TOKYO -- In another signal that investors are steering clear of the technology sector, Vietnam's first private equity manager is shying away from startups in one of Asia's hottest investment destinations and is doubling down on consumer-related companies instead.

Vietnam has seen a jump in deal making amid strong economic growth and jitters over the U.S.-China trade war. Private equity investment rose to a record $1.6 billion in 2018 from $418 million a year earlier, according to business intelligence service Bureau van Dijk. That figure dwarfed Vietnam's neighbors Malaysia and Thailand, and was only slightly less than Indonesia received.

Even so, Mekong Capital, which was set up in 2001 and manages $112 million in assets, is keeping cautious and finds more value in old economy investments than the tech startups that has driven much of the deal flow.

"Some of the [tech] business models don't make sense," said Chris Freund, a partner at Mekong Capital, who warned that the sector is starting to resemble a bubble.

One example is food delivery startups, which handle inexpensive items like coffee and yet are facing off against local super-apps such as Grab -- which even though it is a market leader is widely perceived to be losing money.

"I don't see how they will ever be profitable.... If venture capital money dries up, the whole [industry] will collapse."

Freund was involved in launching emerging-market investor Templeton Asset Management's business in Vietnam in the mid 1990s before setting up Mekong Capital.

It is now mulling its fifth fund, hoping to raise $200 million by early next year, which will help it seal deals worth $20 million or more in local retailers and other consumer-focused companies. That is considerably more than the average $11 million investment per deal that it made in its existing fund.

"There [are] a lot of larger deals that we haven't been able to do" in the past, said Freund. "We still like to be smaller than the regional funds, but there are plenty of deals in the $15-20 million investment size range."

Mekong started out funding manufacturing firms but now focuses on consumer-centric companies, which are screened based on 14 criteria, including corporate governance and culture. Its portfolio includes pharmacy chain Pharmacity, logistics providers ABA cooltrans and Nhat Tin, and pizza chain Pizza 4P's.

"Participating in Mekong’s programs to learn team building from other portfolio companies is helpful, especially since many investors do not take a hands-on approach," said Yosuke Masuko, CEO of Pizza 4P's.

Freund said he is not looking to shift the firm's focus back to manufacturers, even though Vietnam stands to benefit from companies shifting production to the country as a hedge against the U.S.-China trade war. Good investment opportunities are rare because local manufacturers lack brand value and advanced technology that can compete with foreign-owned competitors, he said.

The fund manager's most lucrative deal to date has been a $3.5 million investment in mobile phone retailer MobileWorld in 2007. The company, which went public in 2014, generated a $199 million return by the time Mekong Capital sold its stake in January 2018.

Chris Freund (Photo courtesy of Mekong Capital)

Other deals have not been as profitable, although its portfolio of companies have benefited as a whole from Vietnam's growing middle class.

In one example, Pharmacity has opened more than 200 outlets across the country, grabbing market share from family-run shops.

The growth of modern retail stores has meanwhile fueled demand for better distribution, a tailwind for Mekong's logistics companies, which are expanding their truck fleets.

"The key in Vietnam is to be scalable and have products that are affordable," said Chad Ovel, a fellow partner at Mekong Capital, adding that the average Pharmacity shopper spends about $5 per visit.

Freund says Vietnam's private equity market is still too small for global private equity giants like Carlyle and KKR. But competition for the best deals is set to intensify.

A consortium led by GIC, Singapore's sovereign wealth fund, injected $853 million into Vietnamese conglomerate Vingroup's real estate unit last year, and recently announced another $500 million investment in the group's retail arm. U.S. fund manager Warburg Pincus also invested a reported $100 million in local fintech startup Momo this year.

It will soon be clearer whether Mekong Capital's portfolio and investment strategy will weather growing foreign-funded competition.