Coining it in Kuala Lumpur

Start-up ECM Libra has capitalized on strong markets, hard work and intelligence to become a Malaysian investment banking phenom. How long will its winning streak last?

For months David Chua, Lim Kian Onn and Kalimullah Hassan, co-founders of fledgling Malaysian investment bank ECM Libra, had pitched the country’s largest cellular phone operator, Maxis Communications, to place some of its shares with three local institutions the bankers knew were hungry for telecommunications stock. Although Maxis didn’t have any urgent need for money, it did eventually have to offer shares to meet a government mandate to set aside stock for native Malay investors. So in May 2003, Maxis director Ralph Marshall decided to see if one-year-old ECM Libra could deliver. “I realized that these guys knew what they were talking about,” he says.

Chua, who had expected to get perhaps 50 million to 100 million shares to place, was astounded because Marshall kept ratcheting up the size of the sale. “First, it was 150 million shares, then 200 million, then 250 million shares,” says the veteran equity salesman. “They kept raising the ante, and we kept saying, ‘Okay, we will try.’” ECM Libra succeeded: It placed 260 million shares worth 1.33 billion ringgit ($350 million), easily the biggest equity placement in Malaysian capital markets’ history.

Best known until then for a close relationship between one of its partners and thenMalaysian prime minister-in-waiting Abdullah Badawi, ECM Libra had tapped into an overlooked niche in the local capital markets, and the Maxis deal lifted the partners’ profile at just the right time. Many of Malaysia’s biggest companies were eager to raise money for expansion as the local economy surged and its corps of increasingly deep-pocketed institutional investors clamored for equity opportunities. ECM Libra subsequently reeled off equity placements for satellite broadcaster Astro All Asia Networks, Telekom Malaysia and infrastructure conglomerate YTL Corp.

In its first full year of operation, ECM Libra had become the No. 1 equity placement agent in Malaysia. It raised $1.1 billion in equity-related transactions, a remarkable 28 percent of all such local deals, according to research firm Dealogic.

“They had done a huge placement like Maxis, so it was natural for us to turn to them,” says Francis Yeoh, the CEO of YTL, which placed $92 million through ECM Libra in July 2003. “They had the track record.”

ECM Libra’s run has, seemingly overnight, turned it into the fourth-biggest and most-talked-about investment bank in Kuala Lumpur. It has also made its founding partners very rich. CEO Lim, a 48-year-old banker who owned ECM Libra’s predecessor, the advisory firm Libra Capital; COO Chua, 44, a stock-analyst-turned-salesman who headed the local investment bank HLG Capital; and director Kalimullah, 46, a longtime reporter for Reuters and Time magazine who has run several financial and publishing businesses, secured a public listing in March that valued their firm at $290 million. Although their stock has subsequently followed the market down, senior partner Lim’s share is now worth $41 million. His partners’ stakes are worth $30 million apiece. (The three own just under 60 percent of the firm.)

For all their newfound wealth, ECM Libra’s founding partners still have a lot to prove. Can they successfully diversify into new businesses that provide long-term growth, or will they find themselves overwhelmed by the demands of running a public company with hundreds of new employees? Already this year bigger local rival Commerce International Merchant Bankers has knocked ECM Libra out of the No. 1 position in the profitable but narrow niche of equity placement. And other firms, foreign as well as Malaysian, are gearing up to compete more aggressively. Can Chua, Lim and Kalimullah hold on to their position while trying to build a full-service investment bank?

“ECM Libra is like a soccer club that has had a dream season,” says Nazir Razak, who runs CIMB, Malaysia’s preeminent investment bank. It has 900 employees and $417 million in capital (compared with ECM Libra’s 300-plus staff and $80 million in capital) and a 30-year history in Malaysia’s sometimes volatile markets. “But can they keep up at the top of the league tables for months and years on end? In the end a soccer team is judged not by how it performs over one month or one season but over the course of several years.”

