Profile: Mekong Capital’s Chad Ovel

GPs launching impact-related strategies are sometimes dismissed as opportunists and asset-gatherers. At least Vietnam’s Mekong Capital can point to a credible link between its impending forest and soil regeneration fund and the expertise of one of its partners: Much of Chad Ovel’s pre-private equity career was spent working on sustainable forestry projects in the non-profit and corporate sectors.

Indeed, his introduction to Mekong in 2006 was as CEO of AA Corporation, a portfolio company that turned locally sourced wood into furniture and fit-outs for five-star hotels. Ovel was invited to join the private equity firm on the strength of that turnaround job.

“In terms of technical competency, a track record in timber products, and being familiar with sustainable forestry, I’ve been down this road before. I led sustainable forestry projects all over Southeast Asia and then I greened the entire supply chain for a furniture company [not AA Corporation] with exports of USD 350m a year,” said Ovel. “I know how important it is for the private sector to lead. Governments follow.”

A dedicated team has been assembled for the new fund with a view to raising USD 150m for deployment in forestry plantations and regenerative agriculture, including soil carbon sequestration. Ovel will serve on the investment committee rather than on the ground inspecting timber – a departure of sorts for someone whose 27 years in Vietnam have been characterised by a willingness to get his hands dirty.

In several ways, Ovel is suited to life on the frontier. He was, until settling down and having a family, the enthusiastic high-altitude mountaineer who spent holidays in the Himalayas. He remains an operational veteran who has weathered Vietnam’s vertiginous economic cycles – a relevant skillset as the country grapples with slowing growth.

Asian dynamism

Ovel’s fascination with Asia began in 1995 on spending a semester of his US university programme in Beijing, which was followed by three months travelling around China. The senior theses for his international relations and economics degree focused on enhancing productivity in Chinese state-owned enterprises and on Beijing’s early commitments to reduce greenhouse gas emissions.

“I was enthralled by how dynamic and different it was from my home state of Iowa, which is just a bunch of cornfields and soybean fields. I felt this incredible energy and I just wanted to get back there,” Ovel recalled. “I wandered down to the careers centre at my college – it was back in the days of filing cabinets with those metal hanging files. I opened the drawer and saw a folder with a tab that said Vietnam.”

One of his university’s alumni needed an analyst to work for a Vietnam-focused investment fund. The team had raised USD 20m from an opportunistic high net worth individual in the US; and given Vietnam’s economy was largely closed to foreign capital at the time, they struggled with deployment and never raised any additional capital. After three months, Ovel realised it was going nowhere.

A period of job searching led to an opening with WWF, a non-profit organisation that runs conservation programmes around the world. The Indochina operation spanned Vietnam, Laos, Cambodia, and Nepal, and Ovel was responsible for writing proposals, designing projects, and raising capital.

National parks were central to WWF’s agenda, from redrafting government policies to training forest guardians. One project led by Ovel proved instrumental in shaping his next career move. While helping the government on achieving Forest Stewardship Council (FSC) certification for sustainable local logging operations he got a call from ScanCom International, a Danish manufacturer of outdoor furniture.

“They said, ‘We hear you are an expert in FSC certification and sustainable forestry. We desperately need to green our supply chain,’ Ovel said. “I ended up working for them in Ho Chi Minh City (HCMC) and transitioning the operation from a 98% reliance on illegally harvested timber in Cambodia and Indonesia to 100% FSC-certified. In the space of six years, exports rose from USD 15m to USD 350m.”

The forestry and timber products industry has evolved considerably since then. Ovel notes two key changes that make a fund strategy feasible: the emergence of sizeable plantation companies in the Mekong region, many of them privately owned; and a broader commitment to sustainable practices.

But back in 2006, after six years at ScanCom, he was keen on helping a local company achieve the same growth trajectory. Ovel offered his services to all the private equity firms based in HCMC and Chris Freund, Mekong’s founder and at the time solo partner, was receptive. AA Corporation, a portfolio company since 2003, needed assistance and Ovel became deputy CEO and then CEO.

AA Corporation prospered under his stewardship. Revenue from international sales rose from 10% to 50%, while revenue and EBITDA saw compound annual growth of 51% and 60%, respectively. Mekong exited in 2011 with a 2x return. Ovel was invited to become Mekong’s second partner shortly thereafter, but he demurred, recognising there was more to do at AA Corporation before handing over.

Vietnam’s economy was still in a precarious state, recovering from the effects of the global financial crisis while beset by a property market crash, a jittery banking system, and hyperinflation. The property developers that made up the bulk of AA Corporation’s client base were in deep distress.

“You had to be very agile, shifting strategy and reallocating resources to different clients and channels from day to day. Managing bank relationships to keep credit lines open was almost a daily exercise. There was a heavy focus on cash management instead of margins,” said Ovel.

“We are kind of back into that situation now, but there are differences. Back then, Vietnamese leadership teams were more stable, more loyal – they had fewer options to jump around. Now it takes stronger corporate culture and leadership to keep teams together in the face of challenges.”

Mekong Capital 2.0

Mekong had recently completed its own corporate culture shift. Four years earlier, Freund was on the verge of giving up on a firm that lacked leadership and was plagued by a tendency to dismiss poor performance with excuses. He underwent a personal epiphany after participating in a transformation workshop run by Landmark Worldwide and embarked on a root-and-branch reconstruction of Mekong.

Notably, Freund adopted an ontological investment strategy – called vision-driven investing – whereby value creation is rooted in close engagement with management teams and encouraging CEOs to improve through experience and discovery. It ran contrary to traditional private equity operational improvement programmes and team members who didn’t buy into the new approach departed.

