Carlyle: Global reach key to Yashili success

Private equity firms that can leverage global resources are well-placed to introduce best practices in China's food industry, even if the companies don’t have plans to expand abroad, according to Eric Zhang, managing director for The Carlyle Group’s Asia buyout fund. 

In a recent interview with Private Equity International, Zhang explained how the firm's work with its former portfolio company Yashili International, a Chinese baby formula producer, was largely due to tapping Carlyle's global professional network. 

Carlyle and controlling shareholder Zhang International Investment sold Yashili in June to China Mengniu Dairy in a HK$12.5 billion (€1.2 billion; $1.6 billion) deal, PEI reported earlier. 

Carlyle had invested an undisclosed amount in the business during 2009 and 2010, shortly after China's July 2008 tainted milk scandal, which caused the death of six infants and a further 294,000 Chinese to become ill, according to reports. The cause was traced to contamination by the industrial chemical melamine in the supply chain, and the public lost confidence in all domestic milk producers. 

Yashili didn't have direct involvement in the scandal, but it was nonetheless negatively impacted. Zhang said that while Yashili was a cash-rich business, it needed help strengthening its quality control processes as well as its marketing and branding in light of the heightened consumer concerns with food safety.

First, Carlyle established an internal food safety committee within Yashili. 

“We [then] identified [that] where we could really help the company improve quality and best practices was by having their product baseline audited by an internationally-recognised institution. In our case, we actually got our chief marketing advisor to talk to the NSF [public health and safety testing organisation] in the US and ask them to take a look at the whole production system and the procedures and manuals to see whether [Yashili is] compliant with the highest of food safety standards.”

He added that the firm implemented compulsory tests for the products in the US, New Zealand and Hong Kong, to bolster consumer confidence about the safety of the milk and milk products. Yashili also began to use imported raw milk from Europe, the US or New Zealand, which have long established best practices that address milk quality and safety.  

The international sourcing helped boost the public perception of Yashili, as Chinese customers tend to have more confidence in overseas products than domestic ones, according to Zhang.

“In China the issue is that sometimes, even if the government says [the product] is fine after the testing, which takes quite some time, people were always questioning whether the government  has the authority or what kind of relationship they have with the company. So to have a whole set of international standards to claim your product is fit for global standards was very important.”

Carlyle also helped Yashili with its current plans to open a factory in New Zealand. Yashili, a purely domestic firm, lacked the international experience and connections to tackle the task alone.  

“At that time the company had very few people that could speak English. They only had people doing exports that could speak English and they’d never opened a plant overseas. That was an area where we tried to help a lot. We have a team in Australia and we also have our operating advisor [that has] a lot of experience helping portfolio companies open their factories in different markets. He made numerous trips to New Zealand together with the company to check out the land to set up the facilities and hire a management team.”

Zhang says that operational value-add in China is a key part of the firm’s strategy when investing from its buyout fund, requiring much more time from the partners on each portfolio company. 

“We only do about two or three deals in China per year. So in terms of number of deals, it is much less than some [firms], particularly most of the local firms. But we do spend a significant amount of time rolling up our sleeves to work with those portfolio companies.”