ECM Libra’s political affiliations only raise more questions about its founders’ ability to build a long-term player in Malaysia’s capital markets. Certainly, the hugely successful start-up has had a significant advantage over most newcomers. Among Kalimullah’s close friends is Badawi, who became prime minister at the end of October 2003 (Institutional Investor, September 2004). The two met nearly 20 years ago, Kalimullah explains, and their relationship strengthened in the late 1980s when Pak Lah (as Badawi is known locally) was out of political favor in Kuala Lumpur. “As a senior leader of the United Malays National Organisation, he was one of my best political contacts. I used to go to his house to talk about politics,” the journalist says.

No one suggests that Badawi, who has been lauded during his first year in office for sharply curtailing Malaysia’s notorious crony capitalism, has ever intervened on the firm’s behalf or that ECM Libra has ever won a deal because of government influence. Instead, rival bankers say that tycoons in Malaysia’s government-dominated business sector may be willing to open their doors to give ECM Libra a hearing because they know of Kalimullah’s powerful connection and want to remain in his good graces. “Plenty of businessmen have been happy to give them quite lucrative deals, I suspect, to try to gain favor with the new administration,” says a banker who often competes with the firm. But he adds that he’s “100 percent sure” Badawi hasn’t helped ECM Libra, because “that’s not his style; he’s also dead set against it.”

Kalimullah, who has heard the speculation, admits the “relationship may have opened doors.” But he stresses, “I have never sought his help in any business deal, and until a few months ago he didn’t even know what ECM Libra was, let alone the fact that I owned part of the firm.” Adds Kalimullah, “In the end it is our ability to deliver that has given us the edge.”

Close relationships among politicians, businessmen and other leaders of Kuala Lumpur’s small, tightly knit establishment are hardly unusual. CIMB chief Razak, for example, is the son of former prime minister Abdul Razak and younger brother of Najib Razak, Badawi’s deputy prime minister and heir apparent. Still, the rapid rise of a firm one of whose partners counts the prime minister as a friend rankles rival investment bankers.

In January there was a new twist in the ECM LibraBadawi story. Kalimullah gave up his day-to-day duties at the investment bank for a two-year assignment as editor-in-chief of the country’s No. 2 English daily, the New Straits Times, which is controlled by the prime minister’s UMNO political party. “UMNO wanted a journalist who is trusted by the prime minister to turn the paper around, so I was approached,” says Kalimullah. (He remains a shareholder and director of ECM Libra and plans to return as chairman in 2006.)

Late July brought more news sure to annoy some competitors. ECM Libra hired Badawi’s 28-year-old son-in-law, Khairy Jamaluddin, as director of its corporate advisory team. Khairy, an Oxford University graduate with a degree in economics, was Badawi’s deputy private secretary and was recently elected deputy leader of UMNO’s powerful youth wing.

Chua, Lim and Kalimullah say that they can best answer their critics by transforming their firm into a powerful, multifaceted long-term player in Malaysia’s capital markets. They are making progress. In January, Berjaya Group hired the firm as an adviser when it sold its vehicle assembly business, Hyundai-Berjaya, to Sime Darby, Malaysia’s biggest conglomerate, for $223 million, the largest M&A transaction so far in 2004; later this year ECM Libra is slated to be a joint book runner on a $500 million offering for low-cost regional airline AirAsia, which is likely to be 2004’s biggest local IPO. And their stock market listing has allowed them to raise additional equity from such major global institutions as American International Group and HSBC Asset Management, which they have used to purchase local brokerage BBMB Securities so that they can offer securities trading. As a result, they now have a substantial distribution platform, with about a 5 percent market share, to expand a small asset-management business. And in early August, ECM Libra bought a controlling stake in Singapore’s hot boutique investment bank, SBI E2-Capital Holdings, which has thrived by persuading Chinese companies to list in the city-state.

“What we want to prove is that we are not just a bunch of guys with political connections who came out of nowhere yesterday to where we are now,” Kalimullah says. “We want to make sure that ten or 20 years from now, when Pak Lah is no longer prime minister and probably I am no longer active in the business, ECM Libra is still thriving.” Adds Chua, “We want to be the leading investment bank in Malaysia.”

