Thai transformation

Prominently displayed in the conference room of Lombard Investments' San Francisco office is what at first glance appears to be American painter Jasper John's iconic oil painting False Start, an Abstract Expressionist work of bold color strokes and stenciled names of colors.

But unlike Johns' masterpiece, which Citadel's Kenneth Griffith currently owns, Lombard's Homage to False Start is filled with stenciled names of US states – those in which Dakota, Minnesota & Eastern Railroad Corporation operates. Lombard led the management buyout of the then small rail company in 1986, bringing in UK firms Candover Investments and Electra Private Equity, among others. The firms exited the investment in 2007, selling the entire company to Canadian Pacific for $1.48 billion and generating around a 30 percent IRR for the initial investors. The investment went through several “false starts” before the consortium was finally able to exit twenty years later, hence Lombard's choice of commemoration and reminder of the often bumpy road to investment success.

Lombard was founded in 1985 as a North American middle market buyout firm, investing in industries like manufacturing and transportation in Canada and the US. But then in the early 1990s Lombard began studying Asia, and found that the growth story looked strong. In 1996 the firm bought into Asia Corporate Partners, a fund managed by China Development Industrial Bank and backed by the Taiwanese government.

It was the first step in Lombard's eventual transition into an Asia-focused firm.

The idea was that Lombard could bring a disciplined US investment approach to the still young market. The Taiwanese fund ultimately made 29 investments in China, Singapore, Taiwan and Thailand. In 1997 Lombard launched its own fund, the Lombard Asian Private Investment Company, which began investing after the crisis. The California Public Employees' Retirement System committed 90 percent of the $252 million fund, and Asia Development Bank contributed the remaining 10 percent. That fund made 11 investments in Hong Kong, Korea, the Philippines, Taiwan and Thailand.

The lure of the southeast
by other firms. At the same time, the Thai government and the IFC approached Lombard about the possibility of setting up an investment vehicle to lure foreign capital back into the country after the crisis. Other Western firms had been daunted by the prospect of putting money into Thailand: private equity hadn't been successful in the past, the regulatory framework was still undeveloped, there was no formal partnership law. Considerable regulatory work needed to be completed before launching a truly local private equity fund. “Most people thought it simply looked too difficult,” says managing director Toby Smith.

But Lombard had the support of the Thai government, and after two years clearing regulatory and structural hurdles to launch the fund, the firm recruited a key local player for driving the investment effort: Pote Videt. He had extensive government connections – he had previously been Deputy Minister of Commerce in the Thai Government, then an advisor to Deputy Prime Minister Supachai Panitchpakdi on international economic policy, who later headed the WTO. He was also on the Council of Economic Advisors to the Prime Minister. His financial credentials were also solid – before joining Lombard, he was managing firector of Credit Suisse First Boston responsible for Southeast Asia, and managing director of Goldman Sachs in Hong Kong.

In 2001 the firm set up the Thailand Equity Fund, a $245 million special purpose Thai mutual fund, with the Ministry of Finance of the Government of Thailand, 13 members of the Thai Bankers Association, the IFCT, the Government Pension Fund, the Government Savings Bank, CalPERS, the International Finance Corporation, the Asian Development Bank and DEG (Germany).

Today, Lombard's investments in the country include the largest retailer of English language books, the largest residential developer of low-cost housing and one of the leading securities brokerage and investment banking firms – all companies that can capitalise on growing domestic demand.

Certainly, the country's occasional political instability can cause turbulence in the economy, Smith says. But in general, asset ownership does not change during crises in Thailand, a recurring pattern that that gives him confidence in the firm's investments.

Second time around
In 2007, Lombard launched Lombard Asia III, which seeks investments in Thailand, the Philippines, Vietnam, Malaysia, Indonesia and greater China. Current market conditions could be both a boon and a bane for that fund. On one hand, falling public market indices are bringing down previously heated valuations. But at the moment, exits are scarce, and the domestic growth that had fueled the region’s expansion is certainly cooling somewhat. The influx of a large amount of global capital into the still fairly small Southeast Asian markets had created bubbles, and now the decline in the price-to-equity ratios has been dramatic. But Smith says the low-cost production advantages of the markets are fundamentally solid, domestic demand is resilient and corporate leverage low, putting Southeast Asia in a good position to recover.

Although the firm is still headquartered in San Francisco, Bangkok is now the firm’s largest office and its primary dealmaking hub. Most of the legal and accounting work is done in San Francisco or in the firm’s Hong Kong office. The firm also has representation in Vietnam and the Philippines.

Several original founders are still at the firm, but once Lombard decided to dramatically change its investment focus it was faced with the task of putting down roots on a new continent and building a new Asian team.

Lombard took its time and studied each country before making any hires, Smith says. They recruited primarily local people, and made a particular effort to recruit professionals from different generations who represented an array of business styles so the firm would be able to access both old, established family-owned businesses, which tend to require a more respectful approach and a less aggressive pitch, and the younger generation of businessmen in Thailand who are more accustomed to a Western style of negotiation.

But even though the current team members have strong local ties, each investment professional works on deals around the region. Lombard places an emphasis on regular involvement with portfolio companies, which means Smith, Pote and their colleagues spend many hours on airplanes and in the local offices and factories of their companies. Particularly now, with the future looking uncertain, Lombard needs to be there to shepherd portfolio companies to help them weather market turbulence.

But, as Smith points out, most Asian companies have been through this before.