1. March 2011 • Issue 48
in focus CHRIS FREUND | MEKONG CAPITAL
Team coach
Vietnam-focused Mekong Capital has
spent the last few years overhauling
its team composition and investment
48 approach in search of better returns.
Chris Freund, founder and chief
executive, tells Jenny Blinch why he felt
the restructuring was necessary
I
f private equity firms have a collective reputation for opac-
ity, then Chris Freund, founder and CEO of Vietnam-focused
Mekong Capital, is doing his best to break the mould.
As one limited partner who has visited the firm’s base in Ho
Chi Minh City put it, Freund could almost be said to “over-
share”. There is something of the confessional in his completely
frank approach to discussing Mekong’s
far-from-straightforward evolution since
“The critical thing it was founded in 2002.
But then Freund, originally from
in 2007, when the Chicago, defies convention in many
transformation process ways, and has set Mekong on a path
that ensures it does the same. After
started, was the all, not many private equity firms in
realisation that we the world – let alone in Asia –have a
“chief empowerment officer” on their
weren’t really adding management team, but at Mekong the
value in the post- role, which focuses on the mentoring of
Mekong’s investment staff, is considered
investment phase” central to the successful functioning of
the business.
OVERHAULING THE BUSINESS
It wasn’t always this way though. In fact, for the first four to five
years of Mekong’s existence, the firm did little to stand out from
the crowd. Its maiden fund, Mekong Enterprise Fund (MEF),
launched in 2002 and collected $18.5 million from an LP base
made up primarily of development finance institutions. That was
followed in 2006 by MEF II, launched in 2006, which raised a
total of $50 million from an LP base largely consisting of family ➟
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2. in focus March 2011 • Issue 48
offices and high-net-worth individuals. “I think people are Although the KPIs differ for each
The aim with both funds was to seek investee company, one they all share is
out minority investments in companies watching curiously net profit: “If our companies set high
with strong management teams in to see if what we’re net profit targets and then achieve
mostly consumer-driven businesses and those, it should be strongly correlated
then work with the management to doing is working” with reaching our target IRR,” Freund
grow the business. And though this is adds. That target IRR is 40 percent
exactly what the firm did, Freund began our companies.” gross across the firm’s private equity
to feel increasingly dissatisfied with Further analysis led Freund to believe investments.
both the results he was seeing and the that under-pinning Mekong’s failure to
way Mekong Capital itself – which had succeed on the scale he had envisioned TEAM COACHING
expanded rapidly – was evolving. was a lack of accountability – both Unsurprisingly, one maxim that Freund
March 2011 • Issue 4
“Back in 2006/07 I felt like I’d internally and also at Mekong’s investee stands by is ‘You get what you measure’.
had more than I could handle – I companies. However, he also describes Mekong’s
was suffocating under a mountain of “In the very early years, if some investment style as ‘executive coaching’
accountabilities and felt really alone,” companies didn’t achieve their targets, – a name derived from the industry that
he says. “There were a few other people they had explanations that seemed Freund called on to lead Mekong through
in the organisation carrying more than reasonable,” he says. “But after about much of its transformation and whose
their weight, but I felt I couldn’t really five years, it became evident that it was vocabulary peppers his speech.
rely on the team as whole to deliver the a recurring pattern that our companies “A lot of our tools are from the
results we needed.” had excuses when they didn’t meet their executive coaching world, and we’ve
He adds, in what is a typical refrain: targets rather than being responsible applied intensive training for our team
“Later I realised that I was the person for what wasn’t working, and we were members to master those tools,” he
who had created that situation, and accepting those excuses rather than explains.
therefore I was responsible to fix it.” holding them accountable.” In line with Freud’s emphasis on
And so Freund embarked Mekong This line of thinking ultimately led internal and external accountability, the
on a period of soul-searching, and Mekong to develop an approach that measurement and coaching that happens
ultimately reinvention, that was to last it terms ‘Vision Driven Investment’. at portfolio companies is repeated inside
almost two years. Determining the Essentially, it means that Mekong the firm. The need to constantly stop and
trajectory of the transformation process portfolio companies are given a set assess internal performance, became,
was his increasing scepticism of the of clearly defined goals – or key says Freund, the raison d’être for the chief
firm’s ability to actually deliver desirable performance indicators (KPIs) – to work empowerment officer role, which, he
results at all. towards. says, “kind of evolved over time”.