BY SOME MEASURES, ECM LIBRA’S MOST IMPORTANT deal occurred before the partnership even existed. In early 2002, Lim’s Libra Capital was hired to structure a deal for troubled cell phone operator Technology Resources Industries. The company was facing irate convertible bondholders who bought its dollar-denominated $375 million offering in 1994, in the midst of Malaysia’s previous boom. After the Asian financial crisis knocked the ringgit down 50 percent, TRI was in no financial position to redeem the bonds. And because its shares were trading well below their conversion price, bondholders weren’t about to take a big hit by converting into equity.

The TRI deal was the first time the three businessmen, who had known each other for years, all worked together. Lim called in Chua, who had been a salesman at lead underwriter Merrill Lynch (Asia Pacific) when the issue was first sold, to help put together a plan for bondholders. Chua, who was running HLG Capital, in turn brought in Kalimullah, who was then a director at local financial services group T.A. Berhad and was acquainted with several of the participants in the original deal. The threesome helped devise a complicated but successful restructuring of TRI that would later help ECM Libra vault to the top of Malaysia’s equity league tables.

The future partners realized they had complementary skills and got on well. “Kian Onn can look at a deal, visualize it and map out a plan for how to do it,” says Kalimullah. “David is a great salesman with a fantastic network of contacts and a great reputation among fund managers.” The affable Kalimullah, who had been not only a reporter and businessman but also a government press secretary and public relations man, seemed to know everyone who mattered in Kuala Lumpur and how the local business network functioned, says Chua.

Soon after the TRI deal closed, the three decided to strike out on their own. Raising $2.6 million in capital, most of it from Lim’s old investment banking advisory firm, supplemented by their own savings, the partners set up shop in Libra Capital’s offices. (They crammed 20 employees into a space that had housed nine by subdividing Lim’s old work space and partitioning a conference room.) The new firm was a combination of Libra Capital and a newly licensed investment bank.

“We knew the timing was just right,” Lim says. PostAsia financial crisis, fundraising activity had revived more quickly in Malaysia’s liquid capital markets than in most of the region. The country’s GDP grew by a scant 0.5 percent in 2001 but had jumped 4.1 percent in 2002, and companies again needed to raise money. The number of IPOs rose from 20 in 2001 to 53 in 2002, according to Dealogic.

The bankers were also keen to tap into Malaysia’s increasingly powerful institutional investor community. The country’s biggest state-run pension plan, the Employees Provident Fund, oversees $63 billion, up from $48 billion in 2000, nearly one quarter of Malaysia’s total market cap of $270 billion. The current market value of the assets of Khazanah Nasional, the government’s powerful investment arm, is roughly $12 billion. These deep pockets lend stability to Malaysia’s markets and offer banks the chance to place much larger amounts of equity than it was possible to place just a few years ago. In all, Bursa Malaysia today has nearly 1,000 listed companies and ranks as the second-biggest stock market in Southeast Asia behind Singapore.

ECM Libra initially tried its hand at corporate advisory and finance work and small equity placements supplemented by an occasional M&A advisory assignment (ECM stands for both “equity capital markets” and “emerging companies Malaysia”). “When we started, we thought we would service a lot of small and medium-size companies or emerging corporate players,” notes Chua. The rationale was straightforward: The firm would prosper, he says, “as Asian economies grew and small and medium-size Asian companies grew.”

ECM Libra competed head-to-head for these assignments with a handful of big local firms, led by CIMB, which has long dominated the country’s IPO and advisory markets, followed closely by AmMerchant Bank (formerly Arab-Malaysian Merchant Bank), RHB Sakura Merchant Bankers, Aseambankers Malaysia (part of Malaysia’s largest banking group, Malayan Banking Group), Avenue Assets and, more distantly, by about a half dozen smaller specialized firms. The local firms tend to dominate the ringgit-based equity market, but bigger foreign firms compete for debt- and foreign currencyrelated transactions.

ECM Libra’s partners spotted their big opportunity in January 2003. The state-owned phone company Telekom Malaysia announced it was going to take over Celcom, a TRI subsidiary, in a cash and stock transaction that would pay Celcom shareholders a 45 percent premium. As part of TRI’s reorganization the previous year, Celcom had taken over its stock listing and the ECM Libra partners-to-be had worked on the share exchange and a related rights offering. “We knew where the shares went,” says Lim. He, Chua and Kalimullah also knew that some of the big Celcom holders would soon want to put their winnings back into the telecom sector. Maxis, one of Malaysia’s fastest-growing and best-managed companies, would be a perfect substitute, they reasoned.

