<article>Mekong Capital, Vietnam&#8217;s first private equity firm that has invested in over 30 companies, is seeing greater interest among limited partners (LPs) in Asia to back private equity opportunities in the region.</article>

Mekong Capital, Vietnam&#8217;s first private equity firm that has invested in over 30 companies, is seeing greater interest among limited partners (LPs) in Asia to back private equity opportunities in the region.
&#8220;For our next fund, we don’t plan to do a roadshow in the US or Europe. We&#8217;re only doing a roadshow in Asia because all the investors are basically here now,&#8221; said Mekong Capital partner Chris Freund in an interview.
The firm, which has so far made nine investments out of its fourth fund, Mekong Enterprise Fund III, is working on one more opportunity in the next two to three months before it fully deploys its $112-million corpus. The firm will next be raising its fifth fund, called Mekong Enterprise Fund IV.
In a wide-ranging interview, Freund said there still remains a lot of LP interest in country-focused funds and in Vietnam particularly.
Edited excerpts:
It is said to have become more difficult for small PE firms to raise funds in Asia compared to big global firms. Do you see that happening in Vietnam?
Based on my own experience, it has not changed that much. Investors are interested in all kinds of investments. Some invest in global private equity funds, and there are always others who invest in country funds. We have met a lot of investors who are very specifically interested in Vietnam. In fact, it is the most common thing that they first decide to invest in Vietnam and then find out who they can possibly invest with in the country.
The biggest change I have seen, a little different from your question, is LPs are more and more based in Asia, i.e. there are more and more Asian LPs, for example from Korea, Japan and Thailand. Even for global LPs, more and more of them have offices in Asia or have money being managed out of Asia. For our next fund, we don’t plan to do a roadshow in the US or Europe. We&#8217;re only doing a roadshow in Asia because all the investors are basically here now.
So there still exists interest among investors in country- or sector-focused funds?
If I have to pick out a pattern in terms of how the LPs are coming to us, it doesn&#8217;t seem to me that most LPs are considering the whole region and then looking for the best funds in the region. It&#8217;s more like they choose Vietnam and then they&#8217;re looking for the best fund in Vietnam. I would say that there might be other countries they like too, but they have chosen to invest in Vietnam specifically.
In a market like Vietnam, what do you think investors are looking for? 
There&#8217;s an element of diversification, especially if it&#8217;s an Asian investor. For example, if they come from Japan, Korea or Thailand, normally they have a lot of exposure to their home market, so they make a choice that they want to start investing in some other countries, and then they chose Vietnam as a priority. I have been contacted by a new Japanese investor that has exactly the same story.
And of course, they&#8217;re looking for returns. They choose Vietnam because they think that the overall picture looks attractive here, and it is perhaps safer to invest here compared to some other countries.
What could deter these investors? What can you do to counter those concerns?
In the past, high inflation and currency devaluation were real negative factors keeping investors out of Vietnam. Right now, that is not the issue. If inflation or risk of currency devaluation came back, that would certainly deter investors.
Another thing that would deter them in the past was that a lot of investors who deployed capital in 2006 and 2007 lost a lot of money. They either invested in newly launched funds which then lost money on their investments or invested in existing funds at a very high valuation and then the net asset value (NAV) went down. A lot of investors were burned when they entered the market during that past bubble, so it took many years to recover. I think Vietnam is fully recovered. Some of the same investors that lost money 12 years ago are back and want to invest again in Vietnam. Of course, if something like that (being vulnerable to the bubble) happened again, it would deter investors.
The number one thing we can do is to have a good track record. It&#8217;s the most important thing that you, as a fund, have a consistent track record of delivering good returns in any economic cycle. If the fund can do that, they’ll have a pretty easy time raising capital.
Can you briefly take us through the returns for your previous funds?
Combining all our first three funds together, which are all fully exited, the gross return multiple is 3x and the net return multiple is 2.8x.
How is it compared to the market average in Vietnam?
I&#8217;m pretty sure it&#8217;s higher. Our MEFII is the best performing fund, based on the data that we have.
What is your expectation for the 2015-vintage fund?
Our vision is that we will achieve at least a 5x return on every investment. Based on our first three funds, we didn&#8217;t achieve that, but the returns were still not bad. Investors were happy with what we delivered. But our goal is to perform better than we did in the past. Although there is no guarantee that every investment will deliver a 5x return, that&#8217;s what we are organized around.
In Vietnam, there have been very large investments in established conglomerates like Masan or Vingroup. What do you think is the rationale for these investments?
I can&#8217;t speak for the investors, but I think they have a lot of money and they want to get Vietnam exposure because they believe in the future of the country and they want the safety of investing in market leaders like Vinamilk, Vingroup or Masan. They are not growing fast anymore but it&#8217;s a safe bet that they can grow with the economy. And the investors have a lot of money to deploy. A lot of these investors invest at least a few hundred million dollars, so they need something big to invest in.
