Magazine

The Patient American


By Frederik Balfour

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It was a steamy January morning in 1996 in Ho Chi Minh City, and Peter Ryder was just sitting down to a breakfast of fried eggs, dragon fruit, and iced coffee in the rooftop caf? of the Rex Hotel, a delightfully kitschy edifice that was popular with U.S. troops during the war. From his perch, the former Wall Street banker watched as police squads, armed with ladders and paint, fanned out across the city. The target of this dawn raid were ads for Coca-Cola (KO), Motorola (MOT), Sony (SNE), and other foreign brand names plastered on billboards, bus shelters, and storefronts. "My initial reaction was, That improves the aesthetics,'" Ryder recalls. But it quickly became clear that Hanoi was yanking the welcome mat it had laid out for foreigners like him. "The xenophobic implications couldn't have been more explicit," he says.

Vietnam's brief honeymoon with global capitalism was coming to an end. Reforms in the late 1980s and the lifting of the U.S. trade embargo in 1994 had unleashed a tide of foreign investment. Companies from Procter & Gamble (PG) to American International Group (AIG) to Enron flocked to Vietnam, convinced that after losing the war they could win the peace. But infrastructure was in tatters, the Communist bureaucracy was as Byzantine as they come, and corruption festered at every level. Then came the crackdown, and a year later the Asian crisis hit. Most foreigners bolted.

But Ryder stayed put, and today the 53-year-old New Yorker looks like the smart one. In March, Ryder's Indochina Capital Vietnam Holdings, a closed-end fund, staged a $500 million initial public offering on the London Stock Exchange. Indochina Holdings, the conglomerate Ryder pieced together with a friend, manages more than $1 billion in assets such as golf courses, resorts, and office buildings, as well as a brokerage and investment advisory arm that has worked for the likes of SABMiller and Japanese construction giant Kajima. George Soros, Citigroup (C), JPMorgan (JPM), and other financial heavies have invested.

Ryder's saga, from its early highs to its rock-bottom lows to its current triumphant chapter, is emblematic of Vietnam's story. And his tale mirrors that of countless Westerners who, by stubbornly refusing to scram when an emerging market gets ugly, often keep interest in an out-of-the-way economy alive until the Big Money rolls back in. There are Ryders in Prague and Budapest, Phnom Penh and Beijing??herever capitalism has grown in the past 20 years. Many have gone broke. Others, Ryder included, are proof that the payoff for daring can be rich indeed.

That's not to say either Ryder or Vietnam is completely secure. Ryder himself acknowledges that one of his real estate projects isn't selling as well as he had hoped. The once-hot Ho Chi Minh stock index retreated 25% in the summer meltdown (though it has since clawed back those losses and is now double what it was a year ago). While portfolio investors have poured more than $6 billion into Vietnam-focused funds in the past 18 months, the combined capitalization of the Hanoi and Ho Chi Minh City stock exchanges is just $24.5 billion, leading to fears that some investors are overpaying. These funds now trade at discounts to their net asset values, compared with premiums of 30% six months ago. And even as Vietnam continues to open, corruption and bribery are endemic. "There's big investor euphoria," says Chris Freund, who runs private equity outfit Mekong Capital. "There's a sense it's easy to make money here, but in my experience it's hard."

BIMMERS AND PINSTRIPES

Still, the fundamentals of Vietnam??nd Ryder's bet on the country??emain attractive. Vietnam is sometimes referred to as China's southernmost province, in part because many believe it has the same winning combination of political stability, a large workforce, and tremendous entrepreneurial energy. Better yet for outsiders, pay in Vietnam averages just $60 a month, well below the rate in eastern China. Low-wage manufacturing accounted for more than half of non-oil exports of $31 billion in 2006. Higher-wage work is growing, too: Electronics exports hit $1 billion in the first seven months of 2007, nearly 25% above the same period last year.

Everywhere you look there are signs of the country's solid embrace of capitalism. BMWs, Mercedes (DAI), and even the odd Hummer (F) ply their way through the sea of Japanese motorcycles in front of the Rex. A block away on Dong Khoi Street, souvenir shops that once peddled fake U.S. Army dog tags have given way to boutiques selling Louis Vuitton (LVMUY), Gucci (GUCG), and Dolce & Gabbana. Housewives and college students line up at brokerages for a chance to hitch a ride with the market. At the Park Hyatt, investment bankers from Credit Suisse (CS) and JPMorgan talk IPOs with entrepreneurs. In the 1990s, "this wasn't Indochine, it was 'Nam," says Sesto Vecchi, an American lawyer who has worked in Vietnam off and on since the 1970s. "Now you walk into an elevator full of guys with pinstriped suits. They're in a different class."

