GP Interview: Mr. Louis Nguyen, Chairman & CEO of Saigon Asset Management

General News 5th November, 2008

T&I- Louis Nguyen grew up in Sunnyvale, California, next to San Jose, in one of America’s largest Vietnamese communities, into which his family had immigrated after leaving Vietnam in 1975, during the last day of the American occupation of South Vietnam, when he was 12. His father had been a military officer based in Saigon, so the family had a relatively short path to the US; spending a month in Subic Bay Philippines; then one month in a US Navy base in Guam; then another month at Camp Pendleton in Long Beach, Southern California and finally, moving to Sunnyvale, in Northern California. He attended secondary school in San Jose, in a family of “typically tough Asian parents,” who wanted him to excel as a student. He went on to attend San Jose State, in downtown San Jose, where he studied accounting, because, he says “every company needs an accountant,” and despite the fact that he never wanted to enter business as a young man; but being the eldest son, he had both the burden and obligation, to be the wage earner for the family, so he graduated with his degree in accounting in 1987.

Immediately upon graduation, he joined KPMG’s Silicon Valley practice, in their audit department, where he audited government entities and more importantly, Silicon Valley technology companies; his first exposure to the world of high-tech finance. He spent a decade in the heart of America’s technology center, working for several of the world’s best known hardware and software companies. He worked with KPMG for almost three years, with clients from San Francisco to Gilroy, mostly among public companies. He left KPMG in 1990 to join Apple Computer, working under John Graziano, one of Apple’s long time CFOs. During his three years at Apple he worked in two different divisions: the Fremont manufacturing plant, designed by Debbie Coleman, which at the time was one of the world’s most efficient, most automated manufacturing facilities. It was known not just an exemplary model for American manufacturing, where Apple produced computers and monitors, but as an example of what the shirtsleeve, shorts-wearing work environment could achieve when mixed with state of the art technology. Those who have grown up alongside the IBM/Windows world, won’t recall, but in the Valley it was widely recognized that one of Apple’s great achievements was to mix both best technology and best practices, using ISO standards, the continuous process improvement philosophy and Deming theories, for its factories in a manner that has since been rarely replicated. In his other role at Apple, Nguyen worked in the Apple Sales and Marketing division, where he was responsible for planning, forecasting, and consolidation work.

Nguyen remained at Apple until 1994, when he joined NEC in Silicon Valley, where NEC was making semiconductor parts as well as desktop and laptop computers. Nguyen joined NEC just as it was acquiring Packard Bell and for whom he was given the thankless job of a divisional controller for NEC, responsible for post-merger consolidation of the two companies, known at the time to its employees as “Packard Hell,” where the two cultures – Israeli (Packard Bell) and Japanese (NEC) – tried to find a common ground at a time when the market for desktop computers was imploding in America. Neither was to survive as a significant maker of personal computers, but they struggled mightily, if unsuccessfully to do so. Nguyen was tasked with improving cost savings, commodity purchases, the reduction of operating costs and improvement of the costs of good sold. Looking back on those years in the Valley, Nguyen says that he cherishes the experience, working for some of the worlds toughest, most frugal companies, working in an environment where a nickel or a penny in savings on a single component in a system would make (or lose) tens of million of dollars for a corporation.

That experience provided him with the kinds of insights into operations that many people in the investment community will have never experienced. Reflecting on that years later, he says that the problem for most of the investment community, even among those with financial experience or training [in finance or banking], is that they lack insight into the operations of the companies that they purport to understand when they invest. “When these General Partners come out of the Ivy league schools, then go to work for the top investment banks, only a few [of them] really have any hands-on operating experience,” a simple fact reflected in the kind of inflated, big concept investment style that has transmitted itself to Asia in current times.

How today’s Asian GPs are expected to understand the cost and operating environment of today’s largely integration-oriented Asian manufacturing, is something that Nguyen cannot fathom. The management of commodity type components, either hard good or services, whether for a cell phone, a refrigerator, a laptop or other kinds of products, is a lost art for many of today’s US-transplanted investors. Nguyen says that if you don’t understand inventory issues, supplier issues, component supply and how to project costs and supplies, [portfolio companies can’t compete.] Add in the mostly returnee culture, of non-native Asian investors, and you have the recipe for an entire generation’s lack of success in venture capital in Asia.