That’s when they started sounding out Marshall, a key aide to the controlling shareholder of Maxis, billionaire T. Ananda Krishnan. “We came up with the idea, and we negotiated with Ralph Marshall and his people for months with no sign that we were ever going to get the mandate,” says Kalimullah. “Nobody opened any doors for us in the Maxis deal.”

As it happened, by venturing into territory that local firms had ceded to bigger, better-capitalized regional or global outfits before the Asian financial crisis, ECM Libra’s principals had found an opening. Asian specialists like Peregrine Investment, Crosby Securities and Indosuez W.I. Carr Securities had exited or collapsed during or shortly after the 1997'98 meltdown, and the big international institutions had backed away from their Southeast Asian operations. Most foreign survivors, including Credit Suisse First Boston and Deutsche Bank Securities, had redirected their attention from local market making to servicing big customers that needed access to overseas markets or more sophisticated international services.

“There was clearly a vacuum in Malaysia’s investment banking arena,” says Tan Chong Koay, CEO of Pheim Asset Management, whose fund company manages nearly $800 million in Southeast Asia. ECM Libra, he says, targeted “business that foreign investment banks were no longer interested in and most of the local houses had overlooked.”

Malaysia’s robust institutional marketplace made the Maxis deal possible. “Ten years ago, if you had a placement the size of Maxis, it would have had to be placed with overseas institutions,” says Chua. “That’s where the likes of Merrill had their competitive advantage.”

PROVING THAT THEY ARE NOT, IN KALIMULLAH’S words, “just a bunch of guys with political connections” has become a major rallying cry for ECM Libra. Not including its recent banking purchase in Singapore, the firm generates about $30 million a year in revenue, roughly 75 percent from equity placements and other capital market business. Almost all the rest of its income comes from corporate or M&A advisory fees. ECM Libra’s success, the partners repeatedly emphasize, is a result of hard work, experience and the good fortune (and insight) to capitalize on Malaysia’s robust markets.

Clients like Marshall and Yeoh say that they chose ECM Libra to manage their deals because of the partners’ know-how rather than their political clout. “We gave them the deal because they came up with the idea and worked hard to show where they created value for us,” says Marshall. Yeoh concurs, “When you have a big deal to do, whether it is an IPO or merger and acquisition or advisory work, you give it to someone who knows how to do it.”

That hasn’t stopped detractors, none of whom would be quoted by name (several rival investment bankers declined to speak about the firm), from attributing part of ECM Libra’s success to its connections. Kalimullah himself tells of a prominent businessman who told one of Badawi’s assistants last year that “you had better watch out for Kalimullah. He’s using the deputy prime minister’s name to make deals.” The businessman later conceded to the aide, says Kalimullah, that he had never met Kalimullah, but he still insisted that “you guys have to be careful of him.” (An assistant to Badawi confirmed the gist of this anecdote.)

ECM Libra did get some visibility from the government early on. In January of last year, just eight months after its founding, the firm was asked by thensecond Finance minister Jamaluddin Jarjis to organize a dialogue session in Kuala Lumpur on investment opportunities for international and local fund managers. Jarjis invited Badawi to give the keynote address at the meeting.

Kalimullah says that a few months later, in June, he was asked to attend a casual dinner party at the thendeputy prime minister’s house. When he arrived, Badawi, a devout Muslim, was praying, so the investment banker went to the dining room. There, says Kalimullah, he placed a photo album from the investment conference in Badawi’s usual chair. After the deputy prime minister sat down, he leafed through the album and asked, “Who is this ECM Libra?” The guests, who included several Badawi aides, his son-in-law and some close friends, started laughing. One of the diners told an annoyed Badawi that a partner of the firm was seated next to him. “Is this your company?” asked the prime minister-in-waiting. Kalimullah confirmed that it was. (This account was verified by another dinner guest.)