“The critical thing in 2007, when the “Our approach is kind of unusual, “Everything we do has very clear KPIs
transformation process started, was the but there’s really no rocket science to and measurable targets. When a target
realisation that we weren’t really adding it,” says Freund. “It’s about making sure is not met we call that a ‘breakdown’. A
value in the post-investment phase,” he management has a clear vision, getting lot of meetings our chief empowerment
states. their team aligned around that vision, officer has are with team members
“While we were able to get then making sure they have a clear plan to establish the sources of those
companies to achieve some changes, for with annual milestones for achieving breakdowns,” he explains.
example [instituting the practices of] the vision: clear monthly KPI targets, There are those who would dismiss
LEAN manufacturing and Six Sigma, monthly management reporting to track this as navel-gazing, and Freund is aware
these changes weren’t really resulting performance against KPI targets, and that Mekong’s approach comes across as
in the companies generating sustainably root cause analysis whenever they are wacky to some.
high growth in net profit. But we knew off-track. It’s a pretty straightforward “I think people are watching curiously
that the most reliable way to get to common sense approach, but we’ve to see if what we’re doing is working,”
high investment returns was to deliver just done it very systematically and he acknowledges.
consistently high growth in net profits at comprehensively.” Among them may be some of
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3. in focus March 2011 • Issue 48
48
Freund: Mekong’s approach is unusual, but it’s ‘not rocket science’
Mekong’s former employees. At the “Politics are totally absent,” he goals of the process properly.
time its overhaul began, Mekong had asserts. “Now it’s really a team, in “At the very beginning, I contextualised
a reputation for high staff turnover, which each member is committed to the transformation as being a little
something the process of change initially each other’s success, and to the team’s too much about values, and not about
exacerbated. In fact, Freund admits, success overall.” results,” he says. “Those LPs that had real
over the period of a couple of years In fact, Freund says, the firm’s management and leadership experience,
from the starting point of the firm’s culture has become “a magnet for like current and former CEOs, easily got
rethink, Mekong lost “over half ” of its people who are excited about teamwork it – they understood the importance of
original staff. and leadership”; right now, he says, the strong company values – but some LPs
“At the beginning of the firm is fully staffed and it receives “more didn’t really see a connection and they just
transformation, we went through a job applications than ever before.” wanted to see the results.”
phase of active resistance and then Today, Freund is increasingly
through a phase of people sitting on EMPHASIS ON RESULTS confident investors will like what they
the fence,” he recalls, adding that the The commitment of Mekong’s staff – and see – although he admits it took a good
fence-sitters ultimately went their own especially its “middle bench” – is one year-and-a-half from the launch of the
way too. factor highlighted by the LP who recently transformation before positive results
“In retrospect, there would have spent time with the firm. started to be seen.
been less resistance if I had spent more In a region where many private equity “November 2007 was the very
effort to inspire people one-on-one firms have been built up around one or beginning and it was really only by about
before commencing the transformation two key-men or women, Mekong’s strong early 2009 that we could start to see the
process,” he notes. middle management bodes well for its real impact,” he says, adding that by mid-
However, Freund asserts that while sustainability as a franchise, notes the LP. 2009 it was clear to him Vision Driven
three or four years ago “each of our However, investors need to see Investing was contributing to faster net
employees probably had a different view more than that to be convinced of the profit growth at portfolio companies.
