Another Asian strategy

Another Asian strategy 2006-01-25 Ken MacFadyen <P>It only took a couple of  high-profile homeruns to get Western venture firms high on Asia. <FONT color=#99926b>Draper Fisher Jurvetson</FONT>’s (DFJ) winning bet on internet search engine <FONT color=#99926b>Baidu </FONT>and <

It only took a couple of  high-profile homeruns to get Western venture firms high on Asia. Draper Fisher Jurvetson’s (DFJ) winning bet on internet search engine Baidu and The Carlyle Group’s investment in online travel outfit CTrip helped spark the current flood of interest in the Chinese market, a rush that includes the likes of Sequoia Capital, Accel Partners, Sutter Hill Ventures and even Intel, which launched a new VC fund focused exclusively on the region.

While most groups talk about an “Asian strategy” alongside their push into China, many are leaving out the rest of Asia as part of that model. Areas to the South, that while they may not have the scale of their Northern neighbour, do have many of the same qualities that made China appealing back when DFJ and Carlyle were among the first to be drawn to the market.

Chris Freund, managing director, Mekong Capital

Currently, there are few venture groups that target the Mekong region, so named for the snaking river that flows through Vietnam, Laos, Cambodia and Thailand. Vietnam, in particular, has seen a rising interest locally, amid strong GDP growth and the prospect of World Trade Organisation ascension. A few of the more notable investors include IDG Vietnam Ventures, an offshoot of IDG Ventures, as well as the PXP Vietnam Fund, Dragon Capital and VinaCapital, which primarily target privatisation investments. Mekong Capital, meanwhile, is currently the only VC group that focuses exclusively on private companies in the region.

Mekong Capital’s Chris Freund, a managing director at the firm, tells PEO that Vietnam, where Mekong is based, is in fact very similar to China. He cites that each country is moving rapidly toward a market-based system after decades of operating in a Communist economy, and both Vietnam and China share many of the same legal structures, particularly as they pertain to foreign investment. Moreover, Freund describes a market that is largely driven by manufacturing growth and an opportunity set that features privatisation initiatives set up by their respective governments.

There are some notable differences, many of which might even give the Mekong region a leg up on China in terms of potential investment upside. “Vietnam is about seven to 10 years behind China in many ways,” Freund tells PEO. “One of the impacts of this is that labour costs and executive salaries in Vietnam are typically about one third less than in equivalent locations in China.”

Meanwhile, even as labour is relatively cheap, the culture resembles that of Eastern parts of Asia, areas that tend to emphasise perseverance, according to Freund. “[Vietnam] has a Confucian culture that values education and hard work,” he adds, further noting, “Vietnam is culturally more similar to East Asia than Southeast Asia”.

Like any emerging market, though, the Mekong region can be hairy. The biggest challenge Freund runs into is that many of the companies he looks at do what they can to evade taxes. Since Mekong Capital will only invest in tax compliant businesses, an investment from the firm can sometimes be considered a step back. He says, “In effect it is like a tax on them for having us as an investor”.

To be successful, Freund says that only a very active investment strategy can work in the region. And that, Freund reasons, is why there are still very few groups targeting the area. He notes that even as the GDP has been growing at around 7.5 percent for the past ten years, it doesn’t necessarily translate into wealth for fund investors.

“I don’t think that it’s easier for institutional investors to make money [in the Mekong region] than anywhere else,” he says. “I believe only a very active hands-on investment style can be successful in Vietnam, but a similar style would probably be successful anywhere”.

With that said, if Mekong can find success, “anywhere” could become Vietnam for Western groups that want to find similar riches.