Mekong Capital focuses on consumer goods

illustration photo

The Mekong Enterprise Fund (MEF) III was initially due to be launched last year, but according to Mekong Capital partner Chris Freund the wait was well worth it, as now the fund has long-term investors who will be fully supportive of their strategy. “MEF III will target consumer-driven sectors that benefit from the growth in the Vietnamese consumer demand and the adoption of international business practices in those sectors in Vietnam,” said Freund.

Taking consumer-driven industries as the spotlight of the brand-new fund, MEF III however will not focus on the real estate sector as the fund saw greater returns yielded in the consumer goods market, as seen in the case of MobileWorld or Golden Gate. In particular, the fund will focus on retail, restaurants, fast moving consumer goods and consumer services.

MEF III would invest mainly in minority transactions, that is, acquisitions typically representing 15-40 per cent ownership, but may also invest in buy-outs, either alone or in conjunction with co-investment partners expected to add value in complementary ways.

“MEF III will focus on what we believe to be companies with proven leadership teams that are committed to building significant long-term shareholder value through the development of strong management and leadership teams, and the proactive adoption of best practices,” he stressed.

illustration photo

Conquering trail

Operating in Vietnam since 2001, Mekong Capital was among the very first private equity firms to engage Vietnam and has since achieved 26 private equity investments via its successful MEF, MEF II and Vietnam Azalea funds.

Starting off with manufacturing companies, in 2006, Mekong Capital shifted its focus towards consumer-driven businesses. Freund cited Mekong Capital’s Vision Driven Investing framework for adding value to investee companies as being instrumental in helping the companies to prosper in 2014. Some of the key components of this framework include aligning with the companies around a clear long-term goal and then partnering together to achieve that goal. Frequently this involves active use of the third party experts to help introduce best practices.

Mekong Capital’s first $18-million MEF fund, was initiated in 2002 and invested in unlisted companies owned and managed by first-generation Vietnamese entrepreneurs, which were primarily private family-owned manufacturing businesses. Its last remaining investment out of the 10 original investments is Minh Hoang Garments, which is bidding to exit.

The $50-million MEF II, introduced in 2006, emphasised private equity investment in fast-growing private Vietnamese companies with excellent management teams, typically in consumer-driven sectors. With the expected lifespan of 10 years, the fund made 10 investments and currently holds three after fully divesting from the other seven companies. One of them is MobileWorld, the country’s largest mobile device retail chain.

Likewise, the $64-million Vietnam Azalea Fund (VAF) took off in 2007 and currently holds six investments in companies that were unlisted at the time of the original investments, after divesting from four companies. Some of the well-known investments are Traphaco, the market leader in the manufacturing and distribution of traditional and herbal medicines, Phu Nhuan Jewellery (PNJ), the largest jewellery retail chain with 165 stores nationwide and Nam Long Real Estate, one of the most successful hosing development companies focusing on low-cost and middle market housing in Ho Chi Minh City.

MEF II’s and VAF’s on-year net profit growth, as of November 2014, was reported at 114 per cent and 17 per cent, respectively. MobileWorld, which yielded a massive 183-per-cent on-year after-tax profit, chiefly drove the outstanding performance of MEF II, according to Mekong Capital. 2014 proved to be a glorious year for the company as it witnessed a fruitful second partial exit of MobileWorld and subsequent listing. The aftermath was a 21-fold return on MobileWorld shares that Mekong Capital sold before the listing and the remaining shares are traded at 50.7-times the original price per share since the company invested in 2007.

In addition, Golden Gate, one of the leading restaurant chain operators with 67 restaurants in Vietnam, was also successfully divested last September, offering a 9.1-fold return to Standard Chartered Private Equity.

Clear confidence

Mekong Capital therefore has high expectations in the investee companies to maintain significant expansion in 2015. For instance, MobileWorld is welcoming 400+ stores this year and other companies like PNJ, Traphaco and the Vietnam-Australia International School have made momentous improvements. These lucrative divestments and further track record combined with the company’s structure have given rise to the great interest of commencing MEF III.

“We see many positive factors that will improve consumer spending, like improving consumer confidence, low inflation and a more attractive level of credit growth,” emphasised Freund.

As such, MEF III, according to Freund, will certainly be of a larger-scale than its predecessor funds with the committed capital of $150 million.