After six years in manufacturing operations (a lifetime by Silicon Valley’s pressure cooker work environment) he left to become a sole practitioner investor in 1997. He says he wanted to work in venture capital, but his maturity in industry work made him inappropriate to the apprenticeship in the associate style or Entrepreneur in Residence training years that top Silicon Valley VCs prefer, so he began investing on his own.

On leaving NEC, Nguyen took on the role of CFO for a VC-backed startup, Mobisonic which manufactured portable ultra-sound machines. But at nearly the same time, along with Vietnamese friends and fellow émigrés, he formed an angel investment group called the Dylan Group, based in the South San Francisco Bay Area. He also began investing on his own and one of his first investments was in BEA Systems, a middleware software provider for the systems and the internet; an investment which proved wildly successful.

His work with the Dylan Group brought him into contact with David Stastny, the founder of Osprey Ventures, who asked Nguyen to help him raise Osprey’s first fund in return for which he offered Nguyen an entry into the world of formal venture capital as a Venture Partner, a “virtual” general partner, to help Stastny raise funds and source deals, and as such, Nguyen raised about $15 million of the first Osprey fund of $90 million.

T&I: What do you recall from a decade ago, investing for a Valley VC?

LN: We made about 20 investments in that first fund, but they were all handpicked by David. But I was just a new guy, learning the ropes and earning my stripes at what then was a fiercely competitive venture capital environment.

T&I: How long did you work with Osprey?

LN: I left in late 2002 or in 2003. I stayed through the entire tech boom and crash. I was helping to raise Osprey Pacific, a new Osprey fund, that was to focus on Asian deals or Asian originated deals. We called them “IC” deals, for Indian-Chinese deals, not integrated circuits, because at the time the joke was that these Indian and Chinese expatriates, who made up the largest groups of the engineers in the silicon valley work force, wanted to start doing early stage technology deals, but no one funding these deals except for the very best. Even back then, I knew that there was something exciting brewing among these really smart Indian and Chinese engineers. At the time about 20% plus of the CEOs in the Silicon Valley were of Asian ancestry. It made sense to have a group of investors who could recognize the opportunity and invest in their deals.

T&I: What was your idea for a fund?

LN: It seemed natural when thinking about investing in this group of entrepreneurs that it would be only a matter of time before the home runs started happening. And we tried it, but the market crashed in early 2000 after we raised $20 million plus and at the time we thought, what can you do with $20 million? So we gave the money back.

T&I: What happened next for you?

LN: I went to work with a group called Intelligent Capital, with two of the Special Limited Partners in Osprey, Rick Marshall and Chris Augur, who asked me to do M&A with them. At the time there were great opportunities, because of the downturn. It was the same phenomenon that we see in Vietnam [today.] When there is a downturn people talk about consolidation and M&A. So we did a few interesting M&A deals together. Basically we were doing strategic finance, meaning that we either raised capital for a small company or we took them to a strategic buyer.

T&I: You went from manufacturing to operations to investing to leveraged finance?

LN: The industry experience made me appreciate the value of a company more. However, you can do most of that, finance, and M&A at a VC firm too, although not as hands on because most of the time an IPO is the preferred exit.

T&I: Did you have any standout successes at Intelligent Capital?

LN: Safeweb, that we sold to Symantec and we also sold companies to Oracle, Oak Technologies, Fairchild and Gemplus. I was at Intelligent Capital in 2003 when Pat McGovern of IDG called me said that he wanted to set up a Vietnam fund.

T&I: Out of the blue, you hear from Pat McGovern?

