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Hong Kong's Victor Fung (Int'l Edition)


Asian Cover -- Financiers

HONG KONG'S VICTOR FUNG (int'l edition)

While many investors are bailing out of Asia as if it were the Titanic, Hong Kong's Victor K. Fung has an enviable problem: trying to figure out what to do with the gobs of cash that investors are lobbing at him. As one of Asia's few seasoned professionals in the venture-capital business, Fung is amassing a $1.8 billion war chest for the private equity activities of Prudential Asia Investments Ltd., where he is chairman.

With that money, the 52-year-old Fung wants to begin reshaping Corporate Asia. When he started Prudential's Asian venture-capital arm in 1986, his strategy was simple: ride the coattails of growth by taking lots of small stakes in companies such as Taiwan's Acer Inc. and Hong Kong's Golden Harvest Entertainment Holdings Ltd., then cash out when they go public. "We have to rethink that strategy," says Fung. "There will be a fundamental change in the Asian corporate model."

Now, Fung wants to invest in larger, more established companies and then prod them to slim down and focus on profitable core businesses. He is looking at a $1 billion regional conglomerate based in Singapore and a $2 billion group in Hong Kong. He will also encourage mergers to bulk up companies' remaining businesses and give them commanding positions in their markets.

The eldest son in a wealthy Hong Kong family and a PhD from Harvard University, where he taught economics and finance, Fung is up close to the big changes going on in Asian business. Besides chairing Prudential Asia, Fung is chairman of the Hong Kong Trade Development Council. He has used its $200 million annual budget to help develop policies that boost Hong Kong's 300,000 small and midsize companies, especially in the service sector. Moreover, as the chairman of a second-generation family trading company with sales of $1.7 billion and operations in 26 countries, he has a feel for the market that few investment bankers do. The company, Li & Fung Group, run by younger brother William, has seen its stock price rise 40% in the past year, while the Hang Seng Index fell 47%.

Even in hyperactive Asia, where endless evenings of entertainment follow long workdays, few people can match Fung's energetic pace. He stunned staff on one project by calling 5:30 a.m. pre-breakfast meetings at his penthouse apartment overlooking Hong Kong harbor. Fung's days begin before dawn and regularly stretch past midnight. He says with age he now needs more sleep--but still only around five hours a night.

Fung is a man who straddles two worlds and somehow brings them together. His Western world is one of bookstores and libraries in Boston, where the Fung family has a home and where two sons now live. A U.S. citizen, he also has a weekend house in New Hampshire.

Fung's other life is in the Chinese world of the Hong Kong elite, where Chief Executive C.H. Tung is a neighbor and family friend. It is the world where his mother's apartment is next to his; his younger brother and sisters live downstairs.

Fung brims with ideas to help develop Asia's capital markets. He's backing plans for a NASDAQ-style second board for Hong Kong stocks that would enable smaller companies to get financing more easily. Another idea, a joint venture with the Asian Development Bank, would provide subordinated debt for infrastructure projects. Subordinated debt, which carries higher risk as well as return, is relatively rare in Asia. But the fund may help bridge the gap between equity and straight debt.Return to top

ONLINE ORIGINAL

A TALK WITH HONG KONG'S VICTOR FUNG (int'l edition)

Victor Fung, Chairman of Prudential Asia Investments, is a man who wears many hats. He is also chairman of the Hong Kong Trade Development Council and chairman of a family-run trading company, Li & Fung. To find out more about this multifaceted executive, Business Week's Mark Clifford recently spoke with Fung in his Hong Kong offices in the Central district. Here are excerpts of their conversation:Q: What is the impact of the region's financial crisis going to be on businesses?

A: The whole corporate model in Asia will have a fundamental change. It is a change from the age of conglomerates. In Korea, the chaebol were protected. In Indonesia, companies were protected by a special relationship. Those are gone. The Asian crisis is going to wipe out any vestige of that. In the U.S., it is the age of consolidation. We are going the other way. We are splitting up the conglomerates.

