BUSINESSWEEK ONLINE : JULY 10, 2000 ISSUE
INTERNATIONAL -- FINANCE

Return of a Hong Kong Highflier (int'l edition)
Peregrine's Francis Leung is back. Is that good?

Francis Leung can still count on his guanxi. With those connections, it took the banker all of two hours one February morning to raise a cool $1 billion for Hong Kong high-tech tycoon Richard Li's Pacific Century CyberWorks. Li used the money as part of his bold bid for Cable & Wireless HKT.

What's remarkable is that 2 1/2 years ago, Leung could hardly get anybody to return his calls at all. He had presided over the collapse of Peregrine Investment Holdings Ltd., one of Asia's biggest investment banks, in January, 1998. Leung and Peregrine founder Philip Tose were known for their aggressive investment strategy and heavy reliance on connections--which eventually led to the bank's demise.

Now, as head of the company that emerged from the ruins, BNP Prime Peregrine Capital Ltd., Leung is employing the same tactics. The difference is in the companies for which he's doing deals. Before, he was helping so-called red chips, mainland Chinese companies listing overseas; now, he's at the center of Hong Kong's dot-com scramble.

So far this year, Peregrine has been responsible for some $2.3 billion in international equity issues in Asia excluding Japan, the fourth-biggest behind the likes of Goldman Sachs & Co. and Morgan Stanley Dean Witter & Co. Also, it has raised $2.6 billion in private placements, including the $1.01 billion for Li.

Leung says BNP Prime Peregrine has made more money in underwriting and equity trading for institutional clients than those divisions at the old Peregrine ever did. ''Leung has certainly been successful. Not many people could go like that from a standing start,'' says the managing director of a U.S. investment bank in Hong Kong. And at the Paris headquarters of BNP-Paribas, which salvaged Peregrine's Hong Kong and China equity operations in February, 1998, they definitely appreciate Leung's contributions. ''We've come to realize how important his list of contacts is,'' says a high-ranking BNP-Paribas executive. ''He's brought us business that we could never have achieved without him.''

FORGIVE AND FORGET. A close look at the way Leung runs BNP Prime Peregrine reveals much about Hong Kong's ability to forgive and forget. But it also raises questions about how much progress Hong Kong has made in promoting good corporate governance and transparency. Indeed, a government investigation into the collapse of Peregrine Investment, launched 16 months ago, is apparently stuck somewhere between the Justice Dept. and the office of the Finance Secretary. The government has not said when the report will be released.

With 90% of Leung's original team intact, BNP Prime Peregrine operates pretty much the way the old Peregrine did. The opportunistic style that was the bank's trademark still prevails and continues to attract talented young Hong Kongers looking for an alternative to the stuffed-shirt culture of most U.S. and European banks. ''Francis instills an amazing sense of loyalty. Part of it has to do with the thrill of being the bad boys of investment banking,'' says Christopher Leahy, a former company director who left in June with Leung's blessing to join techpacific.com, an Internet incubator that Peregrine helped list earlier this year.

But techpacific, like many other companies Leung has taken public since January, trades below its initial public offering price (table). Indeed, many of them enjoyed a brief moment of glory on Hong Kong's Growth Enterprise Market before falling when the tech bubble burst in mid-April. Of the 26 companies listed on GEM, eight were either sponsored or underwritten by Peregrine. Hongkong.com, a portal that is a unit of Nasdaq-listed Chinadotcom, was trading at 16 cents on June 26, compared with its initial public offering price of 24 cents. ISteelAsia, an online auction site for steel, floated on Apr. 20 at 25 cents; now it is going for 5 cents. And the hastily cobbled together placement for Li's PCCW in February hasn't turned out so well for the institutional investors who paid $3.02 a share--the stock is now trading at about $2.

This sounds all too familiar to some of Leung's critics. In the mid-1990s, nobody promoted red chips the way he did. At the time, they were hot issues that soared in price. But many of the businesses Leung took public then are today trading as much as 80% off their August, 1997, highs. Leung says he warned that red chips had become overheated by that August. He defends his record then and now, saying: ''In Nasdaq, lots of companies are 80% off their IPO price. It happens everywhere.'' BNP-Paribas seems just as sanguine. ''The markets have been very volatile this year,'' says the executive. ''I certainly haven't heard any criticism of him inside BNP-Paribas as a result of all this.''