about the future of Mekong Capital”, effectiveness of Mekong’s rethink. “For example, companies were
those who sat out the corporate rethink Freund admits that early on – as with increasingly organized around clear targets
– or have joined the firm since – are its staff – Mekong’s makeover divided and KPIs, and they were dealing with
all “aligned around a bold vision and a opinion among its LPs, but he puts this obstacles quickly and proactively rather
shared set of values”. down to his own failure to articulate the than waiting and hoping the obstacles
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4. in focus March 2011 • Issue 48
would go away,” he says. “There was Freund admits that traditional private
more fact-based decision making, more equity investors are thin on the ground.
accountability and more alignment around “Investing in private companies
common objectives.” involves seeking companies out, building
How does this translate into hard strong relationships with those companies,
numbers? MEF, the 2002 vintage fund, and implementing clear programmes
currently has a gross IRR of 3.6 percent, for adding value, and there are only a
says Freund – pretty far removed from few legitimate investors in that space in
Mekong’s ideal 40 percent. The gross Vietnam,” he says.
IRR of MEF II, meanwhile, with its 2006 Mekong itself dipped into the shorter-
vintage, is currently hovering around 26.2 term investment space with its $64
percent – and Freund is confident it is million Vietnam Azalea Fund, originally
March 2011 • Issue 4
gradually on the up. conceived as a pre-IPO fund with the
“One upcoming exit should get the IRR ability to recycle capital.
up to around 35 percent or higher within However, the strategy did not prove
the next few months,” he says. a success, as Freund readily admits: “The
It is with these numbers that he hopes “Back in 2006/07, Azalea fund closed in mid-2007 at the
to convince LPs to come on board with peak of the stock market boom, [so] we
MEF III, which is due to launch soon and I felt I couldn’t really overpaid on the first four or five deals
will “follow what’s been working in MEF rely on the team as from a P/E ratio perspective. So we
II”. The fund has a maximum target of $150 have actually had to climb out of that by
million and aims to hold a first close in the whole to deliver the working closely with the companies to
first half of this year. results we needed” ensure they set high net profit growth
The larger fund size means Mekong is targets and actually achieve those.”
preparing to tap a new LP base – Asian The current IRR on that fund is
fund of funds – which, he notes, are “the of favour,” he acknowledges. He states negative 3.0 percent, and Freund says
most thorough in terms of due diligence”. that concerns over exit track record, a Azalea’s strategy has now migrated “as
Freund envisages Asia-based fund of traditional stumbling block in Vietnam, much as possible to focus on investing in
funds could provide between 30 and 45 have been somewhat mitigated by the companies in which we can ensure that
percent of MEF III, and says: “A year ago spate of successful exits seen from firms attractive net profit growth is achieved,
when we were meeting LPs they were like Mekong over the last six months. rather than just trying to arbitrage
potentially interested but not really moving However, a new concern is inflation and liquidity premiums by listing”.
forward with clear actions, whereas now currency depreciation. At the time of The experience has left Mekong with
they are actually preparing to invest – going to press, inflation in Vietnam was no intention of launching another pre-IPO
such as conducting due diligence visits, at a 23-month high and was predicted fund.
reviewing drafts of the relevant legal to climb even further, and the Dong had “[The strategy] assumes some of the
documents, etc.” suffered four currency devaluations in the upside is coming from getting in at a
“The momentum is definitely building,” past 15 months. discount prior to the listing, but success
he adds. “There are some investors that are is somewhat dependent on macro factors
getting stopped by that – they want to see that are outside of our control,” he states.
QUESTION MARK OVER VIETNAM some guarantee the currency has stabilised “Sometimes, you don’t even know when
One LP notes that even after Mekong has before they proceed,” says Freund. the window is closing, like if the stock
convinced LPs that its investment approach Mekong will also have to combat a market goes down unexpectedly. And
is worth backing, it still has to convince fair amount of scepticism from LPs on that approach of investing in pre-IPO or
them that Vietnam is too. the nature of “private equity” in Vietnam OTC-traded companies has lower barriers
It’s a challenge that Freund is only too – where pre-IPO investments have been to entry – you don’t even really need an
aware of. perceived as private equity practitioners’ office here to do that. Any investor can
“Right now Vietnam is somewhat out primary plays. just hire a broker for that.”
