CAS Energy, Hoa Nang, HAPAS, mindX, and Lotus Group. According to Beacon’s reports, these businesses have experienced significant revenue growth over the last year.

Ms. Doan Thi Ha, Investment Manager at Beacon Fund, shared her perspective on private debt investing: “Many businesses struggle to access bank loans due to a lack of collateral, despite having healthy cash flows from their operations. This challenge hinders their expansion plans. By offering private debt as an alternative with flexible collateral terms, we empower businesses to pursue their growth strategies with greater confidence.”

She further elaborated on the differences between private debt and traditional lending:

+ Loan tenure, interest rates, and repayment terms: Private debt offers more flexibility, tailored to the business’s potential and characteristics, rather than solely relying on collateral.

Regarding collateral, banks typically accept real estate as security for medium-term loans, whereas private debt funds are more accommodating, accepting accounts receivable, inventory, equipment, and personal guarantees.

Loan amounts are determined differently: banks base it on the collateral’s value, while private debt funds consider the business’s potential, profitability, cash flow, and reputation.

Interest rates tend to be lower for bank loans due to their lower risk compared to private debt funds.

+ Maintaining control for businesses: Private debt does not dilute ownership, unlike equity fundraising.

+ Diversifying funding sources: Businesses reduce their reliance on banks or traditional capital markets by accessing private debt.

With its flexibility and accessibility, private debt is increasingly sought-after by businesses. Beacon Fund’s statistics reveal a near threefold increase in the number of businesses seeking capital in the second half of 2024 compared to the same period in 2023, indicating a notable shift in capital-raising preferences as equity fundraising becomes more challenging.

However, to access this form of capital, businesses must not only demonstrate their efficiency but also meet environmental, ESG, and gender equality criteria.