Vietnam-based private equity (PE) firm Mekong Capital’s investment thesis has been rather simple: to let businesses see what they are dealing with, instead of giving them the answers to their problems.
This will be the philosophy of its latest fund, too, which was closed earlier this month with a corpus of $246 million.
The aim of Mekong Enterprise Fund IV (MEF IV) is to achieve better consistency in terms of delivering high returns than its predecessor funds as it plans to dole out larger cheques in the range of $10-35 million and earn at least a 5x return on each transaction.
MEF III closed at $112 million in 2016, while Mekong Capital had raised $132.5 million for its first three funds which it has fully exited.
“I think we have the chance to do even better than MEF III in terms of the high-performance consistency. We are more discipline now about exactly what we are looking for in a pipeline company,” Mekong Capital founding partner Chris Freund told DealStreetAsia in a candid chat.
He admitted that the firm earlier used to put in more effort on deals that were not a perfect fit.
Mekong Capital, in the past, has enjoyed over 5x returns from some of its investments such as retailer Mobile World (57x), restaurant chain Golden Gate (9.1x) and pharmaceutical firm Trapharco (6.3x).
At a fund level, MEF II generated a net return multiple of 4.6x and Vietnam Azalea Fund generated a gross return multiple of 1.8x.
Mekong Capital, through MEF II, sold its final batch of Mobile World shares to Malaysia-based PE firm Creador in January 2018, after a 10.5-year holding period. MEF II originally invested $3.5 million in the retailer when it had only seven stores and a $10 million valuation.
At the time of the exit, Mobile World had over 2,000 stores and a market capitalisation at around $1.6 billion.
According to Freund, Mobile World was Mekong Capital’s best example of how the founder adapted to its portfolio supporting approach.
The PE firm has been encouraging its investee companies to apply what it calls “Vision Driven Investing”, which is a framework of 15 elements that help them achieve their business vision, and transform corporate governance, among others.
Freund acknowledged that, in the past, Mekong’s team members often tried to solve problems or do a business plan for its investees. However, now its strategy has changed – it believes in giving its founders space to discover what works best for themselves, at the same time getting them to ask the right questions about their issues.
In mid-markets, finding the right PE partner that is aligned to the goals of its portfolio companies ensures the latter to scale to the next level, Grant Thorton had earlier written in a note.
“PE wants to do more value-driven business transformation, rather than purely come in and exit in the short term. They [PE firms] are looking for a transformation to enable long-term growth and better return rather than just doing a cost stakeout and quick exit,” commented Grant Thorton global head of private equity Dinesh Anand.
Within MEF III, from which Mekong Capital targets at least deal-by-deal 5x returns, Freund is positive that portfolio companies are being well adapted to the firm’s approach.
A notable example is financial services firm F88, whose revenue by 2019 grew at CAGR of 123% since MEF III invested in 2015. There is also a lot of room for pharmacy retailer Pharmacity, which has grown to 500 stores and aims at 1,000 stores next year.
“The majority of our communication with our limited partners is about VDI,” Freund added.
MEF IV’s limited partners include World Bank’s International Finance Corporation and the Asian Development Bank (ADB), according to public records. Meanwhile, it is understood that the vehicle also attracted commitments from North Asia-based investors.
Founded in 2001, Mekong Capital started with a focus on manufacturing companies but later, in 2006, realised the potential hidden in the consumer sector.
“Companies operating in these sectors often lack access to affordable growth capital given limited equity financing sources in Vietnam, and challenges in accessing traditional bank financing without the hard assets to pledge as collateral,” ADB said in its investment document for MEF IV.