Global journey: Face to Face with Richard H. Frank
Richard H. Frank
- Current position: CEO, Darby Overseas Investment Ltd., Washington
- AUM: $1.2 billion
- Education: B.S. in mechanical engineering from the South Dakota School of Mines and Technology; M.S. from the Sloan School of Management at the Massachusetts Institute of Technology.
- Boards and councils: member of the board of Georgetown University; the International Strategic Board of Banco Finantia S.A. (Portugal); Inter-American Dialogue; Institute of International Finance; Bretton Woods Committee and IBM Venture Capital Advisory Council. He is former chairman of the Latin American Venture Capital Association. He earned a Bronze Star for his service as a captain in the U.S. Army in Vietnam in 1970.
- Personal: Mr. Frank lives in McLean, Va. He is fluent in Spanish and his hobby is gardening.
Mr. Frank's journey began when he was a graduate student at the Sloan School of Management at the Massachusetts Institute of Technology. He signed up for what he calls the finance industry's version of the Peace Corps. He not only gained a career working in emerging countries, but also a spouse and a fluency in Spanish. Along the way, Mr. Frank was chief financial officer and chairman of the private sector group at the International Finance Corp., and then managing director at the World Bank Group. In July 1997, he joined Darby.
Why are you moving beyond Latin America? Two reasons: First, the people that I brought to the firm have backgrounds in many emerging markets, not only Latin America but also in Central and Eastern Europe. … Second, there are two common denominators in those emerging markets that I have described ... One, they are fast-growing. Asia is averaging 8% to 9%; Eastern and Central Europe, 6% to 7%, Latin America, which has more volatility, is averaging 3.5% to 4%. So these markets are growing faster than the more mature parts of the world, certainly much faster than Japan, which is at 1%, faster than Europe, which is at 2%, and more rapidly than the United States, which is doing the best of the mature economies. … Two, if you analyze the emerging economies, you find that growth has been largely financed by commercial bank lending, but the missing link in those economies is what I call risk capital. It's very hard to raise capital that we would have easily available to us in the United States were we to start a company … in the form of venture capital, private equity investment. This is critical because those economies will not be able to continue their growth until they get more risk capital, certainly for their medium-size companies. …The outstanding example of that is China. China is trying to really let die the major dinosaur state corporations and substitute dynamic medium-size companies.
Why now? China is kind of an exceptional case. There you have a move away from state-owned enterprises, which we also see in Central and Eastern Europe, creating more of a private, corporate world, which by definition has to start with small and medium-size companies … You can't start them huge. So I think the way these economies have been structured, politically and economically, has created opportunities as they transition in the manner I just described. In Latin America, you have had a longer history of private capital and private companies, but the region is still suffering from a shortage of risk capital.
Are you finding new prospects in Latin America? Pension funds in Brazil are interested in diversifying beyond government bonds. Of the $85 billion in Brazilian pension funds, 95% is in fixed income. There are some traded equities and almost nothing in (private equity). They are now promoting more long-term investment capital in infrastructure.
What's next? What we're hearing from institutional investors is that they would like to take a first trip into (private equity emerging markets) through a global fund, a diversified play. This is the other thing behind our strategy that we are now in a position to carry out. We now have the platform to do midcap investing in the three most dynamic (emerging market) regions: Asia, Central and Eastern Europe, and Latin America. So we can offer investors a feeder fund, a global fund that will allocate its capital among those three regions somewhat as we see the opportunities.
Do you have that global fund available now? We don't. The key was to be credible to have your teams in each of those regions. …. You have the teams, you have the presence, you have the track record and then you come in and say, "here it is," now we are going to do this. We have tested the institutional interest and it is clearly there.
Do you see investment opportunities for Darby in the United States? We're looking to tap into the purchasing power of the Hispanic population in the U.S, which is estimated at $700 billion. By comparison, Brazil has a (gross national product) of $600 billion and Mexico has a $675 billion GNP. So there's a sector in the U.S. with a buying power larger than the biggest economies in Latin America. We always invested in financial, consumer and branded products as part of private equity. For us, it's a natural. We look at the market from the point of view of a firm that has roots in Latin America. Recently, we did a roll-up of Spanish-language radio, Border Media Partners (LLC). Darby and Goldman Sachs put in a first round of institutional capital for a roll-up of 35 stations on both sides of the border. There is high consumer spending that is reached through Spanish-language radio, which is rising, whereas English-speaking radio is dropping.
Are your limited partners mainly foreign investors? For our Latin America funds, it's a mix of U.S. and European; for Asia funds, it's Asian and U.S.; for Central and Eastern European, it's been European and U.S. The trick has been to find ways to get good return as an investor. There have been some unhappy experiences, certainly in Asia going back to the mid-1990s. A lot of private equity funds (were) created just for infrastructure and the Asian crisis really hurt a lot of those funds. I see them coming back.
Will Franklin Templeton be taking significant positions in your funds? It depends on what stage of development the fund is at. As the parent, they want to show that they believe in the products and their ability to deliver value. That's a very good thing for us to have. … It's not as if they're just finding a way to invest their capital in all of our funds. We view this as a show of total support that they are prepared to put some of their corporate capital into our funds … It's very catalytic.