LN: It was a surprise to hear from the Chairman of IDG. He sent me an email. I had formed a non-profit organization in Silicon Valley, called the Asia-Silicon Valley Connection (ASVC), a group that basically connects investors and tech deals between Asia and Silicon Valley. Pat found me through that. At the time there were only about four Vietnamese VCs in the world. He was calling up all these guys and saying, “Hey, I have these great VC firms around the world and now I’m thinking about launching a fund for Vietnam.” He sent me an email and said why don’t you come down and talk to me. Which I did. He was just down the street in San Francisco. We met in July of 2003. We had lunch, chatted and then I got on a plane for Vietnam and returned to Vietnam for the first time in 28 years Vietnam to do due diligence for a VC fund for Vietnam.

T&I: What was that like?

LN: Looking back, everything was new to me. It took my breath away. This was my childhood home. I had been gone for 28 years and this was the first time I set my foot back in Ho Chi Minh City. It was really something. You could see and I thought that this town is going to go somewhere. The WTO accession was underway, it has the youngest population in the world. There is a buzz in the city; this incredible energy there. I felt like it was booming, not just in tech, so I was feeling a little constrained to be thinking just about tech. Here there was an entire field of flowers blooming and I was only allowed to pick one of those blooms.

T&I: What was your first step?

LN: That first trip was only ten days. I was just gathering information. So I sat down with investors and fund managers. I went to VinaCapital. I went to Dragon Capital. At the time, those guys were very small. But it gave me a feeling for what was going on. They didn’t know anything about tech so they were saying, that they didn’t know why in the hell anyone would want to do tech in Vietnam, but good luck and if you have any extra money, put some into our funds. Just like that.

T&I: Just Ho Chi Minh City?

LN: I went to Hanoi as well. I went to Hoa Lac Hi Tech Park. I was meeting with government officials who at the time were very welcoming. They still are, but at the time they were really encouraging because tech was a sector that people weren’t paying any attention to. Vietnam is all about real estate and the stock market. Most people don’t understand that; that everything in Vietnam, even the stock market, is tied to real estate.

T&I: So what happened with the formation of the IDG Fund?

LN: At the time my interest was never to be involved in Vietnam for the long term. I changed my mind once I was on the ground, but at the time, my discussion with McGovern was that I would be a US guy, as a US partner. So IDG hired Hoang Nguyen and he was the person who set up the fund locally. I worked for IDG for over a year, traveling back and forth between the IDG Ventures offices on California Street and visiting Vietnam.

T&I: And then you had a great offer that took you away?

LN: Not really. Don Lam at VinaCapital suggested that I come and help him run the corporate finance group at VinaCapital and at the time Henry had been hired for Vietnam by IDG. I was considering working with a US-based firm with a big technology outsourcing arm in Vietnam called Paragon Solutions, that recently was acquired by CSC, a US-listed company. They had asked me to be their US sales VP. Comparing the two, the salary and bonus, the IDG and Paragon deals both offered much better salary and upsides, but for whatever reason I took the VinaCapital job in corporate finance, which meant that I was doing investment banking type work; advisory work. And at the time the VinaCapital fund was only $37 million total.

T&I: And yet you joined VinaCapital?

LN: Yes, I sensed the potential there. Plus, Don Lam is a master. He is very good at selling the dream and the vision. I really like him. He’s a very smart guy. Not too many guys in the world could bring a fund from $37 million to almost $2 billion in three years.

T&I: You stayed at Vina for how long?

LN: Over two years. I joined in January of 2005 and stayed until April of 2007.

T&I: You helped start their venture fund?

LN: That’s right. The DFJ VinaCapital Fund. Don Lam threw me a bone, said, “Hey, why don’t you launch a tech venture fund? The government likes it. Technology can be good for the country, it’s a sector that the government prefers, plus you have a background in that.” Don had met Tim Draper at a conference in Singapore and I knew Tim from the Valley, so we went to Silicon Valley and met with the DFJ Team and convinced them that we were serious and wanted to be a part of the DFJ franchise. It’s a pretty small fund of about $30 million. It’s still going.

T&I: Talk about tech investing in Vietnam?