“I witnessed the transformation,” said Ovel. “For the first two or three years, I thought the deal leaders from Mekong were worthless; they just attended board meetings every month and asked for reports. Then, almost immediately, I started getting a very different sense of Mekong. There was a new language and a new approach that made it more about leadership, and it was valuable to me as a CEO.”

This clear and articulated way of working was a decisive factor when Ovel agreed to join the firm in 2012 and formally started six months later. An early baptism of fire – a series of 60-minute-plus face-to-face meetings with Mekong’s 50 largest LPs for someone with no prior direct experience in private equity fundraising – served as a reminder that Mekong’s transition was not complete.

Not only was Vietnam emerging from an economic downturn, but Mekong had few exits to show from 26 investments across three funds. LPs noted that re-ups were conditional on performance.

“I knew the value of the portfolio and I thought it was undervalued by others. I joined at an opportune time because I could see a substantial amount of upside, the snowball collecting snow,” Ovel said. “But Chris and I quickly agreed we would forget about fundraising for the time being and demonstrate that we could deliver more exits.”

A turning point came in 2014 when mobile phone retailer Mobile World went public via a domestic IPO – Mekong completed its exit four years later with an overall 57x return – and casual dining chain Golden Gate was sold for 9.1x. The firm’s fourth fund, Mekong Enterprise Fund III (MEF III), closed on USD 112m in 2016. It was positioned as a sector specialist vehicle only interested in consumer deals.

MEF IV, which closed in early 2022, saw a step up in size to USD 246m. Ovel believes it is appropriate for the strategy and the market, and he doesn’t envisage MEF V being much larger, although the matter is not yet under serious consideration. Mekong typically wants to be the first money in, writing cheques of USD 10m-USD 35m. Once commitments reach USD 50m, overseas GPs get interested and valuations rise.

Some valuation inflation has spilt over into consumer from the technology space, but this is not viewed as a long-term trend. “A traditional business owner will meet a tech founder for coffee and learn that the start-up is valued at 10x revenue, but that doesn’t really translate to the sectors we invest in,” said Ovel. “Anyway, I sense a hangover in the market because those tech valuations are unsustainable.”

Mekong sees opportunities in business succession as Vietnam’s first wave of private sector entrepreneurs enters their 60s and 70s, and in backing up-and-coming founders built in the image of those behind Mobile World, Golden Gate, and farm-to-table restaurant chain Pizza 4P’s. Rising founder quality is a consistent theme, driven in part by overseas-educated returnees.

Ovel points to Gene Solutions, a genetic testing business that received USD 15m in funding from Mekong in October 2021. CEO Hoai Nghia Nguyen underwent doctoral and postdoctoral training at Johns Hopkins School of Medicine and worked for the US National Cancer Institute before deciding to put his expertise to use back home. One of the other two co-founders is also US educated.

Macro headwinds

More broadly, Vietnam’s strong fundamentals – a relatively young population, rising household incomes, and consumption upgrades – continue to attract investors. GPs deployed USD 9.3bn between 2018 and 2022, a near threefold increase on the prior five years. The country is also benefiting from supply chain reorganisation as multinationals ease their China exposure by building factories elsewhere in Asia.

Vietnam was the fast-growing economy in Asia last year, with GDP expanding by 8%. However, growth moderated to 3.3% in the first half of 2023 amid weakening demand for exports in Western markets and a slowdown in the real estate sector partly driven by government efforts to curb speculation.

Mekong’s pace of deployment remains consistent, but deal count over the past 12 months hasn’t kept pace with the tenfold increase in the number of companies being appraised. Ovel puts this down to the imposition of a higher bar in terms of unit economics. At the same time, the portfolio was rocked in March by a police raid on F88, a leading consumer finance business and a portfolio company since 2017.

The timing was unfortunate. Three days earlier, Mekong announced its participation in a USD 50m Series C round for F88. The raid is described as the offshoot of a crackdown on improper behaviour by agencies who conduct debt collection for financial institutions on an outsourced basis. Banks were targeted first, then consumer finance companies. Nothing of material significance has been found on the latter.

Ovel is philosophical about the macro situation. Mekong’s consumer-centric portfolio has not been as severely impacted as those with exposure to areas like manufacturing and export-oriented logistics. Indeed, recent investments in the healthcare sector have performed well due to inelastic demand.

Moreover, he is reluctant to read too deeply into Vietnam’s feast-to-famine economic cycles. This is the third meaningful downturn in his 27-year tenure. The first was triggered by the Asian financial crisis. No economy went unscathed, and investors naturally fled less regulated frontier markets. The second, in 2011-2012, was exacerbated by aggressive monetary policy intended to alleviate a real estate downturn.

Now, though, the government’s approach is more considered and constructive. “There are challenges in real estate because they are concerned about the market getting out of control. They are also taking action to control inflation, which has stayed below 4% over the past year despite what has been happening globally,” Ovel said. “Unfortunately, the economy is getting hit by a downturn in exports.”

The perspective offered by nearly three decades of experience is something he has come to value. Until a couple of years ago, there was a general expectation that the implementation of a succession plan at Mekong would be followed by relocation to the US. Now the thinking has changed.

“I can’t imagine living anywhere else,” said Ovel who married a Vietnamese woman 14 years ago and has two daughters. “I’m business fluent, so I work in Vietnamese whenever I need to. This makes it easier to be here because if you speak the language then you understand the culture. And when you own a firm and all your social capital is here, you want to continue leveraging it.”

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• Topics
• Southeast Asia
• GPs
• Vietnam
• Mekong Capital