By Chris Freund, Partner, Mekong Capital
When Mekong Capital launched its first fund in 2002, our strategy was to be the first private equity fund in Vietnam to focus on private-sector companies in the country.
At that time there were limited investment funds actively investing in Vietnam, which focused on investing in former state-owned enterprises. I was confident that private companies would be much more proactive about building up their management teams and applying best practices compared to former state-owned enterprises, but until then there was not much track record of investments in private sector companies in Vietnam to validate my thesis.
Five years later, the cold hard facts of reality hit me like a piano falling on my head. None of the companies in which we had invested had made any sustainable progress in building out their management team. Most of the companies had not been growing as expected or achieving their targets. Normally, we knew what the companies needed to do, but they just did not have people in their management team who could reliably execute. Some companies had recruited a professional manager here or there, but those people would normally leave after a few months.
By 2007, we realized that recruiting powerful and effective management teams was critical. That meant that we needed to bring recruitment capability in house within Mekong Capital so that we would be directly responsible for recruiting better managers into our investee companies. We hired an in-house executive search professional and started recruiting. We sent over hundreds of CVs to our investee companies, and they would hire some of those people, but only a low percentage were ultimately successful. We still had a long way to go to get strong management teams into our companies – providing resumes was not enough.
Around this time, we launched our internal transformation and restructuring process. We kept looking at what was and was not working, and what was missing. This whole transformation took around three years to complete. By 2010 we had developed a value creation framework called Vision Driven Investing, which was based on what was working well in our best performing companies and what was missing in our worst performing companies.
Over time, Vision Driven Investing evolved into a framework with 14 elements and a 0-5 maturity-model scoring system for each of those 14 elements. A company like MobileWorld, which was a 57x return for our fund, was an example of a top score in Vision Driven Investing elements such as ‘Management Team & HR Capability,’ ‘Core Values & Culture,’ ‘Customer Driven,’ ‘Delegation & Accountability,’ ‘Digital Transformation’ and several others.
All 14 elements of Vision Driven Investing are important for a company to achieve its long-term goals. However, there are two core elements without which none of the other elements can even be implemented. Those are ‘Management Team & HR Capability’ and ‘Core Values & Culture,’ which are the foundation layers on which everything else is built.
The Value of Talent
In Vietnam, there are many people with great attitudes who want to do well, but there is a considerable shortage of professional managers who can reliably manage a department to deliver what they are accountable to deliver. This is true across all sectors, but is especially true in sectors that have not attracted a lot of direct foreign investment. To the extent that a company proactively builds the strongest management team in its sector, it will eventually conquer its sector. This has been the most consistent predictor of success, or lack of success, across our portfolio of 35 investee companies since 2002. It is not about political relationships, the early-mover advantage, how much experience a company has, who has the best ideas, who has the most insightful strategy or even deal structuring – it all comes down to the management team. The best management team wins.
Likewise, in Vietnam most companies do not have a deliberate corporate culture – they just ended up a certain way, normally heavily influenced by the personality of the founder or CEO. Imagine the difference between a company that values integrity, where employees reliably honour their word and do what they are accountable to do, compared to a company in which people constantly drop the ball, cannot rely on each other and then blame others for their mistakes. Similarly, consider a company in which people directly communicate and handle whatever is not working vs. a company in which people are scared to speak up and tolerate a dysfunctional environment. As with a strong management team, strong core values are another layer in the foundations of a successful company.
Learning from Mistakes
When we started to help companies with recruitment, we had some early successes but also made lots of mistakes. Sometimes the job descriptions did not exist or were unclear, and later we realized that the person we recruited was not actually strong in the areas in which we most needed that person to deliver results. Or sometimes we were not sufficiently thorough in our reference checks and ended up recruiting someone who interviewed well but lacked a strong track record. Eventually we realized that thorough reference checks are far more important than interviews for predicting who will be successful in a role.
Today Mekong Capital has a Talent & Culture Team comprising four people. In the first five months of 2019, the team filled 26 management positions at our investee companies, a pace of around five per month. In addition to identifying, evaluating and reference-checking candidates for our investee companies, the team helps with onboarding, ensuring job descriptions are clear and contain clear deliverables for each role, and even play a mentoring role to ensure each new person’s successful integration into the investee company.
Likewise, it was not easy at first to get our investee companies to build a strong corporate culture. We had some early wins like MobileWorld, whose five co-founders saw the benefits of a strong culture and provided the leadership to thoroughly implement it. Many of our investee companies would talk about the core values but not really apply them. Sometimes the CEOs would not apply the core values themselves, and we found that if the CEO is not a model of the core values, no-one will be. Sometimes the mangers had a view that the core values were outside of their urgent priorities – they would get around to them eventually. Often, employees were of the view that the core values were aspirational, or for marketing purposes, not that it was their job to apply the core values in their actions every day.
Through much trial and error, Mekong’s Talent & Culture Team learned to work closely with our investee companies to introduce or design workshops and other activities to develop their corporate cultures around their core values, encouraging them to practice applying their core values. At first there is typically a lot of resistance, but the more that a company’s management team practices the application of core values in their day-to-day actions, the more they will see that it works and will keep doing it.
Mekong Capital’s focus on developing talent and culture at our investee companies, and our in-house Talent & Culture Team, have proved essential in ensuring the success of our investee companies. Visit Mekong Capital’s website or take a look at their profile on Preqin Pro to find out more.
This blog is part of Preqin’s Southeast Asia Private Equity & Venture Capital series, bringing you insight from leading GPs and LPs across the region. Sign up to our newsletter to be notified when the full report is released at the end of August, as well as additional content related to this series.