Mekong Capital, the Vietnam-focused private equity firm, will begin making investments from its fourth fund ‘within weeks’, Chris Freund, the founder of the Ho Chi Minh City-based firm told DEALSTREETASIA, in an interaction. The Vietnamese fund manager has so far raised $87.4 million in committed capital for its new fund that has a target of $150 million. Its fourth Vietnam vehicle – Mekong Enterprise Fund III – that is set for a final close later this year, will have a 10 year span, and will invest between $8-15 million each in companies, Freund said, while adding that PE firm’s investments would continue to be limited to Vietnam.
According to Freund, Mekong plans to invest in about 10 fast growing companies within the next four years from its latest vehicle – Mekong Enterprise Fund III. He also said that the PE firm would continue to look at only Vietnam-centric investments and it had no plans to venture abroad. Edited Excerpts.
When will you begin making investments from your fourth fund?
Our fourth fund up next, Mekong Enterprise III, basically has initial investment. So, within a few weeks, it can start to make investment.
What will be this fund’s investment focus?
Only Vietnam, only private equity and only consumer-driven businesses, that would include retail, restaurants, fast moving consumer goods, pharmaceuticals and consumer services like education and healthcare. It can also invest in online businesses that orient towards consumers, especially when the business combines online and offline retail. We have especially deep expertise in retail, so that is a very high priority.
What is the potential of consumer goods business in Vietnam?
The sector keeps growing. If you look back the last 10 years, even during the most difficult macroeconomic situations, consumer spending kept growing every year. I think the slowest growth rate was about 11 per cent. In regional comparison, consumer spending is low in Vietnam, compared to Thailand, China or Indonesia. So I think it is realistic that consumer spending will keep growing.
It will also be driven by modern trade expanding into the provinces, meaning more retailers will have presence in those areas. That will help shape the market-transparent products. There will be a shift from no-name or poor quality products in the countryside to more and more brands making their nationwide presence. That is a huge opportunity.
The challenge is to find well-managed companies to invest in. It is very easy in the consumer space to find attractive market opportunities, but the hard part is to find the companies that can actually meet our criteria.
So what is the criteria that you are looking at?
The biggest thing we are looking for is that how they are gonna build their team after we invest, and if they are open-minded about applying new practices, because our goal is to help get best practices into the companies and to introduce outside experts. So they need to have the openness and willingness to utilise outside resources and learn from outside experts. That is the most important thing for us, which is quite different from other investors. I think other investors are more focused on financial criteria. Normally, the other funds talk mostly about financial things, but when we come, we talk about the management team, corporate culture and such things like that.
What percentage will Mekong Capital hold in the companies?
The average should be 25-35 per cent, but possibly we can do buyouts. We have never done one yet. We have made 26 investments until now, and the largest ownership percent until now is 35 per cent. But the new fund has the ability to do buyouts. That is not really our priority but something we could do if we see opportunities.
How about the operations of the three existing funds – how many exits have you made so far?
They are doing pretty well. We fully exited 16 of the 26 investments. Hopefully, we will exit two to three of the remaining 10 within the next months. Our second fund is extremely successful because it has two exceptionally good investments. One is Mobile World, which has grown more than 60 times since our investments. Another one is Golden Gate, which we sold last year with a nine time return. The fund was of extraordinary performance. The third fund is also holding some good assets. It has not performed as well as the second one, but the companies have been growing.
So Golden Gate and partially divestment from Mobile World can be considered the most successful exits of Mekong Capital?
Yes. They are the two best so far.
Are there any investees that did not come up to your expectation?
Yes, most of our bad investments were by the first fund. We learnt a lot after that. Although we did some mistakes in the second and third funds, there were many fewer mistakes, because we have got better in selecting the right management boards. In the first fund, we were not yet able to evaluate the teams. When meeting the companies, they told us they would build the team, but then they often did not do it, and had excuses for why it was impossible.
The second fund with the very first investment in International Consumer Products (ICP), we started to focus more on consumer businesses. Also, we were able to find companies that were more committed to investing in the team. From the beginning, which was 2001 to 2008, we tried to add a lot of value in the companies but we were not effective. No matter how hard we tried, it did not have any positive impacts on the companies. But in around 2009, we started to do in a different way and got better and better. We had lots of great successes in the past few years, in terms of how we partner with the companies to help them grow faster.
What are the biggest challenges when you join the management boards of the companies that you invest in?
Some companies have a culture that is really broken, in which people do not work together. It is possible to fix, but it takes a lot of time and effort to transform the culture. Meanwhile, really successful companies, like Mobile World, created a strong culture. That is part of why they are successful.
The other issue is that sometimes companies are not open to building a management team. They have some reasons why they think it is not worth their risks, they do not want to spend their money, or they think they might train someone else who will leave and set up a competing business. These are the ones that do not grow. That has been the challenge.
Another issue is the way the board of directors operates. Companies like Mobile World have a really effective board that has lots of different people to share their ideas. On the other hand, some have a single shareholder that holds more than half of the company. That person would control the board. The companies will make a lot of mistakes, because that major shareholder normally has a lot of blindspots. It is better if the board can debate things.
In the past, at times we were not effective in getting them to create a strong board, but lately our success is getting independent directors on board. Among our remaining investments, almost all of them now have independent directors. We have nominated Tran Tue Tri into Trapharco. She had a long career with Unilever and Procter&Gamble. She is very strong in marketing and product development, the areas that we want Trapharco to be stronger. In Phu Nhuan Jewelry, we also added Phan Quoc Cong, who is founder of ICP and is strong in marketing and branding.
Do you have any intention to invest in equitised state-owned companies and help them improve their corporate governance?
It is possible, but our goal is always to find the most well-managed companies, which often come from the private sector. There are some sectors that are dominated by state-owned companies, like pharmaceuticals. So if you want to invest in pharmaceuticals, you have to consider a lot of state-owned firms. Or in dairy, Vinamilk is obviously the number one in the sector, and it seems to be more well-managed than a lot of private competitors. There are cases where former state-owned companies are the most well-managed in an area. But things like restaurant and retail, the private companies tend to be more customer-oriented.
There is a culture of kickback, corruption in a lot of state-owned enterprises. We do not want to invest in companies where risks are going on. It is not our specialty to clean up such kind of situation.
How about expanding in other countries in the region?
For now we just want to do in Vietnam and private equity and just consumer business. Maybe some time in the future, we can start to explore operating in another country, but we do not have any current plan for that. We would like to focus to do one thing well, which is opposite to some of the investors, who try to do many different things and have diversified approaches. We just want to be the best at private equity consumer business in Vietnam.
Does that mean private equity in Vietnam can still generate enormous potentials for Mekong Capital to grow?
It is not huge, but enough for us to operate. Our goal is to make around three investments per year, so it is big enough for that goal. Some funds may make the biggest as they can, but it is not our target. I think being the biggest is very risky. In the investment field, if you are the biggest, your returns will not be the best.