That class extends right to the top of some of the biggest multinationals. With annual growth averaging 7%-plus this decade, Vietnam has earned a place on the itineraries of jet-setting chief executives, including Intel (INTC) Chairman Craig R. Barrett, Coca-Cola CEO Neville Isdell, and Microsoft's (MSFT) Bill Gates. Last year licensed foreign investment hit $10 billion, buoyed by a $1 billion commitment from Intel. And Hanoi expects $13 billion this year. Japanese tour groups have even visited to check out investment opportunities.

If everyone has a touch of Vietnam fever now, Ryder can rightly say he caught the bug early??ay back in 1992, on his first trip to Vietnam. Salomon Brothers had just moved him back to New York after a stint in Tokyo. But he was feeling the same wanderlust that had spurred him to work on archeological digs in Central America as part of his MA in anthropology at the University of Pennsylvania. A chance meeting with a Vietnamese ??migr?? about a possible property deal in Ho Chi Minh City piqued his curiosity.

Like so many first-time visitors, Ryder was seduced by Vietnam's charms: graceful French colonial architecture, tree-lined boulevards, unspoiled beaches. He still waxes nostalgic about those early days, when there were no taxis, no stoplights, and schoolgirls riding bicycles dressed in white ao dais (the traditional Vietnamese costume) had the streets to themselves. "There seemed to be flocks of them floating down the streets," he recalls. During that visit Ryder also became smitten with a local: Le Bich Thuy, a 24-year-old student and part-time interpreter. She accepted his invitation to dine at what was then Hanoi's only private restaurant??ut insisted on picking up the tab.

KARAOKE COWBOY

Ryder was impressed by the entrepreneurial drive that had been unshackled by the reforms of the late 1980s. At Cho Lon, a sprawling open-air market in Saigon??s many still call Ho Chi Minh City??raders haggled at the top of their lungs over everything from cheap lipstick and smuggled electric fans to sacks of rice and freshly slaughtered pigs slung over the backs of beat-up 50 cc Hondas. Kids darted in and out of traffic hawking Wrigley's (WWY) gum while adults did a brisk business in spare parts for motorcycles. "It blew me away," says Ryder. "I thought, If this is Communism, then the world could use a lot more of it.'"

The real estate deal fell through when it turned out the person promising it didn't have title to the land?? problem unseasoned investors still encounter. Ryder then set his sights on a dilapidated building directly across from Hanoi's baroque opera house. The property belonged to the Vietnam Fatherland Front, a powerful arm of the Communist Party that had an antique store on the site. Ryder figured he had an "immediate in" as his girlfriend, Thuy (yes, they hit it off on that first date), had attended Foreign Trade University in Hanoi with the Front's No. 2. But that didn't do much to smooth the way as Ryder was forced to sit through hundreds of meetings trying to hammer out a deal to raze the building and put up an office tower. "Time after time we'd reach an agreement on a Wednesday, only to come back on Thursday and we'd be back to square one," says Ryder. "Smoke would be coming out my ears."

It took three long years for Ryder to line up the countless permits and approvals needed to break ground. And at every turn, there was an official with his palm out. Ryder says he refused them, but he admits he passed endless nights wining and dining bureaucrats and crooning at karaoke bars?? torture for Ryder, who claims his repertoire is limited to Glen Campbell's 1975 hit Rhinestone Cowboy. "Did we bring nice gifts, take them to expensive dinners, and put bottles of XO cognac on the table 500 times? Absolutely," he says.

LEAN TIMES

By the time the eight-story building finally opened in 1997, Ryder had long since recouped his investment by selling most of his stake to a developer. His timing couldn't have been better, since hardliner Le Kha Phieu had assumed the leadership of the Communist Party, and the investment climate turned ugly.

But Ryder had married Thuy, and they were living in a renovated French Colonial home in Hanoi with their twin sons, so he wasn't about to call it quits. "I was one of the few entrepreneurs left standing," he says. "I had to reinvent myself." To get through the lean times, Ryder and Thuy improvised. She landed distribution rights for Est??e Lauder (EL) cosmetics and bought out her partners in Hanoi's only upscale hair salon. Ryder then set up an IT company that installed networking equipment at offices, at a time when the country had no Internet access (not even dial-up), faxes to the U.S. cost $10 a page, and cell phones were an untold luxury. He sold the business to DataCraft of the U.S. a couple years later for $300,000??bout twice what he put in.

The Ryders also dabbled in the stock market. Although the Ho Chi Minh City bourse didn't open its doors until 2000, Vietnam had a lively informal market in shares of privatized companies. As a foreigner, Ryder was shut out, but Thuy, now 39, loaded up on shares of phone gear manufacturer Cable & Telecommunications Material and appliance maker REE. Today, those blue chips are worth many times their initial investment.

Ryder wasn't the only American struggling in Vietnam. Rick Mayo-Smith was building the Furama Hotel, a $25 million luxury resort on China Beach. The site was spectacular??iles of unspoiled coastline, where American GIs sunned themselves during the war. But there was little more than the sand, sun, and waves. At Vietnam's first (and only) international surfing competition, held there in 1993 just as Mayo-Smith broke ground, organizers had to rig a mile-long telephone cable to the beach and set up a temporary phone booth on the sand so reporters could file their stories and surfers could call their girlfriends. Bathing facilities consisted of a garden hose.

