Beyond capital, short-term gains
Washington-based private equity firm The Carlyle Group is making headway in the world's fastest growing economy. Carlyle Asia Growth Partners (CAGP), its Asia-based growth fund, has seen strong returns from a string of star deals, including equity investments in Ctrip.com, Shanghai Anxin Flooring Co and newly listed Honghua Group.
Sean He, managing director of The Carlyle Group in charge of CAGP's investment in China, will soon relocate from Hong Kong to Shanghai. He spoke to China Daily reporter Chen Jialu about the firm's investment philosophy.
Q: How much had CAGP invested in China by the end of 2007? What is the rate of return of your overall investment on the mainland?
A: CAGP has an aggregate committed capital of approximately $1 billion. By the end of 2007, we had invested about 70 percent of our fund, approximately 60 percent of which was invested and committed in China.
Carlyle achieved over 35 percent internal rate of return globally in the past decade. My goal is to have a better return than our global average performance. We recently filed a few portfolio companies to go public on the Hong Kong stock exchange and the NASDAQ. As you know, Honghua Group, China's largest producer of onshore oil and gas drilling rigs, listed on the Hong Kong stock exchange on March 7 - the first Chinese company to float H shares this year.
Q: How involved are you in the management of the companies in which you invest? What value can you add to those companies?
A: We normally appoint a board director after our investment. We believe the best relationship with our portfolio companies is to build trust and partnership with senior executives and founders. It is our desire to use Carlyle's global network and resources to assist our partners to achieve their strategic and financial goals.
In addition to assisting them in recruiting professionals, introducing business partners and high-caliber independent board directors, we actively help the companies to develop on the international market. We're a patient investor and willing to hold our investment for a high exit value in the long term. Statistically, we hold three to five years on each investment.
Q: Why do you invest in traditional business sectors such as Shanghai Anxin Flooring Co in the flooring industry and Credit Orienwise in the financial sector?
A: The investments in Shanghai Anxin Flooring Co and Credit Orienwise have been growing very fast financially. However, in the developed countries, the flooring and financial sectors are slow-growing industries that growth funds rarely pay attention to.
Economic growth has been largely fueled by hungry domestic consumers and fixed-asset investment in China. This is very different from developed nations, where the competitive landscape has been well defined for traditional business sectors. The leaders in the sectors are already well established in the country and even globally. There are not many opportunities for smaller players and growth opportunities for big players.
On the contrary, most traditional sectors in China are still very fragmented, leaving tremendous market consolidation opportunities for leaders, along with organic growth in tandem with market growth.
Q: The government is encouraging more local companies to list on the domestic stock exchanges. In October 2006, it issued new restrictions on offshore red-chip restructuring. How is Carlyle adjusting to the new requirements?
A: We understand that the Chinese government is promoting domestic stock exchanges and encouraging more Chinese companies to list domestically. We believe the Shanghai and Shenzhen stock exchanges have great potential. It would be a natural goal for us to exit our Chinese portfolios on the domestic capital market. The new regulation would only accelerate our steps toward such a goal. Currently, we are working on several deals that are likely to be listed domestically in the future.
Q: Do you think the Xugong case indicates a more cautious approach by the government to the activities of foreign private equity funds? How is Carlyle dealing with this challenge?
A: There is no doubt that the Chinese government is more cautious on acquisitions of State assets now than before. However, this is consistent with the practice of developed nations.
We would like to demonstrate Carlyle's strategic value to our partners in China. We hope to convince entrepreneurs and our Chinese partners that our investment will not only bring capital, but more importantly the global network, global market knowledge, management expertise and technologies that will foster them to grow and become more competitive domestically as well as globally.
Q: Will Carlyle approach sovereign funds for investment this year? Who is likely to become a limited partner?
A: I have no information on our interests in Chinese sovereign funds, but Abu Dhabi sovereign wealth fund, an investment arm of Abu Dhabi government, invested in Carlyle last year.
It is also interesting to see that the Chinese sovereign fund has invested in Blackstone. I believe we will see more cases like that as capital-surplus countries become more aggressive on foreign assets.
(China Daily 03/20/2008 page15)
