Mekong Capital Case Study
Mekong Capital is a Vietnam-focused private equity firm. Operating in Vietnam since 2001, Mekong Capital is one of the first private equity firms to engage Vietnam, and has completed 30 private equity investments in Vietnam through 4 funds with approximately 25 full-time employees. Mekong Capital has offices in Ho Chi Minh City, Hanoi. Focusing on manufacturing companies until 2005, Mekong Capital shifted its focus towards consumer-driven businesses in 2006. Mekong Capital is known as a private equity firm that has invested significant resources in the development of its corporate culture, and in the corporate cultures of its portfolio companies, and is the subject of several case studies.
Mekong Capital won Private Equity International's Operational Improvement Award for Asian Small Caps for 2013, Private Equity International's Frontier Market Firm of the year for 2014 and Private Equity International's Operational Excellence Award 2015 for the Asia-Pacific Small Cap Category.
Mekong Capital was founded by Chris Freund in 2001. Chris Freund was formerly with Templeton Asset Management, based in Vietnam and Singapore, from 1995 to 2001.
Some of Mekong Capital's well known investments include:
- The Gioi Di Dong (MobileWorld) - Vietnam's largest mobile phone retail chain, with over 980 mobile phone stores and 122 large-format consumer electronics stores, and 39% market share nationwide;
- Vietnam Australia International Schools (VAS) - One of the largest K-12 private school chains in Vietnam, with 8 campuses for the 2016/2017 school year;
- Traphaco - The market share leader in the manufacturing, branding and distribution of traditional medicines and herbal supplements in Vietnam;
- Loc Troi Group - The largest distributor of plant protection chemicals in Vietnam, and a pioneer in vertically integrated rice processing in Vietnam;
- Phu Nhuan Jewelry - The largest jewelry retail chain in Vietnam, with over 200 stores;
- Asia Chemical Corp (ACC) - The largest locally owned specialty chemical distribution company in Vietnam.
Mekong Capital has achieved 19 complete exits of investments that were unlisted at the time of the original investment: Tan Dai Hung Plastic, Duc Thanh Wood Processing, Saigon Gas, Mai Son Retail, Masan Consumer, Minh Phuc Printing, International Consumption Products (ICP), AA Corporation, Goldsun JSC, Lac Viet Computing Corporation, Nam Hoa Wooden Toys, Digiworld, MK Smart, Ngo Han; Venture International, Golden Gate, FPT Corporation, Nam Long and Intresco
Mekong Capital's Divestment HistoryI
|Trade sale of controlling interest of company to a strategic investor||Saigon Gas||ICP||Venture International|
|Sale of 100% of Fund's shares in a directly negotiated transaction||Duc Thanh||Mai Son||Minh Phuc; AA Corporation||Goldsun; Lac Viet; Nam Hoa||Digiworld; MK Smart||Golden Gate|
|Sale of Fund's shares via securities markets||Tan Dai Hung||Masan Food||Ngo Han; MobileWorldII||MobileWorldII||FPT; Nam Long; Intresco; MobileWorldII; PNJII|
IIncludes only investments that were unlisted at time of Fund's initial investment
Mekong Capital is holding several other investments in companies that were unlisted at the time of the original investment and are now listed: Traphaco, Phu Nhuan Jewelry, Intresco and MobileWorld.
- Mekong Enterprise Fund, Ltd. - Launched in 2002, this fund focuses on private equity investments in Vietnamese SMEs, typically private family owned manufacturing businesses 
- Mekong Enterprise Fund II, Ltd. - Launched in 2006, this fund focuses on private equity investments in fast-growing private Vietnamese companies with excellent management teams, typically in consumer driven industries 
- Vietnam Azalea Fund, Limited. - Launched in 2007, this fund focuses primarily on pre-IPO investments, including privatizations
- Mekong Enterprise Fund III, Ltd. - A private equity fund launched in 2016, focusing on consumer driven industries in Vietnam, typically looking to deploy $8 million to $15 million per deal.
Vision Driven Investing
Vision Driven Investing is a private equity value creation framework which applies best practices from Private Equity, Executive Coaching, Leadership Development, Corporate Transformation and Change Management in a Private Equity context.
