Time to invest in well-run firms: fund boss
Mekong Capital is a Viet Nam-focused private equity firm specializing in consumer-driven businesses who are leaders in their industry. It has three funds, the US$18.5 million Mekong Enterprise Fund, the $50 million Mekong Enterprise Fund II, and the $64 million Azalea Fund. Managing partner Chris Freund, who founded the company in 2001, talked to Viet Nam News reporter Thuy Anh about investment opportunities and his experience in Viet Nam.
Please give us an overview of your funds and their performance?
Our funds have completed more than 25 private equity investments, of which 11 have been fully exited and two have been partially exited. Mekong Capital manages three funds, with a of around 30 full-time people in our offices in HCM City, Ha Noi, and Singapore.
We invest in fast-growing companies with ambitious expansion plans and an unwavering commitment to building management teams that will successfully execute those expansion plans. These are typically well-established companies in their sectors, but which typically operate in fragmented and fast growing markets that present attractive growth opportunities.
Mekong Capital's investee companies are typically among the fastest growing and market leading companies in Viet Nam's consumer-driven sectors such as retail, consumer products, and distribution.
Analysts predict a better time for Viet Nam's economy in 2013 though challenges remain. What do you think as a professional investor?
Yes, I believe Viet Nam's economic situation will surprise people positively in 2013. The main catalysts are lower interest rates and the rapid increase of electronics assembly in Viet Nam, contributing to a trade surplus that seems to exceed expectations every month. While we focus on investing in consumer-driven businesses, I believe an overall improvement in the economy will contribute to an acceleration in consumer demand no later than the second half of 2013.
Many believe that foreign investors will continue to have a "wait-and-see" attitude about investing in Viet Nam in the first half of the year. Your comment on this? What is your assessment of Viet Nam's private equity environment in 2013?
|Nam Long Real Estate's EHome 2 project. Prospects for the real estate market in 2013 may be affected by declining interest rates and growing credit. — Photo courtesy Mekong Capital
Yes, most investors do have a herd mentality and wait and see that other investors are investing before they do so themselves. This applies both to local investors and foreign investors. I believe most investors are still too pessimistic about Viet Nam. The P/E ratios of many fast-growing listed companies are still in the mid-single digits which I believe is lower than justified based on their likely growth rates. For example, listed companies like Traphaco has a P/E of 8.5, PNJ has a P/E of 8.5, and FPT has a P/E of just 5.
What is your advice to the investors in this situation?
I believe it is a good time to invest in Viet Nam, but only in well-managed companies with strong corporate governance.
What is the effect of the current monetary policies on Vietnamese firms, especially your investee companies?
I think the State Bank has done an excellent job on monetary policy in the last two years. They had the discipline to keep monetary policy tight while inflation was a problem, and now that inflation is down to 7 per cent, they have eased to the right level, but not too much. There is more room for them to ease monetary policy later if inflation stays at 7 per cent or below.
The real estate sector is suffering from a severe capital shortage. What is the situation at your real estate investees, Nam Long for example?
I think the prospects for the real estate market look very good in 2013, much better than most people realise. Interest rates are coming down, and credit is growing for real estate developers. For example, Nam Long has recently borrowed money from VP Bank and other banks to finance its eHome affordable housing projects. And the government's programme to make mortgages available at rates of 6-8 per cent per cent for social housing will be an important catalyst for the low end of the housing market, which is exactly where Nam Long is positioned. Nam Long's home sales have been ahead of their internal targets in recent months. Meanwhile, Vincom's recent sale of Vincom A in HCM City at a big profit is a good sign for the real estate market. My only concern is the premium or grade A segment of the real estate market, since Viet Nam always has too much investment in premium real estate and not enough investment in lower-cost real estate, which is where most of the market currently is in this country.
With the Government's plans for restructure of State-owned corporations, do you see any investment opportunities for Mekong Capital. What are they?
Yes, some of our successful investments have been former State-owned companies like PNJ, Traphaco, and An Giang Plant Protection. The challenge is to find well-managed companies with strong corporate governance.
What is MC's focus in 2013? Exit or Investment? Any specific targets you can disclose?
Our main focus in 2013 is the performance of our existing 15 investee companies, plus some exits. We are working on achieving around five exits in 2013. I think there are some attractive investment opportunities currently, but we have to prioritise our existing investments before making new ones. Once we have achieved a few more exits, we plan to start making new investments.
What is the status of your fund-raising efforts?
We currently expect to raise our next fund in the second half of 2013 after we have achieved a few more exits.
It is reported that 2012 was a bad year for fund management companies, with almost 50 such firms operating in this market earning just VND30 billion in profits. How about Mekong Capital?
I don't know where that data is from but it certainly doesn't include the private equity fund managers – which are Mekong Capital, BankInvest, and VI Group. 2012 was a good year for our investee companies though most did not grow as fast as in previous years. Nonetheless, many of the companies made a lot of improvement in 2012 like building their management teams, hiring consultants to help them apply best practices, etc. Out of our portfolio of 15 companies, we have 10 whose performance we are pleased with, three that had mediocre performances, and only two that we consider to have serious weaknesses in management that are not yet being addressed.
Pharmaceutical firm TRAPHACO is one of our successful investees. Last year it achieved VND116 billion (US$5.06 million) in net profit, representing 31 per cent year-on-year growth. During the year TRAPHACO opened four new branches and acquired two provincial distributors, bringing its network of distribution branches and subsidiaries to 18 nation-wide. As such, TRAPHACO solidified its position as the second largest pharmaceutical company, and has the second largest pharmaceutical distribution network in Viet Nam.
What are keys to your company's success?
We believe that a strong corporate culture is an essential success driver both for our organisation as well as for the companies in which our funds invest. Mekong Capital's exceptionally strong corporate culture is the result of a significant investment of time and resources since 2007. Our shared commitment to each other's success and the success of our investments, as well as our deeply-rooted core values, are the foundation on which our team has been delivering increasingly strong investment results in recent years. — VNS