Following the flow of private equity

16:51 | 04/02/2013

Haas School of Business at the US’ University of California Berkeley, has been studying the role of private equity (PE) investment in emerging markets.

The specific case study is MobileWorld, a leading Vietnamese company in the mobile devices and home electronics/appliances sectors with PE backing from Mekong Capital. Berkeley’s professor Peter Goodson discussed the study with VIR.

Having  been a pioneer in establishing the PE industry for the last  50 years, how do you access the PE phenomenon today and in particular  its potential in Vietnam?

PE represents the single most powerful advance in global  finance in the history of mankind. The last 30 years, private equity has become a leading resource of capital in  western economies. Close to $6 trillion has been dedicated to this discipline at present. The idea of “smart money” playing a role in developing business potential has outpaced the growth of capital drawn from  public stock exchanges on a global basis. Managers simply are more attracted to working with partners  that are entrepreneurs with the shared goal of building the businesses they invest in rather than rasing capital through  what we term  “dumb money” from faceless public share owners.

Even though PE in Vietnam is in its early stages, it can be seen that   investee companies like MobileWorld have already enjoyed  enormous benefits from enlightened governance and firms like operational savvy Mekong Capital have really helped Vietnamese managers succeed.

Why did you choose MobileWorld for your study?

As you might know, one of the PE investment criteria is to select fast-growing and best-managed companies in potential growth industries, or the companies that are going down but potentially much upside down. MobileWorld has a very strong management team and is the market share leader in the retail sector of mobile devices in Vietnam -  a sector that has huge opportunities for growing because of  strong demand and consuming power of the Vietnamese young generation.

I believe MobileWorld has achieved significant development thanks to the partnership with Mekong Capital,  a leading PE firm in Vietnam. Additionally I believe  that emerging markets, especially Vietnam,  have  more attractive PE investment opportunities than are found in  the  overly crowded US market.  

MobileWorld opened its first store in 2004 but until establishing partnership with Mekong Capital in 2007, the company really accelerated its growth. For the first three years, MobileWorld boosted its stores to five in and around Ho Chi Minh City only. But after one year of the partnership, the company expanded from five to 15 outlets and rapidly grew since then. Currently, MobileWorld operates more than 200 outlets nationwide to position its market share leader of mobile devices, and its revenues have grown at a 60 per cent annual rate with the turnover in 2011 of $255 million. The active post-investment support and value creation from the PE investment to the development of MobileWorld are obviously an example of success.

What are the notable factors in this case study?

“People, people and people” matter the most in these success stories. The strong management team of five capable professionals, all of whom had prior managerial experience with leading companies in Vietnam, led a team that have trained the most effective retail sales force in Vietnam. These five people are also the founders of the company. The company’s customer service level is also critical to its success.  

How about the performance of - the expansion of MobileWorld into a new strategic area, consumer electronics and home appliances from its proven retail concept of small stores in city centres toward a larger format? Is it true that this concept has not grown as expected? What is the responsibility of PE investor in this situation?

Why do we expect overnight success to happen in a new concept? That is rare. Patience and learning from mistakes makes great PE investment work in places like Vietnam. Whether is the next MobileWorld success or not will be determined in the future. Too often we see criticism of   things that don’t work immediately without realising that “overnight success” is usually a result of 10 years of hard work. The job of  the  PE master is to nurture new initiatives and help make them work by trial and  error. Plans are but expectations that need shaping, so we will see in a few years how it all works. But it is most important to try new approaches in a growing market like Vietnam. Be an innovator, find what works and build it.

The decision of expanding into a new strategic area - consumer electronics and household appliances meant launching a new brand, straying from its proven retail concept of small stores in city centres toward a larger format, and venturing into new product categories where the company had few existing supplier relationships.

Mekong Capital’s consultations with the management team ensured that MobileWorld’s managers carefully considered the new concept’s strategic fit with the company’s core activities - including potential synergies as well as constraints - and also the risks associated with entering a new business. This strategic process helped shape the company’s business plan and contributed to a successful start. For the businesses in emerging markets, the difficulty and mistake that the company might make  today is to quit before the miracle happens. A  learning curve is a good thing.

How will the study be used after its completion?

The MobileWorld case study will be used as one of teaching tools at Haas School of Business at Berkeley and for other students at numerous leading US business schools. Besides the purpose of introducing the role of PE investment in emerging markets, the MobileWorld case emphasises the high added-value for Vietnamese business leaders of partnering with savvy PE masters that have vast experience in improving business operations.

The accomplished PE masters are like top level consulting firms, only they have their money at risk in making sure the outcome is realised. In other words their investment strategy hinges on helping managers succeed rather than receiving a fee for advising. This in turn offers tremendously affordable advantage for growth companies like MobileWorld.

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