9 Jun, 2021

Despite pandemic, Vietnam's Mekong Capital manages fundraising, deals

The first in a series of articles looking at how emerging market private equity firms fared through the pandemic.

Private equity firm Mekong Capital has the advantage of operating in a country with an astonishingly low COVID-19 infection rate roughly 8,800 total cases for 98.1 million people.

When the pandemic began in March 2020, Vietnam held a nationwide lockdown for about six weeks and most businesses had to close. Following that, the restrictions were eased and the government targeted outbreaks with more precision, providing tracking apps that show the location of infection risk, according to Chris Freund, founding partner of Mekong.

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Though people wear masks and social distance, he characterized pandemic times as business as usual, working on-site with portfolio companies and meeting people in person.

"The government actually is doing a pretty good job on this," Freund said in an interview. "They fine-tuned it more. So now Vietnam is actually having the biggest outbreak yet, but it's much more localized in how they shut things down. Our whole team is working from the office in Ho Chi Minh City, but Hanoi's a different story, under more of a kind of a quasi-lockdown. It's all location specific."

At the firm level, Mekong had other advantages that supported continuity in its business through the pandemic. All portfolio companies are Vietnam-based and reliant on the strength of the domestic economy, with almost no exposure offshore.

Mekong's primary sector is retail and its larger investments are in F88, a pawn shop chain of businesses, and PharmaCity, a pharmacy retail chain. In March, it invested in Marou Chocolate, which makes chocolate from domestic cocoa.

The bricks-and-mortar retail sector was hit hard in the U.S. and Europe. But in Vietnam, although the sector's growth was down during 2020, it didn't go negative, Freund said. He estimated on average it grew around 2% in 2020 when it normally grows at 10% per year.

"Some sectors have certainly been impacted like elsewhere in the world, especially the hospitality sector hotels and restaurants, and in particular, movie theaters. That's not a sector that we invest in, but that's been hit very hard in Vietnam."

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Fundraising timing

Globally, in 2020 the big brand name PE firms tended to raise the most capital, which was almost exclusively done virtually during that time. Mekong had luck with timing, securing most LPs in late 2019 for its fifth fund, Mekong Enterprise Fund IV LP, which in January closed at $246 million, more than double its predecessor.

"We had most of our investor visits before the coronavirus hit," Freund said. "That was lucky because pretty much all of the investors in our fund were either existing LPs or investors who were able to come here and conduct due diligence in person [in late 2019]. So for us, this virtual due diligence thing never really panned out."

The firm won't have another fund in market for at least three years, he added.

There was some impact from COVID-19, however. Some European investors who were not existing LPs had to abide by a requirement to physically perform due diligence. "[Due to travel restrictions] they actually pulled out at the last minute because they couldn't come here. We did experience a bit of that."

Long holding periods

In terms of exits, the extremely liquid domestic market makes for an appealing exit channel. The Vietnam Ho Chi Minh Stock Index is up about 20% year-to-date through June 8 and 49% year over year, according to Bloomberg data.

Mekong hasn't used that channel yet. Freund said the firm typically holds investments for about 10 years, using an operational improvement framework called "vision driven investing."

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"It's based on, to some extent, a lot of back-testing on what really worked in our past investments over the last 20 years, and we keep refining it. And so therefore, it's very strongly correlated to the growth rate of the company and the IRRs that we achieve."

The firm's last reported exit was Mobileworld, a domestic mobile device retailer, in January 2018, after a 10.5-year holding period.

According to Mekong data, on exit, MobileWorld ran 2,000 store locations, up from seven stores on entry in 2007, resulting in a 57x return multiple for Mekong Enterprise Fund II LP over the lifetime of the investment.

Freund is optimistic about the domestic business environment, adding that the firm has ample dry powder, which some LPs are anxious to see deployed. Mekong has already completed some unannounced investments in 2021, and the intention is to do more deals in the year, he said.

"If you invest in a company that's not growing revenues, then you really screwed up on your pre-investment [due diligence] because there are so many companies that are growing here, they're not hard to find."

Race to vaccinate

Investor perception of Vietnam, given its comparative resilience through the pandemic, has improved, Freund believes. "Other countries have either mishandled the pandemic or imploded, like Myanmar. And that's part of the story of why the stock market here has performed so well [the low infection rates] reinvigorated investors' confidence in Vietnam."

However, one risk is the lack of vaccine supply. Less than 1% of the population is vaccinated.

It probably means Vietnam will only be able to open its doors much later than most other countries, Freund said. "Now there's a scrambling to try to get vaccines and trying to get a lot of them in the second half of this year, but [the government] is behind on that. The risk is that the lack of vaccines will delay the resumption of international travel."


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