PE firms entering China face a lot of headwinds. There’s the idea that, aside from a few homeruns, most investments in the region are underwater. Or that LBOs have no liquid exit opportunities. Or that leverage isn’t readily available.
And of course there’s the country’s country’s notoriously opaque and shifting legal system. “Investors must also file dozens of forms to local tax offices to complete legal registration of a deal or joint venture company. Different bureaucracies within the country make different demands,” a recent Reuters story laments.
Adding to the problems, sellers in the country like to “take advantage of (a U.S. dealmaker’s) need to close a deal quickly,” according Andrew Marino, a principal with The Carlyle Group. Speaking last night on a China-focused panel discussion sponsored by Ernst & Young and Columbia Business School, Marino said the Chinese have patience and use it to their advantage, often to the dismay of foreign investors.
Despite the uphill battle, he said Carlyle remains committed to China, and that the firm’s “long term view” of investment opportunities in China is unchanged. One upside to growth in China includes the explosive growth of China’s middle class, he said. Furthermore, Marino said the Chinese banks are much healthier than U.S. banks because of the use of leverage in the country is much less pervasive.
This commitment is contrary to recent news that Carlyle would shutter its leveraged loan operations in Asia. The firm was in the midst of raising the first fund dedicated to leveraged finance in Asia when the effort was suddenly shut down in late November. Carlyle has 24 leveraged finance funds serving other regions of the world.
A Reuters report suggested the Asia fund failed because of a lack of interest from investors, given the risk associated with leveraged lending in a global credit crunch. Closing Carlyle’s Asian operations resulted in the exits of seven bankers, including Group Head and MD Eric Mason, a source confirmed to peHUB.
My question is how is Carlyle financing its deals, if it can’t sustain a loan business that was intended to contribute to its own deals? Not only was the investor appetite absent, but the demand for leveraged loans must be dead if the business couldn’t get going. I’m also curious to know if the firm will ever return to the market with this strategy.
Marino declined to comment on the firm’s future strategy for leveraged loans in China. However, I understand that the firm’s failure was one of timing, and that the firm will consider returning to that market when the demand for emerging market investments returns.
Speaking on Carlyle’s general strategy, Marino said the firm is trying to “pause, look around, delever the portfolio, and look out for one or maybe two really good deals.”
(Notably, Carlyle was not among the host of mega-buyout firms who rushed into the distressed debt market and missed the bottom.)