Darby goes global

Darby Overseas Investments is fine-tuning its approach to emerging market private equity in Latin America, Asia and Eastern Europe. Judy Kuan speaks with Darby’s Richard Frank and Michael Barth about the firm’s preparation for its first global private equity fund.

It is one thing to be a private equity firm focused on one emerging market, but quite another to be building out an investment platform encompassing numerous developing regions. Logistics and the need for local expertise present barriers to entry that not all private equity firms can or want to surmount, and a quick headcount reveals that firms that are active in more than one emerging market tend to be global funds that also invest in the less volatile economies of North America and Europe.

One of the few private equity firms taking on the challenge of investing specifically in emerging economies on a global basis is Washington DC-headquartered Darby Overseas Investments.

Frank: building ground-up across emerging markets.

Darby’s historical base is Latin America, where it has established deep roots since its entrance into the region in 1994 and now manages five Latin America-specific private equity, venture capital and mezzanine funds.

More recently, the firm also moved into Central and Eastern Europe, announcing early last year that it had been selected by German insurer Allianz and US pension fund CalPERS to take over management of the 2000 vintage, $225 million DKB Emerging Europe Fund from Dresdner Kleinwort Benson. Later in 2005, Darby also made a first close on €100 million ($119 million) for a Central and Eastern Europe-focused mezzanine fund.

In Asia, Darby has built on its status as a subsidiary of Franklin Templeton to make a push as well, beginning with the acquisition in 2002 of Prudential Asia Infrastructure Investors, which is now known as Darby Asia Investors Limited and manages the $246 million Asia Infrastructure Mezzanine Capital Fund launched in 1998. More recently, the firm made a first close on its second Asia mezzanine fund, and Darby is now also working with Korea’s Hana Bank to launch a KW500 billion (€427 million, $509 million) infrastructure fund for Korea.

According to Darby CEO Richard Frank, plenty of work lies ahead in both Asia and Eastern Europe: “Now our goal is to build out in Asia and Central Europe the full range of what we do in Latin America – venture capital and technology, private equity, buyout and mezzanine. I think we will be able to replicate that range of investment expertise and strategy in other regions.”

In addition to building its presence in each geography from the ground up, Darby is also looking at how to best co-ordinate its activities across the three regions, in preparation for the launch of global funds in the future. When exactly the first global fund will be established is not yet clear, but nonetheless, this is a key development for a firm whose activities to date have been clearly delineated by region.

Barth: developing a global footprint.

To lead the process, Darby recently appointed Michael Barth, a former CEO of The Netherlands Development Finance Company (FMO), as managing director for global investment. Barth will officially join Darby’s ranks on March 15 and move back to the firm’s headquarters in Washington DC. Prior to his time at FMO, Barth had worked with the Washington-based International Finance Corporation for 17 years, where he was involved in investment funds targeting a number of emerging markets. Barth’s IFC background is something he holds in common with Richard Frank and five of Darby’s other seven managing directors.

Darby is seeking to offer a broader opportunity set to investors through its global approach, says Barth. “There are always some investors that are interested in certain regions, certain countries, but there are also investors that want to see a better developed global footprint in order that they have a broader array of opportunities inside the firm that they’re dealing with.”

With respect to Darby’s global emerging markets strategy, Barth says: “It really isn’t an issue of inventing something. It is rather adding value to the capacity that is already there. It’s also about utilising the very valuable Franklin Templeton platform to make a sum of the parts that is bigger.”

And while emerging markets private equity as a destination for institutional capital is enjoying its time in the spotlight, Barth – who is on the Emerging Markets Private Equity Association’s board of directors – holds a pragmatic perspective on investing in these markets.

“If you would have gone to a conference on emerging markets investing five years ago, when the sector was really in a slump, and if you listened to all the different presenters, you would have gotten the idea that investing in private equity and mezzanine in emerging markets was so difficult that almost nobody could do it well,” he recalls. “If you went to the same type of conference a few months ago, [emerging markets investing] is so red hot, you get the impression that almost anyone can do it well. It was too pessimistic five years ago, and too optimistic two months ago.”

According to Frank, Darby’s global initiative is seeking to fill a niche that he sees few firms as having the means to fill. “How exactly the [global emerging markets] fund will be designed and structured is something we are now working out,” says Frank.

Many eyes will be watching to see how Darby’s first global offering will be set up – and more importantly, how well it will perform. If the global project proves a success, investors and general partners with an appetite for emerging markets private equity may well choose to emulate the model.