Were experienced investors fooled by fabricated financial statements?

SGI

 When the Huy Viet Nam Co., Ltd shut down a series of its stores under the umbrella of nine of its company brands, it not just surprised the public, but also became the focus of much discussion when the founder and chairman was sued by many groups of investors. 

Is the advantage of having many brands such as Mon Hue, Pho Ong Hung with hundreds of stores nationwide, at prime locations attracting PE funds?

Is the advantage of having many brands such as Mon Hue, Pho Ong Hung with hundreds of stores nationwide, at prime locations attracting PE funds?

This lawsuit is raising questions about the relationship between funds, investors and companies in calling for capital in the market today.

Were the investors cheated?

According to a press release, on 24 October 2019, a group of major investors of Huy Viet Nam Co., Ltd, sued Mr. Huy Nhat, founder and chairman of the company, in the People's Court of Ho Chi Minh City. They represented a group of international private equity funds that had invested in Huy Viet Nam Co. with a total capital of more than USD 70 mn. These included ADV Partners, AIF Capital, F&H Fenghe, Fortress Investments, Gryphus Capital and Welkin Capital.

The legal case filed accused Mr. Huy and his associates, including Ms. Ngo Thi My Hanh, Executive Director of Mon Hue Restaurant Co., Ltd., of violating managerial obligations and responsibilities, unusual and illicit transactions, and possible fraudulent actions by which Mr. Huy Nhat appropriated large amounts of cash and assets. The representative of the group told the press that Mr. Huy Nhat used to present financial reports to them that showed that the business was growing and was highly profitable.

Were these experienced investors easily fooled by Mr. Huy Nhat with his “neat looking” financial statement reports? Were these investors so subjective and so completely confident in this founder that they felt there was no need to take control of the business situation? Or, in terms of pouring capital, did Huy Nhat persuade the investors to give him much more power and authority? All these questions can only be answered by insiders. From the perspective of the outsider, however, experts have their own analysis and theory.

Talking with Saigon Investment, economist Ly Truong Chien said that maybe the funds had totally neglected corporate governance. In principle, investment funds are very tight, but in the process of operating, they are loosely managed. This is because they have so much confidence in the boss of the company they invest in. Even in some cases, when there are many funds involved, one fund can think that the other is managing it. “People often die because of subjectivity, not because of lack of knowledge. Even in developed countries, it is impossible to avoid such scams”, said Chien. However, Chien acknowledges that because he is not an insider, he does not have all the data and information to know whether the lawsuit will bring the expected fair results or not.

From another viewpoint, expert Doan Dinh Hoang, who has extensive experience in developing the F&B segment, said that the closure or bankruptcy of a chain is because of exhaustion of money to pay for the dues. Some people think that with such a huge investment of upto USD 70 mn, how can Huy Viet Nam be unable to pay, and believe maybe Huy Nhat is a cheater. However, we cannot verify this information. Even the news that Huy Viet Nam has raised capital of upto USD 70 mn is still uncertain. The most common news in the press is that Huy Viet Nam had two rounds of funding of USD 30 mn, equivalent to VND 650 bn in total, and this is only the declared capital.

“With the expansion of nearly 200 stores across the country, they had to invest correspondingly in factories, machines, and management technology. If the revenue cannot compensate the cost, the figure of USD 30 mn (if real) could also go out quickly, not because of bad corporate governance. Even if the ‘old wolves’ say that they cannot control management or have being fooled, it surely is an unbelievable story, because they were ‘born’ to deal in money", said Hoang.

Also from his expert perspective, before the chain closed, Huy Viet Nam reduced its charter capital from VND 1,200 bn to VND 600 bn. Maybe this is the result of capital withdrawal by investment funds who found that there was some instability in the enterprise management. Of course, now that the lawsuit has been filed, the authorities will conduct an investigation and many issues will be revealed in the near future.

Calling for capital is not a gameshow

In recent years, a number of Vietnamese startups have gained popularity through millions of dollars of funding, and now even Vietnam is becoming a favorite destination for many regional and global investment fund managers.

According to statistics, in the past three years, the investment capital in Vietnamese startups has increased rapidly. In 2018, the investment capital for startups was USD 889 mn, three times more than in 2017 and five times higher than in 2016. At the Vietnam Creative Investment Fund Forum in early June, there were many remarkable investment commitments from investment funds. Even the director of a Japanese investment fund in Vietnam said that the investment amount in Vietnamese startups now is higher than normal. That is good news, but behind the published numbers, how much capital the startups actually get is something no one knows, except the insiders.

That is not to mention the capital raising journey is also very arduous, because the nature of the investment fund is always the key to making the rules of the game, and providing rigorous appraisal procedures to ensure the safety of capital flow. That is also the reason that in most seminars, there is always the question of what factors will the fund/investor rely on to decide before pouring in capital. Of course, in order to make an investment decision, it will have to go through many more rigorous evaluations because "money is attached to the gut", and no one is foolish enough to throw it out of the window. That is why many funds have their own people in the executive chair to control company operations.

In ‘Shark Tank’, a popular TV program on the startup industry, at first instance the sharks easily give out money. With some startups, the sharks even compete to invest. But what is behind this small screen, and how much money do the startups really get from the sharks is not clear.

Many people say that it is actually just a gameshow, where startups have the opportunity to be more communicative when participating in the game, and can receive valuable advice from the sharks for their business projects. But when joining the game, the sharks’ purpose is not to find a place to invest. They cannot make an investment after just a few minutes of hearing the strategies and business plans of any startup businesses. It is possible that the sharks sit there to promote, affirm their brand, their businesses and seek opportunities from startups.

Investors cannot always control all situations, and there are cases when they have had to swallow bitter fruit when businesses receive capital but do not use it as per commitment. With a potentially lucrative market like Vietnam, the relationship between investors and enterprises calling for capital will still be the subject of much public debate in the future.

Translated by Francis

Thai Ha

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