Lessons from Vietnam

What makes a successful investment in Vietnam? PEI asked two GPs with long histories in the country.

Vietnam is still transitioning into an emerging market. Corporate governance is often weak, management talent is scarce and the regulatory regime doesn't always protect investors. In this environment, what have private equity firms learned?

Chris Freund, managing partner of Mekong Capital, which was set up in Ho Chi Minh City in 2001, suggests setting very high standards for the management team. Don’t tolerate amateur teams – get rid of underperformers and proactively look for professionals. “That’s been the most consistent predictor of which companies did well and which didn’t,” he says.

Another lesson – which he admits sounds clichéd – is that corporate governance really does matter. Companies with a well-functioning board made up of people who have something to contribute invariably perform much better. “They can deal with things that wouldn’t get dealt with if the board was dominated by one person.” 

Choosing who you partner with is more important than choosing your wife. A wife you can at least divorce but here it is very difficult to divorce a partner. You risk not only reputation but the capital invested

Hans Christian Jacobsen, managing partner, PENM Partners

He also recommends going to great lengths to ensure alignment of interest. The mistake is to assume alignment between the GP and top management. Many companies in Vietnam have a short-term perspective, which means the management may not want to spend money on salaries. “If the goal is to build a sustainable business that grows every year, that doesn’t make sense,” Freund says. “It’s a lot of work to get everyone around a common set of goals.”

Especially critical is the choice of founder or entrepreneur in Vietnam, adds Hans Christian Jacobsen, managing partner of PENM Partners, formerly a unit of Denmark-based BankInvest, which has been in Vietnam since 2006. 

“Choosing who you partner with is more important than choosing your wife. A wife you can at least divorce but here it is very difficult to divorce a partner. You risk not only reputation but the capital invested.”

Jacobsen has also learned to structure deals carefully. Straight equity may not be the most suitable approach – creative use of tranches, convertibles or high-yield instruments may offer better risk protection, he says. 

Due diligence is a challenge because no public records database is available, but it can be done. Jacobsen said one positive sign is if the target company is checking into the private equity firm. “The most successful companies we invested in spent a lot of time investigating us.”