July 04,2009

New Foreign Private Equity Demand for Chinese Companies

By Thomas Wilkins,CFA

New evidence supporting the ‘decoupling hypothesis" surfaced as Carlyle Group of Washington, DC  harvested US$1 billion from investors worldwide for its fourth Asia Growth Partners Fund. "Asia remains a core focus of our global business and Carlyle continues to devote more resources to China and India," said David Rubenstein, Carlyle Co-founder and Managing Director.
The "decoupling hypothesis" argues that growth in emerging economies is no longer determined by developed economies as previously imagined. What is significant is that the world’s supposedly largest private equity firm believes that the US$ 1 billion subscription supports improving investor sentiment towards China. "The Chinese domestic consumption story is developing well. 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," said Wayne Tsou, Managing Director and Head of Carlyle Asia Growth Partners.

More evidence supporting the "decoupling hypothesis" stems from the fact that Carlyle’s 4th Asia fund is much larger than the US$159 million raised by its first Asia fund in 2000,  US$164 million by its second fund in 2002 and US$680 million for its third fund in 2005. Also, 40% percent of the invested funds were new investors, spread out over a large geographical range.
"If the markets have embarked on a new worldwide bull market, the ‘new leaders?are likely to be emerging and frontier markets," said Raymond James strategist Jeffrey Saut. "Things are felling better because they are better, largely because of Asia," says Louis Gave of Gavekal.
The Carlyle managers identify their investment strategy as investing in high growth private companies with local management and leading market positions in China as well as other Asian countries. It seeks companies that are not publically registered and takes a longer time horizon than hedge funds which normally concentrate on publically registered companies. The fund will be managed through a team of local professionals in six offices, including Beijing, Hong Kong and Shanghai.

The new 4th US$ 1 billion fund has made its first investment is in Ellassay, a women’s apparel company, domiciled in Beijing. The Carlyle investment is expected to propel international growth.
Another successful  Chinese investments made by The Carlyle Group includes ctrip.com, an online and offline hotel reservations and travel service provider, into which was invested many millions of US dollars. Today Ctrip trades on the NASDAQ in the US. Year to date, its stock has almost doubled in value.  However, ctrip.com has not been invincible as its stock declined from 71 to 16 in 2008.
Other investments made by Carlyle Asia funds include (1) DIO F&B Co., Ltd of Suzhou, China which is believed to be the largest coffee shop/leisure dining food and beverage chain in China, (2) Hao Yue Education Group of Beijing which is a private higher education service provider in China, in which Carlyle invested US$50 million, (3) Babela Restaurant Management Co. Ltd of Shanghai which is an Italian-style restaurant chain, (4) China Real Estate Network of Tianjin believed to be the largest real estate brokerage company in China with nationwide network coverage, (5) Focus Media Holdings Limited of Shanghai which develops interactive advertising, and (6) ZCom Company Limited of Beijing which designs and provides a digital content delivery platforms.
The "decoupling hypothesis" is supported by the fact that large institutional investments are coming to China from such a large firm with significant and influential relationships. The Carlyle Group manages over 64 different funds with US$ 84 billion of assets under management. The 1300 investors for this US$1 billion came from 71 countries. The California Public Employees Retirement System, managers of the largest public pension fund in the US, has a 5.5% stake in the Carlyle management company and the Mubadala Development Company in Abu Dhabi has a 7.5% stake. Lou Gerstner, former Chairman and CEO of IBM was chairman of The Carlyle Group until a few months ago, but remains as a senior advisor. With so many funds under management and such sophisticated relationship, surely this supports the "decoupling hypothesis."


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