Darby emerges

Long before he joined the ambidextrous and rapidly growing global private equity firm, Richard Frank was gaining hands-on experience in the regions he would eventually target as chief executive officer of Darby Overseas Investment.

The Washington-based firm now has offices throughout Latin America, Asia and Central and Eastern Europe. Frank, when he joined Darby in 1997, was no stranger to any of these regions, having spent the bulk of his life involved in foreign affairs of some kind or another.

“What got me started was being 17 years old and getting on a train headed out of Wyoming,” Frank says of his home state. He was at the time on his way to Sweden on a student exchange programme. The experience “changed everything” for him, he says, and whetted his appetite for contact with the world beyond Wyoming and the US.

Having surveyed Europe, young Frank's next stop was Latin America. As a freshly minted MBA student from MIT's Sloan School of Management, Frank was selected for a programme in Colombia that installed him as an executive in a leading financial group. Frank stayed in Colombia for two years, picking up fluent Spanish as well as an appreciation for the region's economic potential.

His first experience in Asia was intense but of a rather different nature. Frank served with the US military in Vietnam, where he rose to the rank of captain and earned a Bronze Star.

Although a long career at the World Bank would follow, this early exposure to a range of very different cultures impressed on Frank the importance of careful relationship building in cross-cultural exchanges, a lesson he makes sure is not lost on the 45 Darby investment professionals in the firm's 10 offices around the world.

Particularly in the emerging markets, says Frank, “you really need to built up a reservoir of relationships and spend a great deal of time with the business owners from the outset. It's a requirement. You're going to be invested in a company with owners and executives for many years. If there's a bump in the road you need to be able to sit down with them and say, ‘Listen, do you remember when we invested together six years ago? Here's what we need to do to get through this.’”

In the early 2000s, during the nadir of interest in emerging markets private equity, Darby reached what might be thought of as its own bump in the road – due mostly to factors beyond the control of the firm's leaders. But while many other organisations fled emerging Europe, Asia and especially Latin America, Darby stayed put. It also entered into a series of well timed partnerships to expand its franchise, including, crucially, the sale of itself to asset management giant Franklin Templeton, which gave Darby expanded resources and incentives to continue its push into new regions and strategies.

The rising tide of the emerging markets has been good to Darby. Just a few years after most Western limited partners were declaring themselves allergic to the word “emerging”, Darby finds itself among a handful of private equity firms to have a substantial track record in these regions. Following a veritable capital commitment famine, Darby is in feast mode. The firm is currently raising six funds, including three mezzanine debt vehicles targeting Asia, Central and Eastern Europe and Latin America, respectively. A Latin American financial-services fund is in the works, as is a Brazilian infrastructure fund. Darby is also raising a global fund that will co-invest alongside all of its fund products. (Frank declined to comment on his firm's fundraising activities).

The infrastructure fund is a follow-on to the great success Darby had raising a similar fund for South Korea last year. Together with Korea's Hana Bank, Darby raised KRW580 billion ($610 million; €461 million) for Korea Emerging Infrastructure Fund, which will make private equity and mezzanine debt investments in companies involved in Korean transportation, utilities and energy. The joint venture is 70 percent owned by Darby and 30 percent by Hana.

Limited partners have now come to a realisation that the emerging markets are something you can be successful in over the long term, not just in spurts especially if you can differentiate the rules

As with Hana, and reflecting Frank's belief that relationships matter deeply in the emerging markets, Darby has cemented a series of partnerships in its chosen geographies, or has acquired groups with more established presences in these markets.

Darby's entrance into Asia was accomplished through the acquisition, in 2002, of the Asian Infrastructure Mezzanine Capital Fund, a division of Prumerica (formerly Prudential) Asian Infrastructure Investors. The fund had been launched in 1998, just as the “Asian contagion” began to spread throughout the region's economies. The division was renamed Darby Asia Investors. Earlier this year Darby tapped Sean Wallace, a former capital markets professional from JP Morgan, to lead its Asian operations.

Darby's next big geographic expansion was into emerging Europe, and was accomplished in similarly opportunistic fashion. In 2005 the firm took over the general partnership of Dresdner Kleinwort Denson Emerging Europe Fund, a vehicle managed by Dresdner Kleinwort Wasserstein and focused on Central and Eastern Europe. The deal was given the blessing of Dresdner Bank and the California Public Employees' Retirement System, two major LPs in the fund.

Darby's very first fund, called Darby Emerging Markets Fund and launched in 1994, targeted Latin America. But for the second Latin American private equity effort, raised in 2005, Darby partnered with Spanish bank Banco Bilbao Vizcaya Argentaria, which has a presence throughout Latin America.

Frank, a big believer in having “muddy boots on the ground”, as he calls locally based investment professionals, is not done growing the Darby network. The firm will shortly open new offices in Istanbul and Los Angeles, the latter location to better address businesses that target Hispanic populations in North America. He may take the firm to new geographies, he says, but that is dependent on finding the right people.

The most significant relationship for Darby, however, has been with Franklin Templeton, the San Mateo, California-based asset management giant with more than $560 billion in assets under management. The publicly traded company was an original investor in Darby when the private equity firm was formed by former US Treasury Secretary and Dillon Read CEO Nicholas Brady (Brady is now the firm's chairman). In 2003, when the market in general had an aversion to emerging markets risk, Franklin Templeton agreed to acquire 100 percent of Darby for $75.88 million in cash.

The acquisition allowed Darby employees to receive ownership and options in the parent company, gave the private equity firm the wherewithal to continue its expansion, and introduced Darby to a new set of investors. Crucially, says Frank, Franklin Templeton has allowed Darby to retain its culture and independence as a private equity firm.

