Insights & Reports > Kroll Global Fraud Report

Commercial solutions for bad investments in Southeast Asia

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Chris Leahy

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For hedge fund, private equity, and other financial investors in Southeast Asia’s emerging markets, restructuring soured deals may seem straightforward enough given the tight legal arrangements usually wrapped around such investments. What happens, though, when the counterparty to the deal, typically the controlling shareholder or sponsor of the company behind the investment, does not cooperate? Similarly, of what practical use is the Singapore legal structure – often adopted in such deals – if the underlying assets lie in a less legally-robust jurisdiction? In certain Southeast Asian markets, questionable judicial independence and a poor track record of upholding the rights of foreign investors mean domestic sponsors often play dirty to retain control of their assets.

It is possible for hedge funds and private equity investors to formulate commercial solutions for exit and recovery when they fall victim to fraudulent or suspect action from sponsors and other counterparties in what, for a foreign investor, can become de facto non-enforceable legal jurisdictions.

The process begins once investors are convinced that legal remedies alone are unlikely, at the very least, to produce an acceptable outcome. The first step is to help them identify the commercial imperatives that will drive the exit and recovery strategy. Key to any approach is the collation of relevant, actionable commercial intelligence in-country. This feeds into an assessment of the financial position of the sponsors; their objectives, motivation, and anticipated strategy with respect to the dispute and any potential, resultant litigation; the views and assessments of other investors and creditors; and their likely appetite for a negotiated settlement.

This research taps into information from a variety of sources, including customers and suppliers of the company, banks, other financiers, investors, and management. In such inquiries, the objectives should be: first, to gain a better understanding of the practical commercial position of the investor with respect to recovery and, if possible, to improve it; second, to compile a list of viable options and alternatives for the investor; and third, to provide an action plan with the aim of exiting the investment in a commercially acceptable way including, if possible, viable recovery options.

Kroll recently advised a client with an investment that had soured in a Thai manufacturer. The sponsor of the company had grown ever more uncooperative in attempted negotiations, and the investor became suspicious of certain trading patterns within the company. The latter were suggestive of attempts to siphon off money from what was clearly an increasingly distressed business. After a complex investigation that entailed intensive source inquiries, we were able to gather intelligence and evidence that supported the investor’s suspicions and to assist in formulating an appropriate commercial strategy to exit the investment.

Kroll was also called in by a hedge fund seeking assistance with a complex debt restructuring for an Indonesian conglomerate that had run into financial trouble. The sponsor’s treatment of creditors, coupled with suspicious trading patterns of the growing debt of the group, suggested that the sponsor, through a friendly private equity fund, was perhaps attempting to retain control of his companies. He was doing this by engineering a debt restructuring that would severely disadvantage, and possibly even defraud, existing creditors. We identified the complicit fund and gathered intelligence that supported the client’s theory, strengthening considerably its commercial leverage in negotiating a successful conclusion to the restructuring.

As these two examples show, legal remedies are not the only ones which can help when investments go sour. A detailed knowledge of the positions and motives of all parties can lead to strategies which are effective, even where the law might be of little practical help.