Global private equity firm Carlyle Group has closed its fourth Asian growth capital fund, Carlyle Asia Growth Partners IV (CAGP IV), for which it raised a total of $1.04 billion in commitments.

Managed by Carlyle Asia Growth Capital Partners, the fund invests in high-growth private companies with strong local management and leading market positions in China, India, Korea and other key Asian markets. The fund looks at potential investments on a per company basis and doesn't have any specific leanings sector-wise.

Although the fund doesn't have any country or sector allocation targets, around 80% of its assets are expected to be invested in China and India, by virtue of the size of those markets and the opportunities available. That's in line with how Carlyle Asia Growth Capital Partners' previous three funds in the region are also invested.

For this latest fund, Carlyle managed to raise more than half the amount it raised for its previous Asia-focused private equity fund, Carlyle Asia Growth Partners III (CAGP III), which was launched in 2006. The firm raised the amount for CAGP IV over the past 14 months despite the extremely tight liquidity conditions for the most part of the past year.

CAGP IV is the fourth fund managed by the Carlyle Asia Growth Capital Partners and the amount raised for it makes up half of the total committed capital of around $2 billion for all its funds. CAGP IV has already made its first investment in a leading Chinese high-end women's fashion company Ellassay.

Wayne Tsou
Wayne Tsou
With private equity investors notorious for hunting for bargains, it's not surprising that Wayne Tsou, Beijing-based managing director and head of Carlyle Asia Growth Capital Partners, sees this as an opportune time to start making fresh rounds of investments in this region.

This is a time when valuations still reflect the uncertainty in the global financial markets, but companies - whether listed or in this case, not listed - are showing early signs of recovering from the economic downturn.

More interest from government pension funds

The fund's investors are broad geographical mix of investors, but most are from the US and Europe. Previous Carlyle fund investors from Asia and Latin America increased their investments in this latest fund by around 40% to 50%, however. The investors consist of government pension funds, financial institutions, endowments and high net worth individuals.

"One encouraging sign that I saw was the government pension funds and financial institutions made up about 50% of the investors of the fund," says Tsou.

That points to en emerging trend, particularly with government pension funds that are opening up more to private equity and to what are generally considered riskier assets in emerging markets. In the past, government pension funds always had a lot of assets to deploy but hardly paid any attention to slow capital growth funds. They were also previously very risk averse and shied away from China and India.

One major development that has brought about this change in risk appetite has been the branching out of government pension funds and financial institutions to several key markets worldwide, including Asia.

"We are seeing a lot more of them building local capability and putting people on the on the ground and being more capable of due diligence on the ground," says Tsou. "Even though this is the most challenging environment, they are getting more comfortable with this slow capital, non-leverage growth model and are more comfortable with the fundamentals of companies in China and India."

China and India

Carlyle says the closing of CAGP IV reflects improving investor sentiment towards China and India, in particular, as the two major economies begin to stabilize and show signs of emerging from the downturn. Nearly 40% of CAGP IV's limited partners are new investors, demonstrating the growing demand for exposure to those two markets.

"Focus is very important to us and we will continue to focus on China and India," says Tsou.

Tsou notes that China's domestic consumption story is "developing well" and continues to attract believers in the market's long-term potential.

"China's strong economic performance, successful implementation of its stimulus plan and incentive measures for small and medium-size enterprises are attracting international firms and investors to the Chinese market," Tsou says.

India's advantage, meanwhile, is its promising demographics, mature capital markets and skilled workforce, according to Carlyle.

Shankar Narayanan, a Carlyle managing director responsible for CAGP's investments in India, says the strong entrepreneurial culture in India has created many potential investment opportunities for the private equity firm.

"India's emerging middle class is fuelling strong domestic consumption, while the outsourcing and re-engineering of various products and services from all over the world to India continues to grow at a lively pace," Narayanan says. "India's growth story is sustainable because of its vibrant capital markets, resilient banking system and a pro-business stable government."

While Korea isn't a major focus for Carlyle Asia Growth Capital Partners at the moment, it is being closely monitored for potential investments because the country's characteristics, environment for being able to organize deals quickly, and its people's strong entrepreneurial spirit makes for good private equity opportunities, Tsou says.

"We are still very optimistic about the resilience of the Korean economy," Tsou says.

Investment selection

Tsou says Carlyle Asia Growth Capital Partners looks at companies very selectively, and has invested in only 1% of the companies that it reviewed for potential investments last year, for example.

"We look at strategic industries and we have a completely open mind when it comes to investing," Tsou says. "We focus on company fundamentals first."

Among the standard investment criteria Carlyle looks at are revenue and bottom-line growth, track record (usually, the companies it invest in have an operating history of five to 10 years), market positioning (usually the top three to five in their emerging sector), and sustainable profitability. The company must also need value-added services from Carlyle and not just its money.

"We want to invest in companies where we can play a transformational role," Tsou says.

Carlyle Asia Growth Capital Partners typically stays invested in a company for three to five years. It doesn't seek majority control. It prefers to be the second largest investor in the company, next to its founder or managing entrepreneur. It takes board seats that reflect the number of shares it owns in the company, and thus is involved in major board decisions but not in the day-to-day operations. In terms of the size of its investments, there's no limit - the company could have a revenue stream in the tens to hundreds of millions of US dollars.

The CAGP IV offers access to high growth opportunities with no leverage, providing the potential for attractive risk-adjusted returns. Carlyle says that despite the economic downturn, most of its growth capital portfolio companies have achieved growth rates in the range of 20% to 50% over the last year.

It appears that 60% of the fund's investors - who previously invested in other Carlyle portfolios - were encouraged by the performance of the CAGP III, which has made 22 investments in two and half years across more than 10 sectors including energy, consumer, technology, business services, education, industrial, healthcare, real estate and media. Around 80% of those investments were made in China or India.

Overall, Carlyle Group raised $19.9 billion in new capital last year, and this latest fund close builds on that momentum. Carlyle Group has around $84.5 billion in assets under management committed to 64 funds worldwide.

"Asia remains a core focus of our global business, and Carlyle continues to devote more resources to China and India," says David Rubenstein, Carlyle co-founder and managing director.

Carlyle Asia Growth Capital PArtners invests through a team of local professionals in six offices in Asia: Beijing, Hong Kong, Mumbai, Shanghai, Seoul and Tokyo. The team manages investments in more than 10 sectors: consumer and retail, energy and power, education, financial services, healthcare, industrial, real estate, technology and business services and media. Its significant investments include Focus Media, HaoYue Education, HongHua, and Xtep.

The previous fund, CAGP III, raised $668 million. That fund invests in private companies at an expansionary stage with solid growth track records across industry sectors in China, India, Japan and Korea. Among the made out of that fund were Claris Lifesciences (a fast growing pharmaceutical company in India), Credit Orienwise (the largest private credit guarantee company in China) and Anxin Flooring (the number one manufacturer and distributor of solid wood flooring in China).

In addition to CAGP funds, the Asian team also manages Carlyle Asia Venture Partners I ($159 million) and II ($164 million), which were launched in 2000 and 2002, respectively.