Asian Direct Capital Management (ADMC), a majority-owned affiliate of State Street, has made its first investments on behalf of the Thai Recovery Fund (TRF), and hopes to expand the fund size from $50 million to $100 million later this year, says Raymond Hood, managing director at Asian Direct.

As a result, the fund's four shareholders û State Street, the Japan Bank for International Cooperation (JBIC), Germany's Kreditanstalt fur Wiederaufbau (KfW) and the Asian Development Bank (ADB) û seek additional investors. The four have agreed to pony up $35 million between them if other commercial players put in another $15 million. The fund has a three-year investment period, looking at deals sized $3 million to $15 million.

"We've reviewed 75 to 80 possible investment options, and now that we've closed our first, we expect a steady stream of deals," Hood comments. The first investment is in Supplier Connex, which provides data services and content structuring, standardizing and outsourcing for regional businesses.

"This is the sort of company you'd expect to find in Hong Kong or Singapore," he continues. "But it's in Thailand. Thailand is becoming a great place to build and grow new businesses. It's big enough and its population is relatively affluent, and it has a more sophisticated legal system, distribution system, and so on, compared to other countries with the same per capital income level. And it's very cheap, labour costs are very low.

"We are taking advantage of three types of opportunities. First are corporate restructuring stories, where debts are being successfully restructured under the new Thai Asset Management Corporation framework. Second are good, traditional companies that need capital to expand and take advantage of growth opportunities. Third, comprising up to 20% of our investments, is early-stage venture capital. Supplier Connex fits into this last category."

Hood notes that Thailand is currently out of favour with institutional investors, because of its slight size in global equity indices, and with private equity players, which favour larger deals in North Asia.

"This is great for us. Deal valuations are now lower. Thai businesspeople are open-minded. Since the Asian crisis, they realize that we offer expertise, and that counts more than just the money. We can help develop their corporate strategy, help them achieve a larger scale of success and advise on their management structure. Because we have so few competitors, we can spend a lot of time with these companies, we have a lot of time to conduct due diligence, and we can watch them evolve their business strategy."

He adds that in 1997 and 1998, local businessmen overvalued their assets, while potential foreign investors insisted on unrealistic fire sales. Since then, the perception gap in valuations has narrowed. The economy is, in fits and starts, coming alive again, and businesses need capital to expand or die.

ADMC's Bangkok office helps bridge the valuation gap. Pannapat Tongpaitoon, its Thailand representative, says, "Thai businesspeople still prefer to talk to professional investors whom they know. Having local connections helps us smooth both negotiations and the investment process. Other foreign companies without a local presence need to partner with a third party to help navigate Thailand's business culture. But here we can just make a phone call. It's a big help in managing due diligence."

Adds Hood: "Thailand is still not transparent. Its legal and regulatory reform is evolving. There is a distinct business culture, and we have to adjust our deal-making mechanisms to the unique setting of Thailand."

Nonetheless, he is confident that Thailand is getting its house in order. The TAMC has been lambasted by Western creditors as being excessively pro-indebted tycoon. Hood says TAMC assumes that most companies are sound businesses worth saving. "The shock of the Asian crisis to Thailand was excessive and undeserved. These companies aren't in trouble because of gross incompetence." He believes the TAMC's bias is realistic. "It is a typical, untidy Thai compromise; it is an attempt to make the right compromise."

He also is a champion of Thailand's privatization campaign, which kicked off last year with the partial sale of PTT but has since stalled over telecommunication concerns. But Hood says privatization will continue, greatly expanding the stock market's capitalization and making exit strategies for private equity funds easier.