Vietnam Q&A: Chris Freund

Q: How are LPs currently thinking about Vietnam as a proposition?

A: It’s actually quite consistent. If they’ve decided that they’re interested in private equity in Asia, China and India always come first. Once they have enough exposure to China and India, they then decide between Vietnam and Indonesia.

The reasons people used to choose between the two are not always clear. Some people say private equity is more mature in Vietnam; some say it’s more mature in Indonesia. Some say the valuations are cheaper in Indonesia, which was true historically, but recently they’ve found out that it turns out the valuations there are higher than Vietnam.

The general pattern is that there’s more and more capital going towards developing countries like Vietnam and Indonesia. There’s momentum building.

Q: What are the differences in terms of investment size between Vietnam and Indonesia?

A: There’s a long history of the private sector in Indonesia. There’s been a lot more room for those companies to mature and grow large. [In Indonesia] there are a lot more big companies that have been around a long time, and are potentially sellable.

Certainly, the private sector in Vietnam is much more immature. Most private companies were started in the mid-1990s or later. There are a few exceptions, but generally speaking, you don’t find too many well-managed companies here that were set up [in the beginning].

Most really well-managed companies here were set up in the last ten years. And normally, they’re not ready yet to get bought-out. I only know of three buyouts by investment funds in Vietnam, and two of them have not gone well.

Q: Do you get the feeling you still need to explain the growth factors to LPs?

A: There’s definitely value in them coming here to visit. They need to see it with their own eyes and experience the energy. Normally, once they come here, they have a lot of confidence in the consumer economy, and the overall energy, the growth story, and the momentum of the Vietnamese economy. Almost always, they get that when they come here, if they didn’t have it already.

But most of the investors who are serious candidates, have decided that they are interested in allocating some capital to Vietnam. Those might be funds of funds, or some DFIs, or occasionally some family offices, where the founder of the family came here and really liked it.

Q: What do you think in terms of investment discipline?

A: The arguments for the opportunistic funds are that they provide access for deals that investors wouldn’t otherwise be able to do. Already you have funds that are listed on the stock exchange and didn’t have a very targeted strategy. I think they are moving in our direction. The next funds they are trying to set up are unlisted and more focused on a private equity strategy.

For every company we invest in, the more focused a company is, the more successful they are. It’s so consistent. I’d say it was kind of counter-intuitive, but it turns out that by doing one thing really well, you can grow a lot faster than by doing a lot of things in a mediocre way.  I believe it’s the same in terms of fund performance.

We are becoming more focused ourselves. In the present market, we are going to be very strictly focused on consumer-driven industries. And with management teams, we’re looking for a very strict focus. For the Vietnam Azalea Fund, we did a couple of deals that stretched away from our core principles, and those didn’t work out well.

But there are different strategies that will be successful here. Our strategy is about seeking out really strong management teams and companies that are really committed to continuously developing their management teams, and then we work with them to set really clear targets that they and we can own. We play an executive coaching role, and work with them to make sure they stay on track. Some of them will stray, but then we meet to them to get back on track.

I think there will be other styles of investment that will be successful in Vietnam, but again, you need to be very focused and a results-oriented coaching approach is what we do well, but it only works with companies that are open to it.

Q: You were one of the few that were positive about what was going on in 2009. You obviously have a model that’s working

A: It didn’t come easy. Until 2007, on the post-investment side our model probably wasn’t working. Pre-investment we kept getting better and better in terms of our investment decisions, but it’s only been in the past few years that we really have become effective at ensuring that our companies really hit their net profit targets. In 2009, our 21 companies on average achieved net profit growth of 89% which was a breakthrough for us.  And 2010 has gotten off to a great start in terms of the net profit performance of most of our companies.

Q: Are you fundraising at the moment?

A: We plan to do it aggressively after we have one or two good exits, which we expect in the near future. We’re looking for opportunities to meet LPs now and keeping in touch with them. But in terms of pushing, we need to have one or two good exits at high return multiples. We have some on the horizon. We have some companies that are ready to exit in the next 12-18 months that will be very good returns for us. 

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• Topics
• Southeast Asia
• Expansion
• Buyout
• People
• Chris Freund
• Mekong Capital