The Bad Boys Of Emerging Markets
For Jim Mellon, the 1994 visit to Moscow was just a side trip after a deal in Vladivostok turned out to be a dud. But the voyage ended up reshaping his fund-management company, Regent Pacific Group Ltd.
What Mellon saw in Moscow was the beginning of Russia's privatization program. Awestruck, Mellon watched as grandmothers from the countryside haggled with traders protected by Kalashnikov-toting bodyguards over vouchers good for stock in Russian industries. Figuring this could be the bargain of the century, Mellon plunged in. Ordering his Hong Kong headquarters to wire him $2 million, he snapped up every share in sight. Six months later, the stake was worth $6 million.
From that brash start, Regent has become one of Russia's largest and most successful foreign stock-market investors. It has $1.1 billion under management in the country and also runs Russia's third-largest brokerage house. In the 12 months through April, Regent's White Tiger fund, one of several Russian funds it manages, was up a staggering 340%.
The Russia coup is a vintage performance for Mellon, an Oxford-educated Scot, son of a British diplomat and distant cousin of Pittsburgh's Mellon banking dynasty. Since taking control of Regent in 1990, Mellon and investment director Peter Everington, have been grabbing headlines by making audacious deals. They first made a name for themselves by raiding closed-end mutual funds sitting on undervalued assets. More recently, they've gone after London's venerable Hambros PLC merchant bank, trying to split it up in order to boost a flagging stock price. In June, they completed a $58 million initial public offering in Hong Kong. And they're pushing into America, where, along with San Antonio-based U.S. Global Investors Inc., they recently rolled out the Regent Eastern European fund and plan to launch several others.
POWERHOUSE DREAM. Although Regent has only $2.3 billion under management, its latest move will pit the firm against the likes of such deep-pocketed emerging-market money managers as Franklin Templeton, Fidelity Investments, and Morgan Stanley. But Mellon, a 40-year-old speed-reader and marathon runner who crackles with energy and ideas, is undaunted. He predicts Regent will be managing $4 billion by the end of its fiscal year next Mar. 30.
Mellon's dream of building a new emerging-market powerhouse might pay off. With one intrepid staff member just back from a Central Asian cheap-stocks scouting expedition, Regent is preparing to market a $50 million fund specializing in the region. A $65 million fund targeting the Balkans just got off the ground, as has an Africa fund. Mellon is moving into Ukraine, where Regent on June 11 closed a $100 million debt fund targeted at yield-hungry South Korean investors. And he is eyeing other funds in Latin America and Europe, where Regent is little known. Says Mellon: "We've barely scratched the surface."
Regent has the resources and drive to back up Mellon's ambitions. Fresh from its IPO, Regent has nearly $150 million in cash and is lining up an additional $100 million in credits. Friends and former colleagues give Mellon high marks for combining an entrepreneurial mind with a salesman's silver tongue. "Jim can sell anything," says a fund manager who previously worked with him at GT Management.
Everington, 38, a Cambridge-trained aeronautical engineer, is the team's analytical member, poking and probing his partner's ideas for soundness. Their alliance goes back 15 years, when both were analysts at GT's San Francisco office learning the firm's top-down investment style. Even today, the two are more interested in making big investment bets based on money flows to countries than in picking individual stocks. In Russia, for example, Regent has profited by snapping up the biggest and most liquid issues it can find.
SETBACK. This style has served Mellon and Everington well. In 1985, while at Thornton Management (Asia) Ltd., they saw that the Plaza Accord to drive down the dollar would mean a boom of unprecedented scale for Asia. So they piled into the biggest-cap stocks in the region. One of their biggest winners was Philippine Long Distance Telephone Co., then selling for two times earnings. When they finally sold out in 1989, their stake had gone up nearly 50 times. Says U.S. Global Investors Chairman Frank Holmes: "They have the chutzpah to go into places and speculate."
While Regent has plenty to savor from its Russian success, it also has a few bruises. The performance of some of its Asian funds has been "dreadful," Everington concedes. And faced with opposition by Hambros' management, Mellon's and Everington's efforts to get the London merchant bank to act on their demands for better performance have thus far gone unheeded. As a result, Regent has barely broken even on its 4% stake. Regent also hit an impasse with Pioneer Industries Holding Ltd., a Hong Kong-listed conglomerate whose major asset is an interest in Thailand's Bangkok Bank Ltd. Again, Regent's bid to bust up Pioneer went nowhere, and the value of Bangkok Bank stock has fallen along with the plummeting Thai market, leaving Regent with an $11 million loss.
Mellon and Everington even had a rare setback in Russia earlier this year when they raised $200 million to buy blocks of stock in Gazprom, the huge Russian oil-and-gas producer, that were reserved for domestic investors. The shares were trading at a discount to Gazprom's American depositary receipts, so Regent attempted to buy the stock via a local holding company. But Regent quit as high-level political pressure convinced Mellon that this battle was one he couldn't afford to win. "I didn't want to end up in the Moscow River," says Mellon. "We have too much at stake in Russia." From that stake, hope Mellon and Everington, will grow an emerging-market investment group that will rank among the giants.