G.P. Asian Strength Bodes Well for Ross LBO Activities –

The 33rd Annual Meetings of the Asian Development Bank (ADB) this week in Chiang Mai, Thailand, are taking place at a time in which almost all market participants are optimistic about Asia.

Since the conclusion of the region’s well-publicized financial meltdown, Asian countries have been steadily improving. Not only have they experienced significant economic growth, but individual countries have also made substantial progress in the fields of corporate restructuring, governance, and legal reformation.

But while there are no major obstacles likely to thwart the region’s continued fiscal progress, there are a couple of factors that could possibly slow this process down, said Wilbur L. Ross, Jr., chairman and chief executive officer of the newly formed WL Ross & Co. LLC.

The first of these factors is widespread cultural tensions which have led to significant political repercussions. For example, ethnic clashes between Muslims and non-Muslims in countries like Indonesia and Malaysia are cause for significant concern, Ross said, as is the Cold War-like stand-off between India and Pakistan. But more important, perhaps, is the escalating war of words between China and Taiwan, a conflict that could lead to destabilization of the entire region.

Secondly, the banking sectors of most Asian countries remain weak. At last year’s ADB meeting, the call for consolidation had been launched, but there has not yet been as great a dedication to achieving this objective as is needed, Ross said. Banking consolidation needs to gain momentum in order to have a positive effect on regional economies.

Still, despite these macroeconomic factors, Asia has undeniably progressed. And, for a distressed investor like Ross, the overall environment presents just the right opportunities to look for bargains. “Since we only do distressed investing, we need countries that have a lot of distressed companies, and a good legal system and courts to implement it,” he said.

In that context, Ross & Co. is currently focused on Thailand. Recently, the Thai government put in place a new bankruptcy law, which, Ross said, could greatly facilitate the efforts of foreign investors wishing to take over any one of the numerous Thai companies currently in bankruptcy. Ross and his colleagues have been observing the implementation of the new law and are greatly encouraged by what they have seen.

“Once we know that the Thai legal system really works, we will go in there and take a lot of that [distressed] stuff,” he said.

Ross, who was one of the first players to enter Asia after the financial crisis hit, has invested significantly in South Korea by partnering both with the Korean government and local Korean companies. In September 1998, the South Korean government awarded mandates to four investment firms, including former Ross’ employer Rothschild Inc., to manage LBO-style mutual funds within the country.

South Korea has experienced an even greater turnaround, Ross said. Indeed, there has been so much action there that opportunities for South Korean distressed investing have now worn thin. Ross’ Korea Fund recently completed a $100 million acquisition of Pacific Life, a failed local life insurance company. Ross’ group partnered with Tongyang Life, one of the larger and better-run of the Korean chaebols or conglomerates. The final objective of the Pacific Life acquisition is to merge the firm with Tongyang, and thereby corner about 5% of South Korea’s life insurance industry, Ross said.

“The last sectors to get reformed in Korea are the life insurance sector and the merchant banking sector,” he said. “We thought life insurance was the most interesting, as it is so huge in Korea.’

In addition to having his eyes set on Thailand, Ross is also very keen on Japan. The restructuring of Japan’s banking sector is only just starting to take place, and there too, the government recently enacted a bankruptcy law that will prove very favorable to foreign investors. The Japanese government has also shown its willingness to allow more foreign players into the banking sector, Ross said.

Besides banks, there are many other interesting Japanese companies up for grabs, Ross said. In light of this, his company will soon put a fair chunk of its $250 million Asia Recovery Fund into failed companies in the Kansai region of Japan, a region that produces 20% of Japan’s total GDP.

“Most other private equity funds are in the Tokyo region,” Ross said. “But there are plenty of good, medium-sized businesses in the Kansai region. So many companies have gone bankrupt there.”

The regional government of Kansai and the larger local companies will also be contributing money to the effort, Ross said.

The Asia Recovery Fund will have another closing in a few months, to raise more money for the region. A good part of that could conceivably go to Thailand, he said.