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5. in focus March 2011 • Issue 48
LEARNING CURVE “We had one company, a restaurant “We have set ourselves the goal of
Instead, Mekong plans to continue its chain operator called Golden Gate, achieving the most consistently high
focus on the path that it has established which tried to expand into Singapore investment returns in Asia by 2015 –
with its Mekong Enterprise Fund series: and that hasn’t really worked out at all,” albeit that right now we’re not yet close,”
longer-term investments in private he says. Freund states.
companies, mostly in consumer-driven “There’s a natural progression of “We’re just finalising now how to
sectors such as retail. management sophistication that they measure that – most likely the measure
As such, the strength of the need to go through. In the first stage we use will be the percentage of exited
management team behind the company they can only manage domestically – it’s investments with a gross IRR above
is crucial, Freund states, saying that where China was five years ago [before] 40 percent among all GPs in Asia,” he
Mekong generally seeks out youngish some Chinese companies like Huawei, continues.
management teams – typically in their Haier and Lenovo started to really build “The whole private equity industry can
48
late thirties, early forties – who will traction outside of China.” be successful together, but we want to be
usually have some experience of living The parallels he sees between the the ones to raise the bar.”
or working abroad. Vietnam of today and the China of You can be sure that if for some reason
“We don’t rule out investing in yesterday have led Freund to seek Mekong doesn’t succeed in that aim,
former state-owned companies, but advice from several China-focused Freund will be candid in sharing the firm’s
nine out of 10 times in any sector the private equity firms, including CDH attempts to get there. n
best-managed companies will be from Investments, New Horizon Capital,
the private sector. And our strategy Hony Capital, Orchid Asia and Capital
is to select the most well-managed Today. Snapshot: Mekong Capital
companies in the sectors we have “We have found everyone very Founded: 2002
targeted,” he says. open to that,” he says, adding: “We’ve Market: Vietnam
In terms of post-investment also found the regional and global PE Headquarters: Ho Chi Minh City
development, Freund says, “For firms to be very open whenever we Funds under management: Mekong
any business that’s about retail and have questions about specific deals or Enterprise Fund, 2002, $18.5 million;
distribution, the theme of building out a specific industry. For example, KKR Mekong Enterprise Fund II, 2006, $50
presence provincially and nationwide recently helped us to understand one of million; Vietnam Azalea Fund, 2007, $64
million
is coming up all the time. Companies the sectors in which we are considering
Funds in the pipeline: Mekong Enter-
are certainly expanding in Ho Chi making an investment for the first time.”
prise Fund III, launch scheduled soon
Minh City and Hanoi, but the really big
with first close anticipated in H1 2011;
growth is coming from establishing a big CLEAR TARGET
target of $150 million
footprint in second and third tier cities.” Freund is optimistic that Vietnam will one
Focus: Minority investments, generally
One example from Mekong’s own day catch up to China, not just in terms of
with a bite size of around $10 million,
portfolio is Mobile World, which, at sophistication, but also in terms of track typically in consumer-related private
the time of Mekong’s initial investment record. sector companies
in May 2007, had five stores in Ho “In China there have been lots of
Chi Minh City. That number has now really successful investments which
increased to 80 stores nationally and returned, say, 5x or 10x the capital
the company plans to open 140 more in invested. In Vietnam, there haven’t been
2011. as many examples as for China, but the
While a post-investment growth momentum is building,” he says.
plan for companies in other countries His ambitions for Mekong Capital
in Southeast Asia, such as Malaysia, are even greater and – as you would
may involve expansion into the region, expect of the firm that introduced Vision
Freund admits it is slightly premature Driven Investment – are set out as a
for Vietnamese companies to be measureable target to be reached within a Vietnam: Domestic expansion a good
expanding outside the country. set timeframe. growth strategy for most consumer-
related plays, says Freund
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