LN: Will it work, yes, if you have the patience of IDG, which has a ten-year plan for investing in Vietnam. In a ten year window technology is probably going to do well. But with the exception of Mobivi and VinaGame I don’t really see many tech companies that are viable. There is FPT, but they’re not really a tech company; they’re a conglomerate, a smorgasbord of laptops, PCs, cell phones, but [not] anything that is proprietary. Venture capital in Vietnam is about proprietary investing or about being the first mover in an emerging market where you have sufficient capital or government relationships that you can use to develop market share. Plus, how can have a tech management team with a few scars or gray hair in a country where 60% of the population is under 30? Unless you have those ingredients, it’s really tough to put together a venture fund for Vietnam. My hats off to the VinaCapital and IDG guys as they’ve done an excellent job.

T&I: VinaGame?

LN: That was a start up out of VinaCapital. Minh Le, one of Don Lam’s lieutenants and a former investment manager for Don founded VinaGame. He raised money from IDG.

T&I: You remained with VinaCapital for how long?

LN: I left in 2007. I wanted to run my own fund with a differentiated model, that can [avoid] a foreign fund’s limitations for investing in Vietnam. For example, Sacombank, which is one of the hottest stocks in Vietnam, is down compared to last year. And foreigners have a limit in what they can buy in that stock in public markets at 49% and a 30% limit in private companies. If a stock price drops, foreigners cannot increase the amount that they have invested in a Vietnamese company. There are also issues with foreign investment funds in Vietnam being required to upgrade their rep office in Vietnam, to another “more local” status (Ed. Covered in a separate and forthcoming interview with Fred Burke of B&M). I wanted to have an investment firm partnered with a locally licensed investment company to insure that we’re fully legal with government requirements and so that deal flow is sufficient and to optimize investor returns.

T&I: Issues remain with all of those things that you’ve just mentioned?

LN: Yes. Some foreign funds don’t see this limitation and restriction as a problem. They use a “nominee” system where a local company buys shares on the fund’s behalf which may pose various risks. I want to be in full compliance locally and with our investors.

T&I: How are the performance of the foreign funds in Vietnam?

LN: At the moment, all of the foreign domiciled funds in Vietnam, are down in both their NAV and share price from 30% to 80%.

T&I: Back to you in leaving VinaCapital and starting a new fund in 2007.

LN: There was a group of businessmen who formed a company called Lion Capital, who had a local license for an investment company, but no team. We decided to join forces in May of 2007. But we changed the name from Lion almost immediately – because that name was already in use around the world – to Anpha Capital. We raised two funds, listed on the Frankfurt Stock Exchange in December of 2007, totaling $125 million and started deploying capital.

T&I: Talk about both of those funds.

LN: The first fund is called Vietnam Equity Holdings (VEH). It’s a $75 million fund that invests in both listed and in private equity in Vietnam. That fund is currently down about 5% in its NAV in its most recent results, but that compares to the 60% decline in the general Vietnam index of stocks, so it’s not doing so badly. In fact, VEH is ranked number one in NAV performance by LCF Rothschild. The second fund is called Vietnam Property Holdings (VPH) and that fund invests in real estate. That fund is up 8% in NAV for the first three quarters of the year.

T&I: The real estate fund invests in what sectors?

LN: It does both commercial and residential, but it focuses on latter stage developments.  It doesn’t do land banking like other Vietnam real estate funds owned by our competitors. We focus more on projects that have imminent cash flow needs; meaning that we invest when a license has been issued, when the land has been cleared and when work has to start. Some firms have invested in land that then sits for years. In real estate you have to make distinctions about what you’re doing; to declare whether you’re a financial investor or a land developer. A lot of funds in Vietnam chose to be both, perhaps because they think that they’re going to make more money that way.

T&I: Whereas you act as a developer?

LN: No. We’re financiers and have to make that a clear distinction with the big funds in Vietnam. We bring in partners who are developers, international guys who bring in capital and domain expertise. The problem is that foreign developers have put money in the big funds in hope of participating through co-investments or co-development. [But this has not come to fruition] so many [investors] are coming to us to fill this need.

T&I: You raised two funds, then Anpha hit a bump in the road of its development?