The framework involves aligning around a shared vision with investee companies, subsequently aligning around a business plan with clear milestones and measurable targets for achieving that vision, actively tracking progress against those milestones, and partnering with the investee company to execute the plan in a way that the company is empowered to achieve the vision regardless of the obstacles encountered.
Mekong Capital’s application of Vision Driven Investing is featured in a case study by Harvard Business School entitled Mekong Capital: Building a Culture of Leadership in Vietnam, as well as a case study by London Business School entitled Mekong Capital: The Importance of Corporate Culture in Emerging Markets Private Equity.
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Mekong Capital – among the most active fund managers in Vietnam with over 30 investments and some multi-bagger exits – places bet on its ‘Vision Driven Investing’ formula to enable portfolio companies to think long-term and deliver a minimum of 5x returns.
The Vision Driven Investing framework seeks to align stakeholders with investee companies to achieve bigger goals, to achieve higher multiples.
According to Chris Freund, founder and partner of Mekong Capital, restaurant chain Golden Gate and retailer Mobile World – the two that generated the highest returns for the fund – were the best performers in terms of applying the initiative. The companies set their goals and achieved the targets very quickly, and then they continued to set new goals, he said.
Mekong Capital exited Golden Gate delivering 9.1x return while its first partial divestment from Mobile World garnered 11x.
“Our goal is to create a new model of private equity investing, which is built on Vision Driven Investing that adds more value than what private equity funds normally do,” Freund told DEALSTREETASIA.
What is Vision Driven Investing? What is its core focus?
For the first six years at Mekong Capital, we tried really hard to add value to the companies, but it was not working. Between 2002 and 2006, we helped them do things like implementing six sigma and even recruited people but it did not deliver results. Typically in any year, only around one third of the companies would achieve the targets. I knew, we could not have achieved success like that.
Between 2007 to 2010, we undertook a huge restructuring under the transformation programme at Mekong Capital. In 2009, we created the first version of Vision Driven Investing. Back then, it had just five components and now it has 14.
It was based on a framework we had used for our own corporate culture transformation, which started with the idea that if you want to achieve something really big, you should set a really big goal. That’s something bigger than what’s predictable. You create clear milestones like an annual milestone, and after that you create monthly or weekly KPIs to see if you’re on track. Finally, whenever you’re not on track, you use it as an opportunity to get to the root cause, make some changes and take some new action that can get you back on track.
The original Vision Driven Investing was applied in companies like Golden Gate and Mobile World. We got them to create a five-year vision, in which they would normally grow five times. For Mobile World, the vision was to have an enterprise value of $50 million. They achieved it very quickly and then created a new vision.
After a few years, we realized that some other key pieces that contributed to the success of the companies were not part of the framework. So we created Vision Driven Investing 2.0, and a few years later, we revised it one more time to the current version Vision Driven Investing 3.0.
Basically, now it has 14 pieces which are the key success drivers of our ability to add value to investee companies. One example is using outside experts. Now for every investment, we get an outside expert involved, who has run a similar business. The first outside expert that we used for Mobile World contributed a lot and then we decided to do the same for all our companies. Little by little, we started to do it with more companies like Golden Gate and Vietnam Australia International School. It was consistently helping a lot, and the pace of improvement was faster.
Each piece of Vision Driven Investing is important. For example, being focused. We’ve seen that companies that are focused and do one thing really well, perform better than companies that try to do too many things at the same time.
Are you the first company to invent the initiative in Vietnam?
We created Vision Driven Investing ourselves but the original framework, the first five pieces, was based on a paper by the Harvard professor named Michael Jensen, called The New Model of Leadership. We were using that framework for our own transformation process. After that, we built on the same.
What are the advantages of applying the Vision Driven Investing method?
With our first fund, we were constantly frustrated because the companies kept doing stuff that looked illogical to us and not in best interest in the long term. For example, they did not want to invest in building the management team. For them, it was a logical thing to do because their timeframe was so short. All they cared about was the short term cash flow and they wanted to maximize that. When that was the goal, they did not want to spend time on salary, in paying taxes, and investing in big IT systems. The impact was that they never grew. So by creating a five-year vision and getting everybody focus around it, they would make a lot of investment in the short term that would lead to the long term goal.
