Online Extra: Carlyle Group's Eye on the East

Wayne Tsou of Carlyle Asia Venture says the region is near the height of its VC cycle but still far from the old bubble days

This year, analysts expect some $12 billion will be raised by private-equity and venture-capital funds targeting Asia. Carlyle Group, one of the largest private-equity firms in the world and an early player in Asia, is ramping up its activities in the region. Its China team, led by Hong Kong-based Wayne Tsou, managing director of Carlyle Asia Venture group, has already had a number of lucrative successes, including getting 15 times its original investment back in online travel company Ctrip, which listed on Nasdaq last year (see BW, 2/14/05, "Carlyle Group's Asian Invasion").

Carlyle Asia was also an early investor in and in late October agreed to pay $375 million for an 85% stake in Xugong Group Construction Machinery. BusinessWeek Asia Correspondent Frederik Balfour recently spoke with Tsou. Here are edited excerpts of their conversation:.

Why do you think there is so much venture-capital and private-equity money being raised to invest in Asia now?

It attracts more interest relative to slower-growing parts of the world. The capital market is very favorable, and we're close to the height of the capital[-raising] cycle (see BW Online, 8/11/05, "There's More Where Baidu Came From").

Is there too much money looking for investments?

There's a lot of exuberance, though it's different from the bubble days, when the rationale was based on a promise of what would happen. Today, companies have proven business models, and the exuberance is about how quickly these companies can become bigger.

What sectors are hot?

A number of sectors are attracting the most attention, such as mobile-phone services and Internet gaming, which occupy a limited space. For the entrepreneurs, it's a bit of a seller's market. Some of the highest valuations aren't reasonable, and in our view there are hyped expectations.

Consumer products, manufacturing, and the health-care sector are only beginning to surface [for venture capital and private equity]. We haven't invested in health care yet, but we're doing a lot of monitoring and research to get to know the sector and its people better.

How would you characterize China's entrepreneurs nowadays?

The environment has improved overall, in traditional and high-tech sectors. Entrepreneurs are better educated and [more] sophisticated [than they were five to seven years ago]. They have seen the success of Ctrip and Sohu and Asiainfo [mainland companies with very successful foreign listings], and more recently of Shanda and Baidu (see BW, 10/3/05, "Bargains Among Busted IPOs").

There's also an economic system evolving around VCs. There are service providers who work with them: investment banks, law firms, accountants, consultants who do pre-education about the VC industry. So when the capital market is hot, on the one hand you have higher valuations, on the other hand success breeds more interest and hence requires less education [about the role played by VCs].

I'm told that if you really want to back a successful entrepreneur, you better deal with the home-grown guy, not the slick "sea turtle" returnee.

This is when you bet on the domestic Chinese economy. The savviest local businesspeople know their customers, the distribution network, and the value chain best. We're backing a lot more people who never left China or speak English. They fought the street battles and won against intense domestic competition. China has become the most intensely competitive battlefield.

Which local entrepreneurs have you backed?

Target Media [which installs flat-panel TV advertising screens in high-rise buildings and public spaces such as train stations] is run by someone who is very local, David Yu. He never worked outside China.

Another one is Sun Hong Bing, who runs one of the largest real estate agencies, Sunco. He's very local. Even with the real estate business in crunch mode, it's an opportunity for them. When the market is in a down cycle, they can quickly expand, especially in the inland cities. We and Softbank Asia Infrastructure Fund have invested in them.

Which investments haven't worked out for you?

Educomp Datamatics in India. The company dramatically underperformed. We felt the entrepreneur or promoter wasn't someone we could work with professionally. The toughest job for a VC is where to spend your time. For ones in the loser category, we liquidate. We took a haircut [by selling the stake back to the company]. You need to make sure they want your oversight on corporate governance.

What other new investments have you made?

In the last three months, two in China and two in Korea: TLi and Flexcom. TLi is a fabless semiconductor plant in the LCD-panel segment. It can probably list pretty soon. We paid $5 million for a stake in the mid-teens. Flexcom makes flexible printed-circuit boards for mobile phones and PDAs. We paid $11 million for a stake in the high 20% range.

How would you characterize the funding situation in Korea and elsewhere?

The Korean market is very robust in terms of entrepreneurial activities in the mobile and display sector. In Korea and Japan, the funding environment for early-stage companies is maturing quickly. They don't get money from banks unless they have hard assets -- they get it from family, friends, or angel investors. There are a lot of VCs.

However, we look at the next stage, which we call growth-capital funding. We aren't backing very early-stage investments, we look at companies that prove they can make a profit.

Edited by Patricia O'Connell

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