Washington, D.C.-based Darby Overseas Investments Ltd., which has made a name for itself over the past four years as the sole mezzanine fund dedicated to Latin America, has plans to bring its mezzanine model to Asia, where the firm claims no dedicated mezzanine fund yet exists.
In order to do this, Darby has purchased the management company that owns and runs the $246 million Prumerica Asia Infrastructure Investors (PAII) fund. The new name is Darby Asia Investors Ltd. Joseph Ferrigno, president and CEO of PAII, will remain in that position for Darby.
In 1999, Darby launched the $225 million Darby Latin American Mezzanine Fund L.P. (DLAMF). It was Darby’s first mezzanine fund and the first fund dedicated to mezzanine finance in Latin America. In order to ensure portfolio diversification, Darby created it as an investment instrument that is rated and supported by long-term debt. The approach also allows DLAMF to tap the international capital markets. (Darby chairman Nicholas Brady is widely known for the strategy he helped to formulate in 1989 as U.S. Treasury Secretary for dealing with developing country debt, known as the Brady Plan.)
Robert Graffam, a managing director at Darby, described the move into Asia as “logical.”
“Asia is the largest emerging region in the world. And it’s one where there is not a lot of mezzanine finance on offer,” he said, adding that Darby felt all along that its mezzanine investing business is more of a global business in order to diversify and reduce the risks associated with mezzanine loans.
Moreover, the timing was dictated by the firm’s capacity rather than the marketplace. “Three years ago we were busy creating the Latin fund. Now it’s up and running and stable, and we have a proficient team demonstrating that it can be done. Some of our investors had strongly encouraged us to do this elsewhere. We were ready and saw it as a compliment,” said Graffam.
The International Finance Corp. has traditionally done mezzanine lending, as well as equity and senior debt lending, in Asia. In certain markets, such as in India, there’s been a lot of issuance of mezzanine instruments such as convertible debt or debt with warrants in the local markets.
But PAII has been the only dedicated mezzanine investor in Asia, and Graffam said his firm “knew about them all along, and met them before we even created the Latin America fund. We maintained a dialogue over the years and compared notes. We became aware last year Prudential was interested in exiting and saw an opportunity.”
Darby’s immediate plan is to integrate the newly named firm into Darby. The fund has an existing portfolio of five companies, as well as $100 million more to invest. Thus, Darby is not seeking to raise any new funding right now. Among the fund’s investments is Spice Telecom in India, Clean Energy Assets in India and Indonesia, and Energy Ltd., which is based out of Australia.
Going forward, the Hong Kong-based fund will make investments up to $40 million per deal. As in Latin America, Darby intends to invest only in infrastructure, either through privatizations or new concessions.
“In most cases in this sector, opportunities are related to companies that [governments] have either [made concessions for] or were privatized in the past, or are being sold in the present,” said Graffam.
While the need for capital in Asia is not as severe as it has been in Latin America (in part because banks in several countries in Asia are willing to make long-term loans), Graffam said there is nonetheless substantial demand in the region.