That was the big difference between our first fund, which had not used Vision Driven Investing, and the subsequent funds.
For example, most companies in Vietnam do not follow management reporting. They might have financial reporting but are not measuring any operational KPIs. Similarly, a retailer might not be measuring things like store traffic, conversion rate or capital efficiency. For our early companies, they often misunderstood that they were more efficient than a lot of competitors. But looking at the data and comparing them to what was possible, they were not efficient at all.
The area they would probably change the most should be the culture. We get them to invest a lot in developing their culture.
Mobile World transformed their culture around 2009. Before that, they were not focused on the customers and did not listen to each other. After about six months, the board meetings were totally different.
Now with Mekong Enterprise Fund III, all of our investments are working to build a strong culture. But, of course, it takes time. The shortest time to see notable impacts is one year or probably more than that.
Is it a must to apply Vision Driven Investing?
We don’t force them (portfolio companies) to follow Vision Driven Investing, but we try to select companies that are willing to apply it. It’s a big part of how we choose our investments, and how open minded they are. If they think they already have all the answers and are not going to apply, we would not invest.
Now, in our investments, we have young management teams that are very open minded. They welcome every part of Vision Driven Investing.
Do they use the same methods to execute, or is the programme tailored for each company?
They could do it differently. We have a criteria in place as to how things must happen, but there are a lot of different ways to go about it. Even how they create the vision could be very different. Some might hire a third party to help facilitate while others can do it themselves.
Same thing with the corporate culture. For Vietnam Australia School, which we recently exited, I facilitated them to create the core values. But there are several companies that we really struggled with. The hardest might be the former state-owned enterprises. We had cases where we failed. Now we’re not having that problem with our new fund because it’s quite easy to get them to see the benefits of a strong culture.
We do not tell the companies what the vision should be. We let them generate it, but we have some criteria, like it has to lead to a very rapid rate of growth or be in the best interest of the shareholders.
Have any of your portfolio companies failed to deliver the goal of 5x return?
In the past, yes. Our goal moving forward is to achieve it consistently. There’s no guarantee that we will deliver that, but it is our commitment.
To ensure that, we do a lot of analysis to see which companies were successful and why, and what companies were not and what was missing. We had companies that implemented none of these, and they were the worst investments. Then we have some like Mobile World and Golden Gate who did all of those, they are our best investments. The performance is strongly correlated to how closely they implement the programme. It’s based on trial and error, and not on theory.
Please elaborate on your successful investments?
All of the new investments are just around a year or six months old, but I believe all of them will deliver 5x returns or higher. They’re taking a lot of action that we know will lead them to be successful. Ben Thanh Jewelry created a new brand called PRECITA and almost every week the traffic as well as conversion rate is increasing. Communication is happening more and more effectively. That’s the pattern across other companies. F88 (pawn shop operator) is in the process of transforming how they work together and how they hold each other accountable, so the results are getting better every month.
You have talked a lot about the results for the companies. How about the results for your fund?
Our goal is to create a new model of private equity investing which is built on vision-driven investing that adds more value than what private equity funds normally do. Most private equity firms are either transactional (buying something at the lowest price possible and sell it at the highest as possible) or doing financial engineering, leveraging the borrowing for part of the money they need to make the investment and then force the companies to pay a lot of dividends so that they pay back the debts. That’s more common in private equity.
There are some private equity firms that also focus on operational improvement, but we want to create a new model for emerging markets like Vietnam that adds a lot of value. What it looks like is to get a 5x return on most of our investments.
What’s your take on the opportunities and challenges for PE investing in 2017?
Firstly, the track record of Vietnam private equity is better than what a lot of people realize. There is a low awareness of the fact that Vietnam has a pretty good track record in terms of successful private equity investments. It’s becoming very competitive for large deals of $100 million or more, as a lot of regional funds are trying to invest in the country. But for smaller deals, it’s not competitive yet. I think it’s an attractive opportunity for Vietnam-focused firms like us.
The macro environment does not really matter in my opinion. It’s all about the management team, the culture and the companies. Are they willing to set a big goal and do what they need to execute? So it’s all the things in our control or theirs.