But outside BNP it's another matter. The dismal stock market performance of the tech companies he listed has heightened criticism of Leung's fast and loose style. ''Other investment banks dislike working with Peregrine because they're shoddy and like to cut corners,'' says a rival from a Western investment bank. Leung dismisses such complaints. ''It's wrong to say we only do deals that other people won't touch,'' he says. ''Most of our competitors can't react as quickly as we can.''

BNP Prime Peregrine has also been faulted for whipping up a frenzy reminiscent of the red chip era. The Hong Kong Stock Exchange expressed ''grave concern'' over the chaos surrounding the Mar. 1 launch of Tom.com, the portal backed by Li Ka-shing, Hong Kong's most powerful businessman. Retail investors all but stormed the bank branches where share applications were available. In the end, the issue was 670 times oversubscribed. The stock listed at 23 cents and is now trading at about 70 cents.

INDONESIAN EXPOSURE. The old Peregrine was one of the first high-flying company to be brought down by the Asian crisis. Its troubles began when an Indonesian taxi company with links to the daughter of then-President Suharto defaulted on a $265 million loan in late 1997. Peregrine watched hundreds of millions of dollars of other Indonesian debt holdings quickly lose most of their value. In a matter of days, the company went bust. Leung, who owned about 17% of Peregrine and had some $100 million to his name, was devastated. ''I lost almost everything except my flat,'' he says. ''But what really hurt me was that I lost Peregrine.''

When Banque Nationale de Paris offered to buy out Peregrine's 150-person Hong Kong and China equity team headed by Leung, he jumped at the chance to salvage his career and Peregrine's reputation. BNP even lent Leung a few million so that he could take an 8% stake in the operation. But business was slow at first, since Asia was in the depths of the crisis. And his French bosses kept him on a short leash. ''He couldn't go to the bathroom without calling Paris at the beginning,'' says a former colleague. Leung, disheartened and underemployed, took his wife and four children on a summer pilgrimmage to Israel and Europe to visit Catholic shrines. ''After that, I changed. Now I rely more on God than I do on material things,'' says the 46-year-old Leung, who goes to church every day before work.

The turning point in Leung's comeback was when he helped Li launch PCCW in April, 1999 by acquiring a company already listed in Hong Kong. This deal, perhaps more than any other, heralded Hong Kong's conversion to the New Economy. And it served notice that Leung was back in the good graces of Hong Kong's financial elite. Li's father, the supremely well-connected Li Ka-shing, had been one of Peregrine's earliest clients. Leung is also a close friend of CITIC Pacific Chairman Larry Yung, one of mainland China's most prominent executives. In February, Leung handled a $520 million placement for CITIC, a Chinese holding company that has stakes in infrastructure, finance, property, and aviation companies. ''The business Leung does with those guys, any firm would want to do,'' says the U.S. banker.

One person is missing at the new Peregrine, though: founder Tose. He didn't join Leung at BNP. Instead, he went to the Templeton Emerging Market Fund in Hong Kong for a 16-month stint that ended in September. ''I've known him from way back,'' says Mark Mobius, president of the fund management firm. ''I thought after the disaster it would be nice for Tose to come on board as a consultant. But there was no intention for that to be a long-term relationship. He wanted to move on.'' Tose, once a regular on Hong Kong's social circuit, is now scarcely seen, moving between his homes in Hong Kong, London, and Scotland. He declined to be interviewed for this article.

While Leung's brash approach may be suited to Hong Kong, it isn't likely to travel well. ''I question his ability to transcend the Hong Kong-China thing,'' says another former colleague. ''If you put him in New York or London, he really couldn't hang.'' Leung admits that virtually all Peregrine's business has been in Hong Kong and China. But he says he'll be seeking to underwrite new deals in Malaysia and Singapore once the markets pick up there. Still, for all his confidence, Leung isn't talking about returning to Indonesia anytime soon.

By Frederik Balfour in Hong Kong

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