In a private equity deal, the attention of the business is usually focused on the amount of money the fund will invest, the valuation of the business or the percentage of shares to be transferred. However, for the investment funds themselves, the most important question is often asked just before the conclusion of the transaction: how and when will the fund divest?
This is not just a matter of portfolio management but a determining factor in the fund's ability to realize profits. Unlike strategic investors who want long-term companionship, private equity funds are established with a finite life cycle, usually from seven to ten years. During that period, the fund must complete the investment, increase the value of the enterprise, divest and distribute profits to limited partners.
In fact, from the perspective of private equity, exit is the process of transferring all the value that the fund has created over many years of investment.
This explains why in international investment contracts, the exit strategy is always negotiated from day one. It can be said that if the investment is the starting point of a deal, the ability to divest is the final measure of the success of the investment.
In the context of M&A activities in Vietnam entering the stage of in-depth development, properly understanding the divestment mechanism of investment funds not only helps businesses be more proactive in the cooperation process but also contributes to improving the ability to attract the next rounds of capital.
Exit is not "selling shares" but the process of transferring the entire value of the business
A fairly common notion is that divestment is merely the sale of shares held by the fund. In fact, from the perspective of private equity, exit is the process of transferring all the value that the fund has created over many years of investment.
That value lies not only in the growth rate of revenue or profit, but also in the corporate governance system, internal control structure, management team capacity, level of legal compliance, market expansion and quality of intangible assets such as brands, etc. data or intellectual property.
Therefore, before deciding to invest, funds often evaluate businesses according to the criterion of "exit readiness" – the level of readiness for future transfers. A business with rapid growth but a lack of transparency in legal records, and a tax, labor or land dispute may still be significantly reduced in value when the fund seeks the next investor.
In other words, a business that is easy to invest in is not necessarily an easy business to divest.
Four popular divestment paths and new market trends
In international practice as well as in Vietnam, private equity funds often choose the four traditional methods of divestment.
The most common method is still to sell shares to strategic investors. This is a suitable choice when the business has reached a large enough scale to attract corporations in the same field. Many M&A deals in Vietnam in the retail, consumer, education and healthcare sectors follow this model.
The second option is to sell it to another investment fund (secondary buyout). This form is thriving in the world when many funds have reached the end of the investment life cycle while businesses still have room for growth. Instead of an IPO or sale to a strategic investor, the investment is transferred to a new fund with a longer holding period.
In Vietnam, this trend also begins to appear as the market size is increasing and the number of funds operating is more. This creates a "secondary market" for private equity investments, contributing to improving the liquidity of the private capital market.
The third path is to list on the stock market. This is usually the option that offers the highest valuation but is also the most difficult option to make. Vietnam's stock market has made many developments, but the number of enterprises eligible for IPO with a size suitable for the expectations of investment funds is still relatively limited.
The last method is for the enterprise or group of founding shareholders to buy back the capital of the fund. This solution is often applied when the parties cannot find a suitable buyer or when the business wants to restructure ownership.
Notably, since 2023, the global private equity market has also witnessed the rapid development of continuation fund and GP-led transaction models. Instead of selling the investment to an outside party, the fund management company itself establishes a new fund to continue holding the business for many more years. This trend reflects the fact that in the context of high interest rates and the IPO market has not fully recovered, it is becoming more and more difficult to find the right buyer.
Legal provisions that determine the possibility of divestment
One of the major differences between private equity investment and conventional investment is that the right of divestment is "designed" right in investment contracts and shareholder agreements.
For investment funds, terms such as drag-along, tag-along, right of first refusal, right of first offer, call option, put option, anti-dilution, liquidation preference or earn-out are not only benefit sharing mechanisms but also tools to ensure the exit of the investment.
In particular, drag-along clauses often play a decisive role in business sales. If the buyer only accepts to buy the entire charter capital but some small shareholders object, the deal may collapse. Drag-along helps solve this situation by allowing shareholders to meet certain conditions that force the remaining shareholders to transfer shares together under pre-agreed conditions.
In contrast, tag-along protects minority shareholders from the risk of being "left behind" when the majority shareholder transfers their shares. This clause allows them to sell their share of capital at the same price and trading conditions.
From the perspective of Vietnamese law, these provisions are recognized in principle on the basis of freedom of agreement in civil and commercial transactions. However, the ability to enforce in practice still depends on the way the terms and regulations in the company's charter are developed, the process of approving decisions of the governing body as well as the compliance with the mandatory provisions of the Law on Enterprises, the Law on Investment, the Law on Securities and specialized documents.
That shows that a clause copied from the international contract template is unlikely to be fully enforced in Vietnam if it is not adjusted in accordance with the domestic legal framework.
Many businesses only start reviewing legal documents when the fund has found a buyer.
Legal hurdles often appear when the fund is about to divest
Through many M&A deals in Vietnam, it can be seen that most of the difficulties do not arise from finding buyers but appear in the legal due diligence process.
The first is issues related to land use rights and land-attached assets. Even a small error in the project's legal documents can cause a significant adjustment in the value of the business.
Next are tax obligations that have not been completely handled. Potential arrears or penalties are often reflected directly by the buyer in the purchase price or claim for a post-transaction compensation mechanism.
For technology businesses, personal data and intellectual property rights are increasingly becoming the subject of scrutiny. After Vietnam promulgates the Law on Personal Data Protection in 2025, the failure of enterprises to fully comply with their obligations on data processing, cross-border data transfer, or data governance may give rise to significant risks during the divestment process.
Issues of competition and control of economic concentration should also be noted. If the transaction meets the threshold for notification of economic concentration, the completion of the transfer may depend on the outcome of the review by the competition authority.
In addition, limitations on foreign ownership ratios, investment conditions for conditional business lines, procedures for registering changes of investors or regulations on foreign exchange management can also directly affect the progress of completing transactions.
Practice shows that businesses often prepare too late
Many businesses only start reviewing legal documents when the fund has found a buyer. This is too late to fix many shortcomings.
In fact, immediately after receiving the investment capital, businesses should build an "exit readiness" program with the goal of maintaining a state of readiness for all future transfers.
This includes standardizing the company's charter, updating the shareholder register, developing an electronic record-keeping mechanism, completing the system of labor contracts, commercial contracts, business licenses, intellectual property rights, tax records, environmental records, and data governance systems.
At the same time, businesses should also set up a virtual data room right from the operation stage instead of waiting for transactions to arise. Practice shows that the quality of the electronic data room not only significantly shortens the appraisal time but also builds trust in potential investors.
From "investment-ready" to "exit-ready"
For many years, Vietnamese businesses have been mainly interested in becoming attractive enough to receive investment capital. However, as the private equity market enters a more mature stage, a new criterion is gradually becoming equally important: readiness for divestment.
A truly quality business is not only one that can successfully raise capital, but also one that can be conveniently transferred to the next investor at a higher valuation. That is also the reason why investment funds are increasingly interested in the quality of governance, transparency and compliance of businesses from the first day of investment.
From a policy perspective, the development of the private equity market depends not only on the ability to attract capital flows, but also on the formation of a regulatory environment that enables funds to divest smoothly, transparently and predictably. When the "output" of the market is improved, the "input" of capital flows will become stronger.
For Vietnamese businesses, the most important lesson is perhaps: prepare for the day the fund leaves the day the fund enters. Because in private investment, a deal is only really considered successful when both businesses and investors can close the cooperation journey with an effective divestment, laying the foundation for the next round of growth.
