Seeing the opportunity to set up the first fund in Vietnam to focus uniquely on investing in private companies, Mekong Capital launched Mekong Enterprise Fund (MEF) in 2002 at $18.5 million in committed capital. The Fund was fully invested in 10 companies by the end of 2005. We expected that our investments would be into private companies that would emerge as the leading private companies in Vietnam. Plus, due to their fast growth, they would overtake SOEs to become the largest companies in Vietnam within ten years or so.
However, for the first 5 years, Mekong Capital made an ongoing series of mistakes and didn't get many things right.
MEF invested mainly in family-owned businesses managed by first-generation Vietnamese entrepreneurs, which proved very difficult to change or build up their management team.
Further, the Fund pursued smaller sized companies with significant exposure to manufacturing and export-related industries, which were cyclical and proved difficult to capture much shareholder value given that they typically didn't own anything of strategic value (like a brand, a distribution channel, intellectual property, and others).
Moreover, we thought acquiring significant minority stakes will enable the Fund to cooperate closely with its investees. We tried to add value by sharing our useful ideas, providing solutions, and sometimes doing work for the investee companies. Hence, we applied value-addition programs focusing on implementing operational performance enhancement projects (such as six sigma or lean manufacturing systems), financial management, human resources recruiting, and corporate governance advisory. We were going to Board meetings and giving them useful suggestions. We even hired experts in Six Sigma and Lean Manufacturing to show the companies how to improve their operations. However, no matter how great our ideas were, this just had little or no impact.
Compounding the problems, we tried hard but typically failed to add value to these companies. And, in the end, we also made many mistakes in the timing of exits.
Around 2005, we noticed the investee companies who had domestic business in Vietnam tended to deliver more stable growth and higher margin from these domestic businesses. This made us curious to explore other domestic consumer-oriented companies in the next funds.
MEF is no longer active and has completed its winding-up procedures, ultimately returned approximately 100% of the value of its original capital to shareholders, which was far under our expectations. However, the opportunities and lessons learned from it had led to our second fund, Mekong Enterprise Fund II, implementing lots of improvements and becoming one of the best performing funds in the history of Asian private equity.