LN: Basically we picked a local partner to manage the funds. The earlier group was called Anpha Capital Stock Company (ACMC), but we’ve recently changed our local fund management partner. The reason being that in tough local market conditions, our local partner was unable to raise funds, sufficient to satisfy the conditions of our Frankfurt prospectus. That was the rational of our choosing a local fund; they had to be able to raise local funds as it was a requirement in the prospectus in order for us to gain the foreign fund, local fund combination status which is advantageous in what and how much you can invest. They were unable to do that, so we’ve parted ways.

T&I: So the fund managers have left?

LN: No, the fund managers remain. Previously our fund management company was called Anpha Capital Group, today that group is called Saigon Asset Management (SAM) in order to differentiate ourselves with the previous local partner; the Cayman entity that underlies the group is still the same, the fund management group is still the same. The confusing part, that some people don’t understand is that while the funds management group remains the same, the local sub-advisor, the sub-management group, has changed. I, for example, am part of the fund management group and I sub-contract a part of the fund management work to another local partner called Hanoi Fund, part of the Military Commercial Bank, in order to get the best deals, to get the best costs, to have the most efficient operations and in order to meet legal requirements in Vietnam. This is a fairly unique model in Vietnam.

T&I: Does Anpha still continue in some form?

LN: I don’t want to comment on the local Anpha, but we’re on good terms and I wish them the best of luck.

T&I: So today the two Frankfurt listed funds are operating as Saigon Asset Management and the principles of SAM are?

LN: Myself, Desmond Lin, Dr Lee Lam and Howard Golden

T&I: And you’re based on Calmette Street?

LN: Correct, in District One, in the Vietnam Military Bank building along with our new sub-manager, Hanoi Fund.

T&I: The name of the local fund management is what?

LN: Hanoi Fund is the sub-investment manager for us locally. It changed from Anpha Capital Joint Stock Company, the previous local manager, to Hanoi Fund Management Company.

T&I: And both of you have a relationship with the Vietnam Military Commercial Bank?

LN: No. Hanoi Fund has the Vietnam Military Commercial Bank as a major shareholder; this is one of the most influential banks in Vietnam and is a part of the military.

T&I: People outside of Asia won’t know this, but what you’re describing is a common structure, where a military sponsored bank has investment fund relationships.

LN: We’re somewhat different. The Vietnam Military Commercial Bank has lots of assets and we take strength from that, but we don’t raise money from them. We raise money from international sources. We collaborate with the Hanoi Fund Management Company, in order to adhere to our requirements, to be considered a local fund, and to deploy our funds legally.

T&I: So that you’re effectively a domestic investor in Vietnam?

LN: No, we are a foreign fund manager which partners with a local fund manager, so that we can invest legally and that clearly is an advantage for us over foreign status funds. At the moment there are still limitations on how foreign funds can invest in Vietnam; so our key competitive edge is that this hybrid model provides the flexibility and better deal flow sourcing for our investors.

T&I: You are in fact an offshore fund, domiciled where?

LN: We’re a Caymans domiciled fund, listed in Frankfurt, with $125 million under management.

T&I: How far committed are those two funds?

LN: We’ve deployed over 75% of our cash.

T&I: Which means you begin fund raising again when?

LN: It’s a bit hard to say, because that will depend upon markets. At present listed funds in Asia have a share price below their NAV. We’ll be close to fully deployed [before too long], so we’ll be looking towards the middle of 2009 to formally go on the road.

T&I: Firms are beginning to rethink having publicly listed PE funds. What about you?  

LN: You’re right. Everyone wants to return to traditional LP/GP structured funds. For two reasons: Number one, they can’t raise another public fund due to deeply discounted share price and poor NAV performance so they have no choice. And number two, they want to attract long term institutional investors who do not invest in listed funds and to bypass the individual investors who react to the volatility of public markets. The reason why funds for Vietnam listed originally, was because as an emerging market, the traditional investors have been high net worth individuals who prefer the liquidity of listed funds. If you want a traditional fund structure you want to deal with institutional investors who have a longer term outlook for their position and who are comfortable with their managers who have a track record. And that is the case in Vietnam. Funds who have been around for a while, with a track record, will be able to raise new funds for Vietnam, as long as they have positive performance. But for young funds and for first time funds it’s going to be very hard.

