Finnfund

Small and medium-sized enterprises are the driving force behind economic development in Vietnam, which is why Finnfund’s first investment in the country is the Mekong Enterprise Fund, a venture capital fund that specialises in supporting the SME sector.

The Fund’s target size is 25 million US dollars. Established in 2002, it had reached 16 million dollars by December. Finnfund’s share is $3 million. The other major financiers are the Asian Development Bank ADB, the Nordic Development Fund NDF and the Swiss Government.

The Fund is also seeking to make investments in businesses in Cambodia and Laos, in addition to Vietnam.

“This is the first venture capital fund to concentrate on SMEs in the Mekong Region,” says Chris Freund, managing director of Mekong Capital Ltd, which is managing the Fund. Its life is 10 years. It is not listed on any stock exchange.

Cheap labour Vietnam’s trump card

The Mekong Enterprise Fund aims to make investments in successful but unlisted businesses, primarily in sectors that increase the competitive advantage of Mekong countries.

“The competitive edge of the Mekong Region is based on human resources and low labour costs,” Freund explains. “This is why, for example, Vietnam’s position as an exporter of clothing, footwear, furniture and agricultural products has become stronger in the past few years.”

The Fund believes that labour-intensive exporters and local service sector companies will bring wealth and employment to the Mekong Region in the future. It intends to invest about 65 percent of its funds in Vietnam, 25 percent in Cambodia and 10 percent in Laos.

“Our first investment commitments are due to be made at the end of 2002,” Freund notes. “Investment planning is a long process in these countries, taking an average eight months.”

Experts enlisted for Fund management

The Mekong Enterprise Fund will be closely cooperating with the Mekong Project Development Facility (MPDF), a programme to offer expert assistance to enterprises in the Mekong Region.

The MPDF is supported by the International Finance Corporation, which is an arm of the World Bank Group, and various development aid donors, including Finland. It seeks to make the maximum use of local resources in providing management training.

“By cooperating with the MPDF, we will be able to offer immediate skills to our customer companies, in fields like personnel and financial management, as well as strategic planning,” Freund points out.

“Business methods that meet international standards are one more way that we can help a company to succeed. But the Mekong Enterprise Fund has no intention of intervening in the day-to-day operations of the enterprises.”

If necessary, expert assistance and training can be continued even after the investment phase, he adds.

Investments chosen with care

The average holding period for investments is expected to be five years. The average investment size will be approximately half a million dollars. Freund stresses that the Fund will select its investments carefully.

“The main criterion is management skill and commitment to developing the enterprise. There must also be a distinct division of responsibilities within the company and a clear view of the direction it should develop in.”

The honesty and integrity of business management is another precondition for Fund involvement, he says. Its partners are required to observe current laws, good accounting practices and other principles of business ethics.

Chris Freund believes that the greatest obstacles to developing businesses in Vietnam are related to accounting.

“They have very strong resistance to transparent accounting, because of a tax system that punishes entrepreneurial activities. Compared with other countries of the region, Vietnam has a high tax rate and inconsistent tax regulations. Taxes are not levied properly and fairly, either.”

In Laos, entrepreneurial activity is hindered by a very primitive capital market. There is better access to capital in Cambodia but it is hard to find competent business managers. This latter problem is a brake on developing enterprises throughout the Mekong Region.

For Finnfund, cooperation with the Mekong Enterprise Fund will be a valuable source of information and experience about the markets of Vietnam and the whole Mekong Region.

“This is useful know-how that we can offer to Finnish companies that are planning to set up in the region,” says Pekka Juusela, Regional Director at Finnfund’s Southeast Asian office