Despite an entire career spent working in the emerging markets, Frank calls the current state of his market “unlike anything I have ever seen. There's been a sea change.”

Frank runs through the many bullish signs that abound in the three broad regions deemed, not uniformly accurately, emerging. He notes more than 100 emerging economy national investment rating upgrades over the past several years. He highlights the surge in LP commitments to emerging markets funds, focused mostly on Asia, but with materially higher interest in Central and Eastern Europe and Latin America.

Economies have diversified and the capital markets have deepened such that, while serious corrections will continue to occur in the emerging markets, Frank says, they are likely not to be as contagious as in past cycles. Frank draws a contrast between the widespread misery of the 1998 Asian financial crisis and the more recent currency collapse and bond default in Argentina, which “barely moved the needle in Brazil”.

“Limited partners have now come to a realisation that the emerging markets are something you can be successful in over the long term, not just in spurts especially if you can differentiate the rules,” Frank says.

This new LP attitude is a welcome respite from several years ago. Speaking of Darby's fundraising efforts in the early 2000s, Frank notes: “We had a hard time convincing investors. But we were never as pessimistic as them. During the whole period of economic volatility we kept investing.”

Particularly in Latin America, a region from which a number of Western institutions retreated amid the various economic crises, Darby took the opportunity to double down. Among its biggest homeruns, says Frank, have been two investments made in Colombia during the height of fear among many international investors that the country's democracy would succumb to narco-terrorism. Darby bought a stake in power-plant operator TEBSA from an international group that was exiting the country. That investment has been a “huge winner” as capital rushes back into the country, says Frank. He declines to name a second huge winner in Colombia, however, citing security concerns.

“There were so many private equity firms that pulled out of Latin America and the emerging markets, but we didn't,” says Frank. “Emerging markets is all we do, so we stayed.”

Frank says Darby's whole is worth more than the sum of its proliferating parts. His is an approach to the emerging markets that is at odds with some country specialists, who argue that deep local knowledge in one market is hard enough, let alone doing deals in Columbia, Korea and Hungary at the same time. Frank is well aware of the many regional differences in culture, law and capital markets, but says that one of Darby's strengths is the ability to apply common deal structures, due diligence methods and investment policies across countries.

The global network allows for cross fertilisation of deal skills, but also for intelligence sharing. For example, a deal team working on a river barge investment in Eastern Europe benefited from the experience of the Latin American deal team, which had already acquired a barge company called Fluviomar. A Darby client company in Brazil that makes ceramic tiles was able to learn from the Darby Hong Kong team why a certain Chinese ceramic tile maker was able to sell its products in Brazil at seemingly below-cost prices.

Equally important to Darby's expanded network is a phenomenon Frank increasingly observes that he calls “South to South” activity – economic link-ups between different countries in the emerging markets category. As, for example, Chinese companies seek to expand into Eastern Europe or source materials from Latin America, Darby will be there to facilitate this movement, not to mention profit from it.

Seeing the economies in which Darby invests reach such robust levels of growth is tremendously satisfying to Frank on several levels. As the former chief financial officer of the International Finance Corporation, the private sector arm of the World Bank, Frank was a key driver of the group's mission, which is to promote economic development or private sector led development and in the process reduce poverty, especially with a market based approach. The success of Darby is evidence that this mission is at least partially on its way to fulfillment.

But it's the human element that interests Frank the most. Success in private equity means accumulating deeper and deeper reservoirs of relationships. A highly personable individual, he plays the role of relationship-builder-in-chief perfectly. His wife travels with him frequently on business trips and they together spend time with company owners and their families. He encourages Darby's professionals to take a similarly personal approach to business as much as possible. Says Frank: “The intense relationships that you build – that's the greatest dimension of this business.”

Founded: 1994

Corporate parent: Darby is a division of Franklin Templeton Investments, which acquired the private equity firm in 2003.

Key personnel:

Nicholas Brady, chairman
Richard Frank, CEO
Julio Lastres, senior managing director, Americas
Robert Graffam, senior managing director, Europe
Sean Wallace, senior managing director, Asia Pacific
Clark Nielsen, senior managing director and general counsel
Michael Barth, senior managing director, global investment

Offices: Washington DC (headquarters); Miami; Mexico City; Sao Paulo; Hong Kong; Seoul; Mumbai; Vienna; Warsaw; Budapest; Istanbul (planned); Los Angeles (planned).


Korea Emerging Infrastructure Fund($610 million; 2006; joint venture with Hana Bank)

Darby-BBVA Latin American Private Equity Fund($175 million; 2005; a joint venture with Spain's Banco Bilbao Vizcaya Argentaria)

Darby Converging Europe Fund(€300 million)

Emerging Europe Fund, L.P.,($225 million; 2000; Darby took over management of this fund in 2005)

Darby Latin American Mezzanine Fund($196 million; 1999)

Asian Infrastructure Mezzanine Capital Fund($246 million; 1998; Darby acquired the Asian infrastructure division of Prumerica in 2002)

Darby Emerging Markets Fund($150 million; 1995)

Recent deals:

January 2007- Darby – BBVA Latin America Private Equity Fund makes a $25.2 million equity investment in BRA Transporteos Aereos, Brazil's fourth largest scheduled flight operator.

November 2006- Darby Asia Mezzanine Fund II makes a $20 million investment in Hangzhou, China-based Shayne, a manufacturer and exporter of high-end upholstered furniture and leather apparel.

August 2006- Darby Central European Mezzanine Fund makes a €15 million investment in UNO, the largest industrial bakery in Turkey.