Carlyle Group's Asian Invasion

So far, the private equity partnership is reaping mighty sweet returns

Last year it made a staggering profit in South Korea from its investment in a local bank. In Japan it just placed a big bet on cell phones, and it also controls a hoist-and-crane manufacturer and a medical-equipment maker. In China the bets include online travel, storage software, and outdoor media.

The powerful engine behind all these investments is Carlyle Group, the politically wired, Washington-based private equity partnership. The group has already invested more than $4 billion in the region, and that's only the start of the party. Carlyle's most recent coup was in China, where it just agreed to pay $400 million to take a big stake in Shanghai's China Pacific Life Insurance Co., the mainland's third-largest. No place on earth "has more significant growth potential in the private equity industry than Asia," says Michael B. Kim, the Seoul-based, Korean-American head of Carlyle's Asia buyout operation outside Japan.

Carlyle's biggest investment yet came last October, when it put up 60% of the $2.1 billion cost of taking over Japanese cell-phone maker DDI Pocket, which it just renamed Willcom Inc. Carlyle now has a $750 million buyout fund focusing on Korea, China, and Taiwan, two venture-capital funds totaling $323 million, plus a $482 million fund for Japan. But as the Willcom deal suggests, it can attract outside partners to its deals, greatly increasing its buying power. "We are never constrained by our fund size," says Kim. "That allows us to go after elephants." The group is tapping its global network of investors, which includes California pension fund CalPERS and the Abu Dhabi Investment Authority, to raise $1.25 billion to $1.5 billion later this year for Asian investment. Kim says Carlyle is exploring a number of new Asian deals, with the emphasis on logistics, financial services, telecom, and consumer industries.

The returns so far have been sweet. Carlyle first dipped its toes in Asian waters in the wake of the 1997-98 Asian financial crisis, buying a controlling stake in Korea's KorAm Bank (C ) for $450 million. In April, KorAm was sold to Citigroup (C ) for $2.7 billion (it is now part of Citibank Korea) in a deal that represents the single-largest private-equity exit in Asia to date. Carlyle's $675 million profit on the transaction gave its investors a 250% return.

Now, Carlyle leads a growing list of private equity firms trying to strike it rich in Asia, including Newbridge Capital, Lone Star Funds, Warburg Pincus, and Ripplewood Holdings. Carlyle's modus operandi is to install a new CEO and management team (in KorAm's case a group moved over from Citibank Korea), streamline governance and operations, then wait three to five years for a surge in profits before selling.

Part of Carlyle's approach in Asia has been to put in place advisers and executives with local clout. Korea is one of the investing venues "where relationships are going to pay off" for private investors, says Kim, a 41-year-old native son (now a U.S. citizen) with a Harvard MBA. Kim should know, since he himself is one of the best-connected figures in Seoul. His father was a top insurance company executive, and his father-in-law is former Prime Minister Park Tae Joon, founder of Posco (PKX ), the world's most profitable steelmaker. Kim, who became a Salomon Smith Barney managing director at 34, first came to the notice of Korean bureaucrats by lead-managing a $4 billion sovereign bond issue in 1998 that helped stave off national insolvency.

In Korea, Kim sees plenty of opportunities in telecom, financial services, logistics and consumer goods. Carlyle's prospective partners include Korean conglomerates, or chaebol, seeking to sell noncore assets, and entrepreneurs looking to cash out their businesses in proprietary deals rather than initial public offerings. Carlyle has been actively bidding for assets of the now-disbanded Daewoo Group that are for the moment controlled by creditors.


Carlyle management believes that all business is local. In Japan its buyout team of 15 professionals is entirely Japanese, including the boss, Tamotsu Adachi, a highly regarded dealmaker with a résumé that includes top posts at GE Capital (GE ), McKinsey, and Mitsubishi. About 60% of Carlyle's $482 million Japan fund was raised through Japanese institutional investors, including the Development Bank of Japan. "As they penetrate the Japanese business community, they are better accepted by top executives of Japanese corporations," says Motoya Kitamura, a vice-president at Alternative Investment Capital, a Tokyo fund-of-funds investor. And those corporations are crucial to Carlyle's plan for Japan, Adachi says, since "basically, we target noncore businesses of large conglomerates." In January, Carlyle announced its first big exit in Japan: the sale of a majority stake in Asahi Security Co. for $200 million, a 100% return on its 2002 investment. Carlyle acquired Asahi Security from Daiei, an ailing retailer, tripled its profits, and then sold it to Toyota Industries Corp. "The employees and management are very happy," Adachi says.

The game is completely different in China. There, buyouts are rare because almost all listed companies are majority-owned by the state. So most of Carlyle's money is in small, unlisted private startups. "Most of our companies are high-growth and early-stage," says Wayne Tsou, head of the Carlyle Asia venture group, based in Hong Kong. The biggest success so far for Carlyle in China was its purchase, for $8 million, of a 25.97% stake in online travel company International Ltd. (CTRP ). That investment was worth $125 million when the company listed on NASDAQ in 2003. Carlyle has since sold down its stake to 2%. The group's other Chinese bets include a stake in Shanghai semiconductor-design company Huaya Microelectronics; a $12 million piece of eBis Co., one of China's largest private computer components companies; and a $15 million stake in outdoor advertiser Target Media. What Carlyle says it brings to these tiny companies is funding, solid financial oversight, and broad management expertise.

But where Carlyle sees itself as an active investor and management guru, some politicians think private-equity funds are just milking Asia for fat payouts. In both Japan and Korea, there has been a serious backlash. In December, Japan's Ministry of Finance proposed a 20% tax on capital gains made by private-equity firms, and the tax seems likely to go into effect in April. "It's very unfortunate that the Japanese government is trying to impose a kind of tax on funds," says Adachi. Carlyle's efforts to lobby against the tax have been ineffective, he says. In Korea a new law went into force in December that restricts foreign investment in banks and allows the establishment of domestic equity funds to compete with foreign funds. At the very least, that is expected to drive up the prices for available assets. Clearly, Kim and his private equity colleagues will have to work harder than ever on building those relationships. But if anyone has the contacts, it's Carlyle.

By Moon Ihlwan in Seoul, with Ian Rowley and Hiroko Tashiro in Tokyo and Frederik Balfour in Hong Kong

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