Kalimullah points out that Badawi’s discovery of his role at ECM Libra came well after the firm had done its deals for Maxis and YTL, among others. “People can say anything, but if they want to convince anyone, what they should do is cite examples of where I have used my influence,” says a defensive Kalimullah. “How much more do you want me to do to dispel this notion?”

Some local financiers see the controversy surrounding ECM Libra’s rise as an unintended consequence of changes undertaken by Badawi, who has tried to eliminate any vestige of the patronage system that existed under his predecessor, Mahathir Mohamad. A rival banker says it’s possible that corporate chiefs haven’t grasped “that the style of leadership has changed.” Some business leaders, he says, may be operating “by the traditional method in seeing where a connection is and trying to help it out and currying favor in that way.” This, he says, may have worked to ECM Libra’s benefit.

BUT IF ECM LIBRA IS TO PUT THE RUMORS BEHIND it and extend its dream season, it needs to become a bigger and more diversified investment bank and brokerage firm. “Our challenge now is to turn a niche investment bank that relies heavily on three founding partners into an institution,” says Chua.

In March, ECM Libra took its first step in a planned expansion by doing a reverse takeover of a small listed plastic molding company, South Peninsular Industries. The firm sold off SPI’s manufacturing assets and renamed the remaining, public, entity ECM Libra. The investment bank then followed up with a $55.3 million share rights offering that was nine times oversubscribed. In addition to AIG and HSBC, ECM Libra’s shareholders include the U.S.'s Prudential Investment Management and Fidelity Investments, the Government of Singapore Investment Corp., the Kuwait Investment Authority and even a London-based hedge fund, GLG Market Neutral Fund.

“That says a lot about the confidence large foreign institutions have in us to create value for them,” says recently hired CFO Lim Boon Soon, who joined ECM from Malaysia’s fifth-largest bank, Hong Leong Bank. (None of these shareholders would discuss their reasons for buying the shares, though a Fidelity spokeswoman says that the firm is enthusiastic about Malaysia’s prospects and has purchased the shares of a number of local growth companies in recent months.)

ECM Libra is also trying to solidify its upper management ranks to run a public company that has ballooned to more than 300 employees. “The challenge for us as a small and successful firm that is trying to scale up its operations is to hire and put in place the right people,” acknowledges Chua, who says he and his partners have committed themselves to spending at least the next five to ten years establishing ECM Libra further.

They recently hired as deputy chairman Roger Tan, a well-known local businessman who was president and CEO of Hong Leong Credit, the financial services arm of billionaire Quek Leng Chan’s Malaysian corporate empire. (Chua’s previous employer, investment bank HLG Capital, was part of the same group.) Syed Elias Alhabshi, ECM Libra’s new head of asset management, joined from Merrill Lynch (Asia Pacific.) In all they have created a senior management team of 12 (including several executives from CIMB) that will oversee ECM Libra and fill the void left by Kalimullah, who still attends directors’ meetings.

Almost all of the money from the rights offering has already been put to use. In March, ECM Libra acquired the much larger BBMB Securities, a local brokerage house, from Khazanah Nasional for $50.6 million. BBMB owns Smith Zain Securities. Combined, the two form Malaysia’s seventh-biggest brokerage and give ECM Libra a distribution arm for its small private client and asset management operation. “With BBMB, we’ve now got the platform to start seriously building a real investment banking institution,” says Chua.

Malaysia’s increasing prosperity has created a growing pool of high-net-worth individuals interested in long-term investments. A recent local survey estimates that there are now about 15,000 millionaires in Malaysia and that more than 300,000 of the country’s 23 million citizens have at least $140,000 in investable assets. Alhabshi says his brief is “to gather assets and provide value-added personalized services to top-tier clients in stock trading, asset allocation and investment advice.”

Alhabshi has a tall task: ECM Libra manages only $10 million in assets, most of it collected from a handful of high-net-worth clients who have asked the firm to handle their stock market accounts. In July it spent $600,000 to acquire a tiny asset management company (an entity partially owned by Lim), whose main attraction is a license to solicit client money. In contrast, Malaysia’s biggest private unit trust company, Public Mutual, manages more than $2.5 billion for some 500,000 account holders, and CIMB’s various asset management and unit trust companies and their affiliates oversee about $900 million in all.