Do you think there is a gap in mid-sized deals, given that there are those big investors and then funds like yours doing smaller deals?
There are a lot of funds that will do deals of $20 million to $50 million. That is a very common size range that they&#8217;re looking for.
But definitely, Vietnam is a flat pyramid in terms of the deal sizes. At the bottom of the pyramid, there are a lot of small deals. Many are too small even for us. And as the deal sizes get bigger, the number of deals available gets fewer and fewer. Plus, for a regional fund making an investment, they also have a lower likelihood of completing it for various reasons. If it&#8217;s a smaller deal and a Vietnam fund like ours, there&#8217;s a high likelihood that we&#8217;ll get it done because we&#8217;re not going to be surprised by things like regulations or the macro-economy.
When you&#8217;re dealing with regional or global funds that may have never invested in Vietnam or only did one or two investments in Vietnam, they also end up getting surprised more during the due diligence. They might find out something that will scare them off.
There have been some deals in the mid-sized range in technology. What do you think about the potential and also the valuation of these technology businesses?
The valuations that I see don&#8217;t connect to the cash flow generating potential of those businesses. If you&#8217;re the world’s number one in something, like Amazon, Google or Facebook, you could deserve a premium valuation for a lot of reasons because it looks like an unstoppable machine in certain ways. But a number one player in a small market doesn&#8217;t deserve the same value as the world’s number one. And if you&#8217;re the number two or number three player in a small market, you probably deserve a quite low valuation. A lot of the deals I see appear to be overvalued, at least based on what I know about the financial situation of the companies.
LPs also tend to be increasing commitment to venture capital funds. How do you see that?
I consider it a bubble. There is too much capital going into venture capital, which is why companies like Uber are losing $10 billion and still have a high market value. Investors are willing to finance huge losses with no clear path to profitability, and I think it is too much.
It’s not so bad in Vietnam, but in the region in general, you could see a lot of money going into things that do not justify how much money is being invested.
It also seems to me that a lot of younger entrepreneurs with a tech focus don&#8217;t really think profit matters. For quite a lot of them, the whole game is just to keep getting more and more venture capital money. I don&#8217;t think that is sustainable. At some point, the venture capital money will dry out because the returns aren&#8217;t very good, and all these businesses will just collapse unless they&#8217;re profitable.
Despite all of that, would you ever consider an opportunity in technology given the growing interest in the sector?
The main thing is not about growth but about profitability. We want to invest in a business model that already has a lot of examples of profitability. There are some pockets of technology which have that. But there are other parts of technology, companies like Uber or Grab, there&#8217;s no sign that they will be profitable. For such kind of model, we would not consider, but if it is something that has a record of people making a profit on a year-to-year basis, then we will consider it.
Do you believe in AI? SoftBank&#8217;s Masayoshi Son is betting big on the future of AI and machine learning. What do you think about his vision? How about your vision about the consumer market?
I have a more negative view of AI. I think it will eventually displace people and will basically result in a concentration of wealth among people that control the best AI. It would be destabilising, so I&#8217;m very concerned about it.
In terms of consumers, they will keep spending. In countries like Vietnam, the middle class keeps growing and their wealth is growing too. So, I&#8217;m sure that for the foreseeable future, consumer businesses will certainly have a growing market.
Would you consider Vietnam an inefficient market?
In one sense, the value is whatever the buyer and seller are willing to agree on. Vietnam actually has a lot of transactions. It has more deals happening than a lot of other countries. I consider it a pretty liquid market in terms of the volume of deals happening and investors coming in and out. There&#8217;s always a lot of interest among buyers for any deal. I don&#8217;t consider it too inefficient, even as sometimes I see investors buying at valuations that don&#8217;t make sense to me. And the public markets seem fairly priced. A lot of listed companies have P/E ratios of 10 to 14 and that seems quite reasonable.
For the next couple of years, what is your projection for deal flow, investor appetite and opportunities in the market?
I don&#8217;t notice any big changes in terms of what investors are looking for. I don’t see many changes, too, in terms of the opportunities.
There are some funds that have investments they&#8217;ve held on to for a long time and they need to sell. There&#8217;s quite a big backlog of those. So, I think there will be a new round of private equity investors that will buy the investments from the first generation of private equity investors. I&#8217;ve heard people say that the privatisation process is slowing down a lot, so the opportunity might be shifting away from there. For us, it&#8217;s barely changing. It&#8217;s still the same sectors we&#8217;ve been looking at before, such as retail, restaurants, pharmaceuticals, education and healthcare.

Mekong Capital, Vietnam’s first PE firm that has invested in over 30 companies, sees greater interest among limited partners in Asia to back PE opportunities.

More and more LPs are now based in Asia, says Mekong Capital's Chris Freund

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More and more LPs are now based in Asia, says Mekong Capital's Chris Freund

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