Darby Overseas Investments has established a new global fund which will invest in private equity and mezzanine finance in the emerging economies of Asia (ex-Japan), central and eastern Europe and Latin America.

The Global Emerging Markets Capitals Fund (GEMCAP) will target $1 billion in funds and will invest directly in private equity, via co-investments, and through the Darby series of regional funds. The fund is being launched in response to investor demand. “They are saying ‘we want a more global exposure’. Through this fund they get exposure to all regions,” Aamer Shahab, managing director of Darby Asia Investors Hong Kong office, said. Darby targets emerging market mid-cap businesses with a reliable track record and good growth prospects. “These companies are looking for more capital and they are all established businesses with a good track record and successful products,” Shahab said. “We check up on companies and entrepreneurs and learn their credit history,” he said. Mezzanine financing is a hybrid of debt and equity investment used to fund a company’s growth. If the debt is not repaid, the issuer has the right to convert invested capital to an ownership or equity interest in the company. GEMCAP is attracted to Asia’s growing domestic business, intra-regional trade and export sectors but is wary of the fragmented nature of Asian markets – the result of cultural and language barriers. It sees opportunities in central and eastern Europe, where banks are reluctant to supply risk capital to mid-market companies. The fund is targeting an initial close of the third quarter of 2007. Shahab was in Australia recently to promote another Darby instrument, the Darby Asia Mezzanine Fund II. DAMF II invests in mezzanine loans with equity kickers to companies in China, India, South Korea and Southeast Asia. It recently made its first investment, a $US20 million stake in Shayne International Holdings, a high-end furniture and leather clothing manufacturer and exporter based in Hangzhou, China. DAMF II capital is expected to boost the company’s production and marketing capacities. “We provided a loan with equity warrants,” Shahab said. “Shayne wants to increase its production capacity and distribution and build a second factory. We can use equity options once the company is successful.” Shahab said DAMF II hopes to raise $US208 million in committed capital for its second close this week and targets $US300 million for its third and final close in April 2007. It hopes to have at least one Australian investor in the final close. Darby’s activities in emerging markets began in recent years in 2002, when it took control of Prudential’s $246 million Asian Infrastructure Mezzanine Capital Fund. In 2005, investors voted that it became general partner with Dresdner Kleinwort Capital Emerging Europe Fund, giving it control of the fund’s portfolio. Darby expanded the portfolio and, later that year, launched the Darby Converging Europe Mezzanine Fund. Darby is the private equity and mezzanine investment arm of global funds management giant Franklin Templeton Investments, and manages $US2 billion in private equity and mezzanine funds. It staffs 40 fund managers in 10 emerging market offices, including Hong Kong, Mumbai, Vienna, and Sao Paulo.

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