T&I: So you’re next fund is going to be?

LN: We’re contemplating a traditional LP/GP structured fund, but at present we have sufficient cash so that we’re not too worried. At the same time, we’ve had many suggestions from regional investors in Malaysia, Hong Kong and Singapore, that they would prefer to invest in specific projects instead of into funds. So that is raising the opportunity to create limited partnerships and raise capital for specific projects which suits their mentality as real estate investors, who want to know exactly what they’re          getting in to. They’re concerned about giving funds to firms who are going to invest those funds in deals that they may not understand or agree with or where they have no say on participation.

T&I: In non-real estate, what kind of investor is Saigon Asset Management?

LN: Just one comment first, we’re seeing a lot of investors coming into Vietnam and looking around, seeing what is happening on the ground. A year ago, Vietnam was very expensive, but now pricing is reasonable, if not down right attractive, on both the equity and real estate side, so cash is king at the moment. But that’s also unfortunate in that none of the funds have cash. If I had a magic wand, I’d want to create a big war chest to capture this market opportunity while the market is down; because compared to the other big markets, Vietnam has much more momentum.

T&I: I’ll gainsay you on that. I hear from the best, most experienced LPs in Asia, that they think that this is the best time to come in to both Asia and Vietnam. And in fact, they have plenty of exposure to China and India, and they’re seeking to diversify their risks. Which prompts me to ask about valuations for investments in Vietnam?

LN: Our position is that valuation has not yet hit bottom, not even in equity markets. Real estate, by comparison, remains a total wild card. People are still waiting on NPL reports from the banks for the year end of all betting, to see how bad its going to be

T&I: What about private company valuations?

LN: Private companies are impacted by publicly listed companies and usually they’re at a discount to publicly listed companies because they’re not as liquid and not as financially transparent. You can’t command a high valuation when one of your peers which is liquid, with great earning potential and with great market share is at a low valuation. So private companies valuations are benchmarked against public companies.

T&I: So it’s a great time to be making private investments in Vietnam?

LN: I’d say theoretically yes, but unfortunately Vietnam is an emerging market. Private equity here, is unlike private equity in a developed market. Here we have issues that require great patience and domain expertise in value creation. Doing private equity deals in an emerging market means that you have to have pretty damn good due diligence to know whether a deal is viable. On top of that, very few PE firms in Vietnam have the expertise, perhaps Mekong Capital is the only player that has been around long enough. We’ve been staying away from private equity lately, for the simple reason that you have to ask yourself, why do you want to do a private equity deal, when you can do a listed deal for the same price or cheaper? The valuations are so attractive for public companies why would you want to invest in private equity? That is the question we have to contemplate in Vietnam at the moment.

T&I: So at present either PIPES or “Take-private” deals are attractive?

LN: It’s hard to say, but there are not enough take private deals being done that it is worth mentioning. I think Dragon did one recently.

T&I: Do you contemplate making PIPE deals?

LN: Unfortunately, we’re not a big player. So one big deal like that and we’re dry. Larger funds who have only 5% of their holdings in cash are in the same boat. It’s a common dilemma that isn’t well recognized. If anyone had a fresh vintage $1 billion fund in Vietnam right now, they’d be kicking butts and taking no prisoners, because there are all these great deals that badly need capital infusion. And they’re getting cheaper by the day.

T&I: To wrap up, give us your outlook for Vietnam for the next six months to one year.

LN: I’m anxious to wait to Tet – the Chinese Lunar Year 2009 – in February, perhaps March, to see the annual reports from banks, which will divulge the status of their real estate loans in Vietnam. That is going to tell us one of two things; the market may take another hit, or it may not be as bad as we think and both the real estate and equity markets will rise. But for now, no one, without some insight into the banks, knows for sure. We do know that the expectation for non-performing loan reports is not that good. No one is certain until after Tet [so we’re] in stand-by mode.

Thank You T&I