What is that new corporate form? It is going to be very narrowly focused companies that are global in nature. I think you are going to see a move toward the Hong Kong mode, toward medium-sized companies that are focused on narrow market niches but which are going regional or global. You are going to see an outburst of medium-sized global players that are focused on narrow niches.

You slay the old dragons, but you unleash a nest of hornets that might be very competitive. It might take Asia a few years to transform into that. If you take places like Hong Kong, Taiwan, Singapore -- there is a long tradition of having very vibrant small and medium-sized enterprises [SMEs]. Hong Kong has 300,000 SMEs. Although they are SMEs, they have very strong international players. 40% have a multinational type of capability.Q: What is the impact of the crisis on Hong Kong?

A: Hong Kong obviously has been affected. We have not been as affected as some of our neighbors. Real estate prices have come down 30% to 40%, but our economy remains robust. Hong Kong at the end of the day is a very externally oriented economy. Our external trade remains robust. Our big markets are the U.S., Western Europe, and China. They are all very strong. Half of our economy is trade-related. We are underpinned by our external economy.

To understand what happens in Hong Kong, you have to go beyond looking at this 1,000 square kilometers. We are thinking about the whole concept of an external economy. Hong Kong is a metropolitan economy, it is a greater New York, greater London-type of approach. There is a very large part of trade by Hong Kong companies that doesn't appear in Hong Kong trade statistics -- companies like Li & Fung setting up a Shanghai office and exporting to America. That is about another one-third.

The Hong Kong Trade Development Council just completed a survey of over 45,000 companies. We discovered you could add something like $136 billion to our total trade [by including this type of offshore trade]. Our total trade is just under $400 billion. It is fantastic. That offshore trade has incredible invisible benefits for Hong Kong. Offshore trade has grown at 17% per year in the last 4 years.

Q: Is there a danger of an anti-foreign backlash in Asia?

A: It is a very delicate point. Countries are very eager for foreign direct investment. They are liberalizing their foreign investment regimes very rapidly. [However] foreigners will be have to be careful that they don't raise an "ugly American" profile that when the natives are in a time of crisis you take away their best assets for next to nothing. A lot of small and medium-sized deals will be welcomed, but if you take over the national telephone company, you have to be very careful. It is very easy to fall from being a welcomed investor to being a hated foreigner gobbling up the best assets at cheap prices. Q: As a venture capitalist, you now say that Asia must sell value not growth. What does this mean, and how is your thinking different from your previous strategy?

A: I used to tell my guys "don't be too fancy." Asia is diversified. As the region rises, we will rise with it. That strategy has worked admirably for us.

With Asia reaching a new stage, I think we have to rethink that strategy. I used to be very down on fancy financial engineering. In the U.S., a lot of returns come from financial engineering and financial leverage. I think we are going to see the beginning of that here. You have to get a lot more involved in management as opposed to planting the seed and sprinkling holy water. We have to do a lot more in building value in the structure, especially in financial engineering.

What used to make a lot of money was taking a significant minority piece in a growing company. You just watched it grow. Investors will have to do things like create management buyouts. You have to create the value yourself by bringing consolidation. You have to appoint managers. You probably would have a majority control as opposed to minority. You will do fewer but larger deals.

The currency crisis has taken the valuations way down. In a sense, you are restarting the clock. [In the early 1990s there were] easy IPOs, easy debt. As a private equity investor, you were competing against all these other things -- and taking a lot more risk a lot earlier. [The crisis] has reopened the running room for private equity. Q: What opportunities are you looking at in real estate?

A: A lot of values in real estate have been created. One of the projects we are looking at is helping the so-called big-box retailers come in from Europe and the U.S. They have been looking at Asia and circling for a long time. They are looking at 25-year leases. We see an opportunity with the bombed-out market and the connections we have with real estate. We can afford to give it to these guys on, say, 15-year leases. What we would do to give us some upside is give us rentals as a percentage of sales. We can use these long leases to warehouse these properties until Asia returns, and we can [then] realize the capital values. If we get good leases, we can put them in a bundle and [securitize them] in the U.S. market. Return to top


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