Mekong Capital, the first private equity firm in Vietnam founded in 2001, is placing its bets on consumer-focussed sectors among top themes to watch out for in the south-east Asian country up to 2020.
Even as Mekong Capital is not investing in technology, Chris Freund, founder and partner, Mekong Capital, told DEALSTREETASIA, in a recent interview, “All consumer sectors should do well between now and 2020, but the companies that successfully implement omnichannel retailing, which tightly integrates online and offline, will be most successful. Companies that are online only or offline only will struggle compared to those that successfully apply both online and offline in a seamless way.”
The homegrown PE firm has to date clocked six investments in Vietnam-based consumer-driven business, through its latest Mekong Enterprise Fund III.
The firm has been investing in retail, distribution, pharmaceuticals, education and logistics, seen as the biggest beneficiaries from Vietnam’s growth story of more than 6 per cent annual economic expansion and more than 10 per cent growth in retail sales.
Mekong portfolio of six consumer companies are growing their gross profit at a rate of 25 per cent per quarter on average, the fund partner revealed.
Vision Driven Investing
In 2017, the company also made a series of successful divestments, including Traphaco (6.3x gross return multiple), Loc Troi (3.6x), Vietnam Australia International School (4.5x) and a partial exit from Mobile World that resulted in a 133x return on that tranche of shared sold.
Mekong Capital has recently registered to sell its remaining shares in Mobile World, the most anticipated private equity divestment in the market.
Among the list of top seven private equity firms in Asia and the best track record investor in Vietnam (according to Preqin), Mekong Capital shared with DEALSTREETASIA in an earlier interaction that its secret sauce was the Vision Driven Investing framework applied within the company and its investees.
Chris Freund, Founder and Partner at Mekong Capital, holds firm that high-yield investments in private equity requires a hands-on experience. “We have a team of around 30 people and currently we are overseeing only around 10 investments, therefore we can spend a lot of time with our investee companies,” he told DEALSTREETASIA in a recent interview.
How a successful deal looks like
With an appealing demography, Vietnam is without doubt a fruitful market for investors in the consumer sector. Only investing in consumer-driven sectors, an approach proven by investments in companies like Mobile World and Golden Gate, Mekong Capital also identifies the teams who can align with its Vision Driven Investing formula.
“When our investee companies apply this, they always grow very fast. So when selecting new investments, we are looking for companies that will easily apply all aspects of Vision Driven Investing – for example, companies that will build a strong management team, build a strong culture, implement advanced IT systems, focus on their core business without expanding into unrelated areas,” Freund said.
Deal-sourcing, according to the general partner, is not too difficult in this Southeast Asian country in terms of getting information for the decision-making process. One tip Freund suggested was to fund companies that have obtained an audit by a Big-4 company prior to the completion of the investment.
Investing money and resources
While many investment firms market to potential portfolio that they will add value to the teams, not many of them can focus the entire resources for invested companies.
Freund said: “We have a team of around 30 people and currently we are overseeing only around 10 investments, therefore we can spend a lot of time with our investee companies.”
In order to realize its goal of generating a 5x return within five years, Mekong Capital targets at helping investee companies build strong management team and a corporate culture that translates into excellent customer experience.
“Adding value is a core part of our business model so we are an “active” investor. Investors that are passive tend to not be successful in Vietnam, especially passive investors into unlisted companies, Freund added.
Easy exits in short term due to higher valuation
Vietnam has attracted global attention to its recent sales of big state-owned companies like Vinamilk and Sabeco, as well as Vincom Retail, the Warburg Pincus-invested arm of property developer Vingroup. “The valuation on mature businesses have increased to high levels and investors are deploying new capital at P/E ratios in the mid-40s,” Freund commented.
While a lot of overseas investors are chasing after investments in Vietnam, he suggests the situation looks like a bubble similar to 2006, and easy exits this time are simply because valuation is getting higher. In the long term, these valuations will not be sustainable, Freund said.
“It’s always easy to complete exits in Vietnam or in any market environment as long as the investor has cooperation from the investee company. We’ve completed 23 exits since 2008. The only companies that we struggled to exit were which we didn’t receive a sufficient level of cooperation from the CEO or chairman,” he added.