A mutual friend had introduced Mayo-Smith to Ryder in 1992. The two teamed up to launch Indochina Capital as a consulting company, but jobs were few and far between. So the pair began trying to raise money for a fund that would invest in real estate and take stakes in local companies. It was a lousy time to rattle a cup. Vietnam was yesterday's story. Even the intrepid Mark Mobius, who launched a Vietnam fund for Franklin Templeton Investments (BEN) in the early 1990s, had pulled out. "We were a decade too soon," Mobius says now. When Ryder approached his old Wall Street buddies, he got the cold shoulder. "They'd look at me and say, Pete, it's time to buckle down and get real. Vietnam is never going to happen.'"

But on the ground things were slowly starting to move. In 2000, the country inaugurated its first legit stock market?? handful of listings traded three times a week. And a 2001 trade deal with Washington helped exports of coffee, seafood, garments, and shoes to the U.S. to quintuple to $5 billion by 2004. The following year, Hanoi passed a landmark private enterprise law, spawning tens of thousands of small businesses, from tailoring shops to brokerages. Authorities also lifted obstacles to 100% foreign ownership in most sectors, sparing Western companies the headache of finding local joint-venture partners.

Another economic boon has been a reversal of decades of antipathy toward boat people, who fled after the Communists took over. When they started to return in earnest about seven years ago, Vietnam recouped much-needed skills and capital. Among them was Henry Nguyen. Born in Saigon in 1973, Nguyen left for the U.S. at the war's end. He moved back in 2001 armed with a medical degree and an MBA, and set up a tech services company. In 2004, International Data Group hired him to run a $100 million fund to invest in Vietnamese tech startups. Nguyen credits Ryder's good fortune to his unflappable personality, a wife with incredible business savvy, and stamina. "There's that old Woody Allen quote that 80% of success is just showing up, and he's been showing up for 15 years," says Nguyen.

FAST RETURNS

By 2005, Ryder's luck was starting to turn. Indochina Capital raised $42 million for a property fund, mostly from a couple of U.S. hedge funds and wealthy Americans with strong stomachs for risk. Investors in his Indochina Land Holdings didn't have to wait long for a payout: They collected 20% on their investment that same year, when Ryder and Mayo-Smith flipped their stake in the Sofitel Metropole Hotel Hanoi. By 2006, Merrill Lynch (MER), HSBC (HBC), and Credit Suisse, among others, began issuing bullish research on the country's prospects. That helped Indochina raise $265 million for a second property fund.

Since the London IPO in March, Ryder's new closed-end fund has already plowed $150 million into companies ranging from a domestic snack food maker to technology company FPT. It also put $21.4 million into unlisted shares of Bao Viet Insurance in June, at 79 times 2007 earnings. "Is the price high? Absolutely," says Ryder. But like bigger rivals such as HSBC, he wanted to get into financial services, where foreigners can now own as much as 30% of companies.

Some, though, say the latest bout of Vietnam fever may already have peaked. Donning a yellow hard hat, Ryder takes a walk around Indochina Riverside Towers, a development that includes a 21-story apartment tower and a three-story mall that Indochina Capital is building in Danang. With seven months to go before work wraps up, nearly 90% of the 95 apartments have been sold. But so far there are no takers for the space in a 12-story office building adjacent to the mall. "We are worried, definitely," Ryder acknowledges, adding that there may be too much foreign money chasing too few good deals. Shares in his London fund stand about 6% below their offering price.

Yet Ryder and other investors are betting that despite some parallels between now and the 1990s, things will turn out differently. "The foundation is quite well poured this time," Ryder says. Privatizations and economic reforms have accelerated under Prime Minister Nguyen Tan Dung, who took over in 2006. A better legal infrastructure is in place, and the private sector has been unshackled. And there's little room for backsliding on reforms since Vietnam was admitted to the World Trade Organization in January. Major manufacturers like Hon Hai, that don't want to put all their eggs in China, now see Vietnam as a strategic alternative: The Taiwanese company (which makes all manner of gadgets for the likes of Apple (AAPL) and Hewlett-Packard (HPQ) plans to invest $5 billion in Vietnam over the next five years. Researcher iSuppli predicts that the volume of contract manufacturing in Vietnam will double every year through 2011.

Still, investors must maintain constant vigilance, as Ryder found while clearing land for a golf course at China Beach. Regulations require a payment of about $2 for every tree cut down or removed. The rule led to a flurry of planting by locals, some of whom stuck large branches into the ground hoping to pass them off as bona fide trees deserving compensation. Ryder greets such antics with a philosophical shrug: It would take something far worse to drive him from his adopted country. "The only way I'm leaving this place," he says, "is feet first."

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong


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