Nathaniel Rothschild, scion of the English branch of the famous banking family, teamed up with the Bakries and the Roeslanis of Indonesia to exploit its mineral wealth. But it dawned on him too late that the Bakries and the Roeslanis “were acting in concert from the beginning”
 

In my prior column, I discussed the hidden wealth of the family of China’s outgoing prime minister, Wen Jiabao. (Read here: Chinese princelings: Wen Jiabao’s family fortune). The enormous wealth and power of elite families is not just limited to China. It extends to all emerging markets. The reason is simple. The rules are different. Investors in any given market are aware of the local rules and adapt their business practices and models to them. The problem comes when outside investors want to play too.

Once such example is Indonesia. Emerging markets have been the darlings of investors for the past few years. Recently they have fallen on hard times as their economic growth has slowed and their markets have stalled. The exception has been Indonesia. Over the past several years Indonesia’s vast mineral wealth has been exploited to feed the seemingly ever growing demand from China. Even with China slowing, Indonesia has grown at an enviable 6.2%. Its market has increased at twice the rate of the S&P 500 since 2009 and is up 13% since June.

The idea of exploiting this market and especially Indonesia’s mineral wealth seemed to be a “no-lose” situation especially if investors could be protected by listings on markets with better safeguards. This was the brain child of Nathaniel Rothschild.

Nathaniel Rothschild is the scion of the English branch of the famous banking family and the future fifth Baron Rothschild. He believed that with the world’s growing demand for energy resources, an investment in Indonesian coal, would net investors returns of “two to three times their money”. To exploit this idea he created a company, Vallar. With the magic of his name and the promise of unlimited growth in emerging markets, he was easily able to raise $1.07 billion from Vallar’s IPO on the London Stock Exchange in July of 2010.

With all that money, Mr Rothschild went looking for local companies and local partners who he could help with foreign capital. He found them in the Bakrie family of Indonesia -- an aristocratic lineage in their own country equal to his. The Bakries dynasty was started in 1942 and thrived like many families in emerging markets through lucrative connections with the government, which was at that time under Suharto. They also made the successful transition to democracy. Aburizal Bakrie is the chairman of the largest party, Golkar, and a potential presidential candidate in 2012.

There was one problem with the Bakries. Their business practices were adapted to Indonesia. They survived, not through the legal protections, but because they developed strong relationships with the government and other powerful families. The Bakries’ empire was created through leverage made possible by a corporate shell game. It had nearly collapsed twice in the past 12 years, after the 1997-98 Asian financial crisis and again in 2008. When this was pointed out to Mr Rothschild by a local journalist in December of 2010, he brushed it off. He told the Jakarta Post that there was nothing wrong with them.

So Rothschild teamed up with not only the Bakries, but with another powerful Indonesian family, the Roeslanis. They contributed their interests in two large coal mining concerns, Bumi Resources and Berau, in exchange for shares in Vallar which was renamed Bumi plc. The deal seemed quite a success. After it came out, Bumi’s shares increased by 30% by April 2011, but then things began to go horribly wrong.

The Bakries, true to form, had leveraged up their interests. By fall, the stock had fallen 40% from April and was 20% below its IPO price. The Bakries had a margin call for a $1.3 billion dollar loan. But the Bakries had been here before and knew how to handle these problems. They called in one of their friends—another Indonesian business tycoon—Sami Tan. Like the Roeslanis, Mr Tan had a long term relationship with the Bakries and arranged to bail them out. They didn’t even bother to contact Mr Rothschild. He wasn’t part of the family. When he called, they didn’t bother to pick up the phone.

In November Rothschild vented his anger in the press, but it didn’t help. By February Tan and the Bakries almost removed him from the board. But that wasn’t the only problem. By September of 2012 Bumi investors learned of $400 million interparty loans to the Roeslanis that, despite promises, were never repaid. Not to mention an interesting $363 million investment in a Yemeni oil field with no listed reserves.

By October Rothschild resigned from the board when it finally dawned on him that the Bakries and the Roeslanis “were acting in concert from the beginning”. He never understood until it was too late that the relationship systems in emerging markets are transparent only to the locals. He was playing in a game where he never understood the rules.

To read more articles by the same writer, click here.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)