Mekong Capital: Investing with vision

■ How did private equity investments in Vietnam perform in 2017 and what do you forecast for 2018?

2017 reminds me of 2006, which was the year before the last bubble formed and burst. Lots of investors are chasing after investments in Vietnam now. The valuation at which investors are currently investing into mature listed companies like Vinamilk, Sabeco, Vingroup, and Vincom Retail have increased to high levels similar to the last bubble. The trend will continue until it pops. I don’t know when it will pop, but it’s just the matter of time. Financial markets always go in cycles, from too pessimistic to too optimistic and then back to too pessimistic again, and the cycle keeps going. I think Vietnam has great prospects but, nonetheless, investors’ expectations have overshot reality, similar to what happened in 94/95 and again in 06/07. 

■ What do you recommend for foreign investors when investing in Vietnam?

Investors should be aware that market sentiment is cyclical. Optimism for Vietnam is quite high currently so I would say that many investors are too enthusiastic at the current time.

Long-term investors looking at investing in Vietnam should have an approach to add value to investee companies. Many say they add value, but few have done it successfully.

I would recommend that investors only invest in companies that have audits by Big-4 firms and full tax compliance.

I would also recommend investors not invest into companies that depend on political relationships, as this seldom works out the way the investor expects and sometimes it turns out to be a liability.

■ In what sectors in Vietnam can private equity be profitable in the long term? Why?

Private equity is all about adding value and getting results. It’s the opposite of passive investing. For that reason, private equity works in most sectors. But the most attractive are sectors in which there is a scale advantage, or sectors that are very inefficient and where the ability to introduce best practices and operational improvements will lead to big growth in profitability.

■ Mekong Capital was the first private equity firm in Vietnam, founded in 2001. Seventeen years on, how do you view its performance? 

Mekong Capital struggled and made lots of mistakes in its first seven years, and then in the next two years, 2008 and 2009, we underwent a major transformation. From 2009 onwards, things have gone really well for Mekong Capital as we became much more effective at how we add value to our investee companies.

We have always believed in the opportunities in Vietnam. The private sector has consistently been the key driver of economic growth. Fifteen years ago there were not many entrepreneurs who dared to take risks to set up new companies, so many of the investment opportunities were family-style companies and former State-owned enterprises (SOEs). Now there are more young entrepreneurs who are open to modern business practices, so there are more companies for us to choose from. 

We are currently investing our fourth fund, and our three previous funds are nearly fully divested. In 2017 and early 2018, we made a series of successful exits from Traphaco (generating a gross return multiple of 6.3x), Vietnam Australia International School (4.5x), LocTroi (3.6x), and MobileWorld (57x). These companies have continuously generated excellent performance and big achievements.

All companies in our latest fund, Mekong Enterprise Fund III, are doing well and growing their gross profit at 25 per cent per quarter on average. The companies are proactively applying our value creation framework, called Vision Driven Investing, with which they have created a big breakthrough vision and aligned their team around that long-term goal.

■ Mekong Capital now invests primarily in Vietnam-based consumer-driven businesses. Why is that? 

We used to invest in other sectors, like manufacturing, real estate, and IT, but over the years we saw that consumer businesses were performing better than other investments in our portfolio, and we gradually shifted towards investing only in consumer sectors. Other industries might create a lot of wealth for other investors, but we choose to focus on consumer-driven businesses so that we can develop expertise and become a specialist in these areas. 

The industries of retail, restaurants, fast-moving consumer goods (FMCG), education, and logistics will continue to do well. A lot of these industries remain fragmented, so there is room for companies to grow. 

Our approach is to consistently generate 5x returns on our investments and do what it takes to make sure each of our investments achieve that.

■ What are the main attributes when you consider and select new investments in Vietnam? How has Mekong Capital prepared for future private equity investments in Vietnam this year and in the years to come?

The most important criteria for us when choosing an investment is the founders and the management team. We apply a value creation framework called Vision Driven Investing and 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, and focus on their core business without expanding into unrelated areas, etc.

Our Mekong Enterprise Fund is actively investing. We will raise the next fund once Mekong Enterprise Fund III is fully invested.