For India & China, good times will last for another 3-5 years

For India & China, good times will last for another 3-5 years
GEORGE SMITH ALEXANDER


Carlyle is one of the most aggressive faces in the private equity world. Its big-ticket deals, presence in 100 markets and complex transactions have often brought the fund under media glare.

One of the largest private equity (PE) players in the world, with $51.8 billion under management, the Carlyle Group plans to increase the fund size to over $70 billion by the end of 2007.

Since its inception in 1987, the firm has invested $24 billion equity in 576 transactions. In India, Carlyle has invested $100 million in over six companies.

Alan Greenspan once said the worst of deals are made at the best of times. We are seeing a lot of liquidity and numerous deals in recent years. Will the good times last?

I think liquidity is probably here to stay for another three to five years. I don’t see anything on the horizon that would alter the prospects of growth for China and India or the availability of debt or cost of debt, globally.

There are going to be opportunities for investors to make great many mistakes. Good times are now, if you are taking your company public or if you’re to sell. It’s predominantly a sellers’ market at this point.

But, if you maintain discipline and look at buying companies that you can actually improve, you will still have opportunities to make reasonable returns for your investors.

But then again it will be more dependent on changing performance on the factory floor rather than playing market cycles. Adding value in a robust market can be very tricky. You can’t afford to make too many mistakes. In this market, the goal is to move profitability up rather than counting on an exit at a higher multiple than you entered.

There is a growing fear that in the current environment, acquirers are overpaying for a lot of deals. The answer is probably ‘yes’. But again what they do for the company is even more important than what they paid.

My intuition would suggest this is a time when many people will have overpaid in retrospect. I don’t think the dot.com bust will happen again. Rather, I believe there will be a soft-landing in the next three to five years. I truly believe that our current investment opportunities, globally, have strong underpinnings of growth and sustainability.

PEs are largely financial investors; what do they bring to the table when they step into a company’s board?

One of the main transitions that private equity generally has gone through over the past 10 years is to realize that financial engineering has truly become a commodity.

Therefore, bringing in operational advisors to mentor our deal teams and CEOs is very essential. They are able to work with our teams from the point of due diligence.

Then, from their positions on the board, they help: attract the best management talent; provide a higher level of corporate compliance; through their and our networks bring companies together to increase the chances for value-added cross-selling; and improve the company’s business development opportunities, including providing merger and acquisition advice.

Private equity firms can also shepherd their invested companies through balance sheet restructuring and exits, including trade sales and IPO processes.

There are regulatory concerns that the dividing line between PEs and hedge funds are getting blurred. Further, questions have been raised on sources of funds for PEs.

Is there something to worry about?

I do believe that there has been a bit of blurring between hedge funds and private equity. The investors, who chose hedge funds rather than private equity, are making a decision that it is fundamentally different. They are looking for more diversification, more liquidity in addition to returns.

This hasn’t prevented some hedge-fund operators from taking positions in what otherwise should be a private equity opportunity, that is, relatively more illiquid, longer-term and a more capital gain-oriented approach to investing. In some cases, when investing in debt positions, they provide a complexity to the syndication by virtue of their impatience with respect to changes in the financial structure or performance of a company.

I believe that the increased scrutiny of private equity and hedge funds has been a function of their success. Governments are good at doing one thing — following the first rule of investing, that is, “follow the money”. If somebody’s making a lot of money, you can be sure that the government is interested in getting their share.

In a certain sense, regulators may be reacting to the fact that the current business trend, of globalization may, in some regards, be reducing their effectiveness in influencing their own economies and international trade effectiveness. It’s clear that the democratization of finance, information and technology works to the disadvantage of economic protectionism.

Which are the markets and sectors that smart PE investors will chase?

You have to start with technology, telecom, and media and anything that has to do with one person communicating with another person. Technology is expanding exponentially in just about every sector that we look at — healthcare, telecom, media, aerospace, defense, industrial, and consumer. One sector, which is deepening and becoming very robust, is the whole technology of healthcare, and we are looking to do a lot more there.

I think one of the most important trends other than globalization is demographic change. It will change the face of markets globally within the next 50 years. You have both an ageing population and a demographic dynamic coming together; for example, negative birth rates all across Europe. I predict the next year’s number one topic in Davos will be demographics — not global warming. Asia-Pacific will become much more important in the world in the next 15 years.

Since the time Carlyle hired former Amaranth employees, there has been speculation that you will set up a hedge fund. What are the plans? Where do you see Carlyle three years from now?

If you had asked me this question five years ago, I would have failed to answer. We will fill out all of our geographies with respect to our current products, for example, real estate in India and Latin America. We have some curiosity regarding continental Africa.

The idea of having a full range of investment alternatives is to give our investor base the full range of risk-return opportunities. We may consider public platforms for specific asset types. The concept of permanent capital is similar to KKR and Apollo. We may consider this as an alternative to close-ended funds. But, in terms of doing things dramatically different, I don’t think so.