Carlyle: where next?

In the second part of our interview with Carlyle bosses David Rubenstein and Michael Kim, we examine the firm''s Asian strategy.
Carlyle, the $14 billion buyout fund, continues to see Asia as a priority.

Asian boss, Michael Kim says the firm is close to finalising its third Korean investment, to buy control of Ssangyong Information and Communications for $248 million.

The control-transaction will see management buying-in to, making it a quasi-leveraged buyout and a quasi-management buyout. The company makes the software that allows the likes of Korea Telecom’s systems to work.

In this respect, it complements the earlier acquisition of Daewoo Telecom, which makes telecoms hardware such as switching systems and fibre-optic cable.

Carlyle has a three to five year view on both investments and reckons the advantage of the latest purchase will be to liberate management from the financial travails of the Ssaangyong group.

Carlyle first made its name in the US via defence industry buyouts – in one case making $1 billion of profit on a single deal. In Asia, however, its transactions have focused on banking (Koram bank in Korea), telecoms and the Taiwanese cable industry.

It finished its legal and accounting due diligence of Ssangyong Information and Communications last week, and so closure, says Kim, is imminent.

Once the deal is done, the group’s third in Korea, the firm will be forced to look at other countries around the region, since its single country limit will be straining. It will have also committed 50% of the firm’s $750 million Asian buyout fund.

Carlyle’s global boss, David Rubenstein says: “Taiwan is an interesting place to do buyout investing. We’ve not been so active in Malaysia, Thailand, Indonesia and the Philippines, in part because we felt that Northern Asia had more attractive opportunities. We’ve hired Eugene Lai to head up our efforts in Singapore and I think we’ll do some transactions outside of Korea and Taiwan.

And China? “The PRC is a very attractive place to invest but it’s more difficult to do control or buyout investments than technology or venture capital investments. So our venture arm is probably going to be more active in the PRC than our buyout team.”

Adds Kim: “We do see tremendous potential in these two markets and particularly the PRC. We’ve had a hard time coming up with control opportunities in the PRC, but I must say I was very encouraged by Zhu Rongji’s statements at the opening of the Peoples Congress, when he really reiterated a commitment to open the economy. From that opening, I infer that an important part of that will be foreign investment. So we’re very optimistic.”

However, Rubenstein admits buyouts can be tough in China. “Very often the companies you might want to buy are owned by the government and generally the government has not yet crossed the Rubicon on giving up control of these companies. And when you do a buyout, you put in equity and borrow some money. The banks that are most familiar with leveraged and management buyouts generally haven’t done a lot of that in China, and the Chinese banks are not experienced in this area.

“So it’s more likely that the kinds of investment that will be made in the PRC will be non-control investments, where you have protections but you don’t really control things the way you do outside the PRC. That will change over a period of time. And typically you do buyouts of mature companies where the seller normally does not think it fits with its current plans. But when an economy is growing as rapidly as China, that aren’t that many mature candidates that are available to be bought, and against which you can put some leverage.

“It’s clearly a more difficult environment than Korea or Taiwan.”

In Hong Kong, says Rubenstein, there aren’t so many things to buy where you can get control.

On a final note, Rubenstein notes that CalPERS, the corporate governance-driven Californian pension fund has also said it will put $50 million into a new Carlyle venture capital fund to invest in Asia.
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