Earlier this week I sat down in New York with Sasquehanna Growth Equity (SGE) partner Vincenzo La Ruffa and Pentagon Federal Credit Union (PenFed) senior vice president and AsianPundit colleague Brett M. Decker to discuss their prognosis for the “Happy Blue Year” Americans cynically greeted each other January 1. SGE is a leading private equity group investing in growth capital and late stage venture opportunities in the financial technology, software, business services, and specialty finance sectors.
SGE is a unit of Sasquehanna International Group of Companies, a significant investor in innovative Asian entrepreneurships, and La Ruffa oversees technology startups such as 29 West Inc. – a provider of high-performance financial messaging services – and Derivix Corp. – which provides a real-time options trading system for the financial sector. He is a seasoned investor, having previously placed $100 million in late-stage growth companies. La Ruffa has looked at several financial technology opportunities in Asia.
PenFed serves the financial services requirements of over 780,000 members of the U.S. Air Force, Coast Guard, Department of Homeland Security, Department of Defense, defense-related companies, and the Veterans of Foreign Wars. Decker is better known in the Philippines, however, as a former editorial page writer for the Wall Street Journal Asia and more recently as the author of Global Filipino: The Authorized Biography of Jose de Venecia, Jr., the Visionary Five-Time Speaker of the House of Representatives of the Philippines . (See my December 31st column, “The return of martial law and other stories.”)
La Ruffa and Decker watched the global financial crisis unfold close to ground zero, and have definitive feelings about how it will affect Asia and Asian entrepreneurship in 2009. Despite the gloomy American New Year’s greeting, La Ruffa told me that demand for financial technology services remained strong last year, and he is optimistic about the first quarter of 2009. But the second quarter could be a different story.
Decker explained why. “Because large financial institutions are beholden to government, they will serve large customers with the largest number of employees, doing what government tells them to do. As a result, access to capital will dry up.” The U.S. government is pouring $700 billion into US financial institutions in a bid to keep the financial sector solvent and lending to traditional industries. Lawmakers are calling for increased oversight of these funds to ensure that banks are indeed lending to these large employers.
The problem with that strategy, however, was illustrated late last year by Republican senators who refused to approve a de facto bailout out of the US automobile industry. “Pouring $700 billion directly into financial institutions and indirectly into traditional industry is nothing more than pouring good money after bad,” said Decker. “To rescue the US economy, it is imperative that investment be directed towards dynamic, innovative enterprises that can respond to new economic challenges.”
Decker believes that the US government is following what he calls the “Japanese Model” for addressing a financial meltdown: Ridiculously low lending rates meant to resuscitate traditional industry at the expense of startups that ultimately are the future. In fact, La Ruffa told me that capital is already drying up among traditionally reliable sources of funds.
The impact of these developments extend far beyond the US and other developed economies. According to La Ruffa and Decker, Asian technology entrepreneurship is likely to be stalled just when it could conceivably and otherwise gain momentum. Since the Asian Financial Crisis that began in 1997, Asian governments have gradually come to the realization that research and development conducted by innovative startups is not a luxury, but a fundamental component of their continued development.
Given these circumstances, what are Asian governments to do? For La Ruffa and Decker, the choice seems clear: Do not mindlessly follow the Japanese model into a decade-long period of stagnation and industrial mediocrity. While balance is required, propelling Asian economies past the global financial crisis will require a new generation of companies that think and do things differently from their traditional counterparts. That means that Asian governments will need to ensure that investment in innovation increases despite a downturn in traditional exports as a result of a new financial crisis created in the West.
But do Asian governments get it? So far, it doesn’t seem so. The reasons are varied. The Global Financial Crisis is staggering in its breadth, and clearly not really understood. Political support comes from traditional industry and its employees. And governments are – like traditional industry – notoriously risk-adverse. But if Asia is to leverage the Global Financial Crisis to create new sources of growth, innovative Asian governments must play a major role.
The question is: Where are they?