Q&A: Mekong Capital's Chad Ovel

Q: How has Vietnam evolved as an addressable PE market?

A: The market has matured considerably. Ten years ago there were very few companies in Vietnam with revenues over $20-30 million; today there are 30 companies with revenues of more than $1 billion. In the 10 years previous to 2004, there were less than 50 PE or VC transactions, but in the past 10 years there have been in excess of 300 transactions. By most measures $150 million is still a small fund, but there is enough depth in the market to be doing deals of $7.5-15 million.

Q: The country has been best by macroeconomic problems. Is the worst now passed?

A: We had a lot of macroeconomic instability, with inflation hitting almost 30% a few years back, and then the public markets lacked liquidity. It took a while for the central bank of Vietnam to get its head around how important it was to control inflation and get interests rate down, which they have down. We've had a period of very stable inflation, we've had a trade surplus for the first time in 18 years, and we have one of the most stable currencies in all of Asia. There were 2-3 funds that liquidated far below their invested capital, and they are now gone. There has been a huge humbling of egos among entrepreneurs in Vietnam, we are starting to see really good entry valuations and there is little competition for deals because no one has dry powder.

Q: What are investors' concerns?

A: There are concerns as to whether you can have a portfolio of 10 investments and generate consistent returns of 2-3x. They say the private sector is still relatively young, the maturity of management teams isn't there yet, and a fund like ours may face some difficulties generating returns across the portfolio. Our response to that is because of the huge opportunity of scalability in the consumer sector it is possible to have 2-3 runaway successes. In our second fund we've got a 22x and an 8x. Those can offset any mistakes you might have in 1-2 companies that come in below cost. We have become much more aggressive in cutting losses early to the benefit of the IRR, slimming down the portfolio and focusing on the winners.

Q: Why the exclusive consumer focus in Mekong Enterprise Fund III?

A: We are only going to do consumer because it has worked best for us in the past and it is also bullet proof if there is any macroeconomic instability. Vietnam has the highest retail growth rate yet the lowest penetration of organized retail of any country in Asia. It makes it by far the outlier in terms of future scalability potential. Golden Gate, our casual dining business, started with four hotpot locations and is now up to 57, with another 15 opening this year. It is the same with Mobile World and with Phu Nhuan Jewelry. There are few companies large enough for a minority growth transaction in excess of $25-30 million. In our pipeline we have 2-3 deals in which we do our typical $10 million and a co-investor brings in another $10-20 million. But there are very few deals at $50 million plus unless it's a buyout.

Q: What do you look for a in a prospective portfolio company?

A: When we are doing our top-down pipeline development, we are never looking for the largest by market share or the company with the best locations and brands. We want the best management teams, because it's all about execution, about being able to open one store a week in different locations. We are looking for management teams are younger, have previous working experience with multinationals and have a very high level of discipline in terms of accepting when things are wrong. We have seen this with all our retail businesses. You go through a period of rapid growth and you have to be disciplined around locations that are non-performing. We steer clear of autocratic leadership styles. These are people who say they can't apply any best practices from other countries because it's different here. With Golden Gate, there are four founding partners, each bringing a different skill set to the table. They all lived in Russia for many years. They are extremely good at execution and open-minded, with an inbuilt culture for discussion of ideas.

Q: In terms of exits, what kind of interest do you see from trade buyers?

A: Five of our 15 exits have been trade sales, five were IPO and five were sales to other PE firms or back to the owner. We are getting approaches all the time - Japanese, Korean, Thai, Singaporean, Indian. We are not seeing big interest from America or Europe. When we talk about strategic trade sales, it is likely to be buyout, so the owners have to be aligned with the PE sponsor on exiting together. It tends to be people who have a track record as serial entrepreneurs and have started and sold companies before. It is also those people who were in the first wave of entrepreneurs in the early 1990s. They are getting on, their children don't want to run the business, and they haven't put meaningful management in place to make their companies attractive to trade buyers. A lot of these folks are reaching out to us.

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• Topics
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• Mekong Capital
• Vietnam
• Growth capital
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