“We have to see whether we really do have the core competence to build an entire buy-side business in-house” or whether the firm is better off setting up co-branding arrangements with well-established regional and global fund managers, says Chua, who worked in sales at Jardine Fleming Securities and at AsiaEquity before joining Merrill Lynch.

In July, ECM Libra also spent $10.7 million for a nearly 30 percent stake in Singapore investment bank SBI E2-Capital, which has been renamed Westcomb Financial Group. The Singapore firm has carved out a very profitable niche in helping second-tier China companies list in the city-state. Westcomb’s CEO, Peter Choo Chee Keong, says the tie-up will enable the firm to offer clients dual listings in Singapore and Kuala Lumpur. “We can jointly look at companies from Vietnam, Cambodia and Indonesia,” he explains. It also opens up opportunities to cross-sell securities and venture capital and asset management products. The purchase, says Chua, is the first step in ECM Libra’s plan to build a regional investment banking franchise.

On the horizon as well is an expansion into Malaysia’s nascent fixed-income markets, where local companies raised $7.8 billion last year and are expected to offer about $9 billion in new deals this year. Chua says it’s possible that “we might at some point buy a discount house with a money broking license” so the firm can trade government and corporate bonds.

With the addition of stockbroking and asset management (and possibly debt trading) to a regional investment banking operation, ECM Libra’s partners don’t believe that they need to diversify their business platform much further to realize their ambitions. “The only thing we can’t do legally is submissions to the Securities Commission for IPOs, which we can always hire another merchant bank to do for us for a small fee,” says Lim.

STILL, HAVING THE CAPACITY TO PROVIDE A VARIETY of financial services is a lot different than making all of these new businesses work effectively together. ECM Libra has already had to cope with some growing pains. Although the firm posted a healthy $3.1 million in earnings in its first fiscal quarter, which ended in June, and expects $20 million in full-year profits, its share price has fallen 50 percent from its February high of RM3.92. And Razak’s CIMB, which recently won the coveted IPO mandate for KLCC, owner of the world’s tallest building, Kuala Lumpur’s Petronas Towers, has reclaimed the No. 1 spot in equity-linked transactions so far this year, while ECM Libra has dropped back to No. 2. Two other local competitors, AmMerchant Bank and Alliance, have filed to list their shares and bolster their capital positions to fund expansion. Citibank, awakened to the renewed opportunities in Malaysia’s capital markets, has just announced that it is expanding its local investment banking operations. And last month Badawi introduced a substantial financial liberalization program that will allow five foreign stock brokerages and five fund managers to buy or start up wholly owned local operations in Malaysia, opening the door to much more serious competition.

Lim and Chua have to meet these challenges. At the same time, without Kalimullah’s full-time assistance, they must shoulder more of the management and deal-making burden for a more complicated firm that has about six times as many full-time employees as it did a year ago. “When it was just the three of us major shareholders doing everything, we knew nothing would go wrong,” says Chua. “But when we have several hundred people, we need to have all sorts of controls and risk management systems to safeguard our own interests and the interests of ECM Libra.” He and Lim will continue to be “rainmakers,” he says, while overseeing the integration of the new businesses.

Will ECM Libra fade under the pressure, proving to be, in Razak’s words, Malaysian investment banking’s “flavor of 2003"? A Singapore-based investment banker says: “ECM Libra has done spectacularly by picking all the low-hanging fruits in Malaysia, partly because there is so little competition there. Once the market matures and there are more players and fewer low-hanging fruits to pick, they might wake up to see the game has changed.”

Chua counters that the partners have decades of experience and are unlikely to chase opportunities that stray far from their “core competence” in deal making. Their intention, he says, is to utilize “the maturity of our key players and the maturity of the market” to grow their business, without getting ahead of Malaysia’s capital market development.

In any event, the partners are thinking big. “We want to be remembered the way people remember Mr. Merrill, Mr. Lynch, Mr. Fenner, Mr. Pierce and Mr. Smith -- for building a great financial institution,” says Chua.