SINGAPORE - In a ballroom at the posh Raffles Hotel, 300 or so venture capitalists, fund managers, and institutional investors swapped business cards over exotic dishes of sea slugs and hot and sour soup.
It was a crowd you might expect to find at a conference on risky Asian equity investments, with one possible exception: a contingent of U.S. bankers, their sights set on cashing in on the region's economic explosion.
Competition in this part of the world for the best investments is intense, and the banks are late arrivals, to say the least.
According to the Hong Kong-based Asian Venture Capital Journal, at the close of 1993, $1.5 billion in capital was controlled by 70 fund managers based in six Southeast Asian countries - Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
Less than 5% of that tally belonged to U.S. banks. But now they are coming on with a vengeance.
For several years, big U.S. banks have jumped into the region with limited partnerships, subsidiaries, and investment arms to take equity stakes in locally run companies.
"The more you know, the more risks you're willing to take," says Peter Mok, senior manager of investment banking for Singapore-based DBS Bank. American "bankers no longer have a phobia about this mysterious Asia. They are willing to make the same investment decisions here they would make at home."
A variety of factors - both internal and external - is driving U.S. banks to take equity positions in the region, not the least of which is the payoff: Equity investors in Asia can expect annual returns in the 30%-40% range.
With few exceptions, annual economic growth rates in Southeast Asia have hovered around 8% for years. Those numbers have fueled the emergence of a middle class, hungry for goods and services.
That, combined with the emergence of stronger capital markets, is driving U.S. banks to take equity stakes in light manufacturers whose products are aimed squarely at domestic consumers - not the export market.
"If we are going to truly be a global equity investor, we have to be in Asia," says Arne Chavkin, a partner in Chemical Venture Partners, a limited investment partnership of Chemical Banking Corp. "It's the fastest-growing region of the world."
Despite their late starts, the Americans say their extensive wholesale operations in the region give them an advantage over the competition.
"We have the infrastructure in place, and we can leverage it for relationships and to analyze investments," says David Lesoff, managing director of global equity investments in Asia for Bank of America.
Another factor is the joint venture push of U.S. firms into the region. "Those guys are our customers, and they want to come to Asia. We're their bank," explains Scott McKinley, a Singapore-based partner in Chemical Venture Partners.
But the risks, too, are high. Legal systems are still developing, and contracts can be difficult to enforce.
A dearth of solid financial and market information makes conducting due diligence next to impossible. "There is no Dun & Bradstreet in Asia," says one banker.
With that in mind, bank officials are moving cautiously to avoid a repeat of past foreign investment debacles. And some believe that equity offers safeguards simple lending cannot.
"Banks often incur equity risks with their lending anyway," Mr. McKinley says. "But as a lender, you tend to be one step removed from where you want to be ... It's easier to get the information as a principal investor."
Sunil Sreenivasan, chief operating officer for Citicorp in Malaysia, adds that the Southeast Asian equity markets "have developed a lot faster than the debt markets, so often there are more opportunities and security" in equity.
Thailand has a reputation as an extremely tough market to crack, with lots of insider deals. Malaysia, with its booming electronics industry, British legal system, and government incentives, is easier.
Singapore is a good base, but well-developed and loaded with competition. Indonesia offers plenty of potential, but its legendary corruption and immature legal system scare away many investors. Although exciting, Vietnam and Burma are considered a bit too adventuresome at present for most bankers' tastes.
In most countries, exiting investments remains a challenge. As they do in the United States, equity investors in Southeast Asia want to sell their stakes within about five years.
But the merger and acquisition markets here are still underdeveloped. "We find ourselves pretty dependent on the IPO as the main avenue of exiting," Mr. Lesoff says.
Even that can be difficult in places like Indonesia, where the capital markets often are not developed enough to handle such transactions.
As the financial infrastructure in those countries expands, exits will become easier, Chemical's Mr. Chavkin predicts, and that will make equity investments more attractive.
Everywhere, cultural diversity is a challenge. In most countries, influential families own big conglomerates.
"Asia isn't a simple place to do business," says Mr. Lesoff, a Chicago native. "Each of the markets has different ideologies, relationship networks, and legal structures."
"It's very important," Mr. Chavkin adds, "not to be viewed as an outsider, to develop contacts and understanding."
Despite the potential roadblocks, U.S. banks are raising their stakes here dramatically. The banks are reluctant to give specific figures, but total equity stakes in the region easily reach nine figures.
Bank of America, which has the lion's share of its $2.5 billion equity portfolio invested in North America, wants to place 20% of its equity investments in emerging markets.
Right now, though, it has less than $30 million invested in Asia. "When you put that against the backdrop of Bank of America's presence in Asia, our portfolio here is underweighted," Mr. Lesoff says.
To customers, the equity business looks like an extension of the banks' services, and there may be a bit of referral and information sharing from time to time.
But internally, the banks keep a "strict firewall" between equity investment arms and corporate banking, says Adrian Lam, a director of Citicorp Capital Asia Ltd.
For the past few years, some banks have followed a simple strategy to make up for the knowledge gap: Invest in established, respected funds and then co-invest with those funds on major projects.
Chemical, which plans to invest soon in Southeast Asia, has used this strategy well in both China and India and has even taken an equity stake in Peregrine Direct Investments, one of the region's top investment managers.
The alliances allow Chemical to gain cultural know-how and experience operating in those countries. In exchange, Chemical brings process and discipline in structuring deals.
"We can benefit from the knowledge of our partners, diversify the risk . . . and make more friends," Mr. Chavkin says. "It's a good way to become 'local,' . . . but you have to bring something to the table, too."
Other U.S. banks have created funds of their own, which invest in everything from start-ups to mezzanine and expansion projects.
In Malaysia, Citicorp Capital Sdn. Bhd. opened its doors in 1991 as a straight venture capital enterprise. It invests $2.5 million to $10 million in high-tech start-ups, where it aims for returns of up to 40% and exits within five years.
Today, the $50 million fund has a portfolio that spans the technology ladder. One recent investment: a new company that pumps out compact disks in a totally automated plant outside Kuala Lumpur, the Malaysian capital.
"We're trying to diversify with a multitude of small businesses in various industries," Mr. Sreenivasan explains.
Other banks, citing the high costs of researching potential investments, have higher thresholds. BankAmerica aims for investments of $5 million to $15 million. "Otherwise, it's not worth it," Mr. Lesoff says.
But experts warn that Asia's fledgling venture capital industry, now about 10 years old, is at a crossroad. It was estimated that only 44% of the capital available at the close of 1994 was actually invested.
But U.S. banks, with their deep pockets and extensive networks, appear well-positioned to survive any shakeout.
"Many of those fund managers are under pressure to invest," says Citicorp's Mr. Lam. "We are not under any pressure . . . We can take the cream off the top and give the bread crumbs to the little guys."
