Friday Letter Carlyle’s quest to crack the China code

If Larry Page, Sergey Brin and David Rubenstein were to have a discussion about the attractions of China as a business location, they would not see eye to eye. The creators of Google appear to have had enough of the place and its censorship of the internet, and it has been suggested the company’s Chinese earnings have been lacklustre anyway. Rubenstein on the other hand is determined to lead his investment firm deeper and deeper into the country.

Carlyle’s latest step into China is the deal it has just cut with the Beijing local government to set up an RMB-denominated fund. Taking advantage of recently established legislation enabling such provincial funds, Carlyle is the first foreign private equity firm to partner with the Beijing authorities in this way, and only the second to do it in any of China’s regions (last year Blackstone won approval for an RMB vehicle in Shanghai).

The Beijing partnership is further evidence that Carlyle is becoming part of the private equity establishment in China. Its particular brand of incentivising local investment professionals to invest capital on its behalf appears to have travelled well to the Middle Kingdom. To be sure, there aren’t many countries in the world where the firm has tried and failed to build a franchise (though Russia does spring to mind). But exporting the model to the open economies of the UK, Italy or South Korea was one thing; growing an investment business in China on the other hand is a challenge of a different order – not least because it requires a rigorous and adaptable modus operandi for dealing with government institutions.

Carlyle has learned the hard way that the politics of doing business in China can be frustrating. The firm tried for three years to complete an agreed control investment in Xugong, a state-owned construction company. In the end official resistance proved insurmountable, and Carlyle walked away with nothing – except, importantly, its reputation intact. 

Putting the Xugong failure aside, the firm has a string of Chinese investments to its name, including stakes in a baby milk maker and a travel company, as well as large investment teams in Beijing, Hong Kong and Shanghai. Rubenstein is on the record as describing China as the “epicentre of the private equity world” today and soon to be the “largest private equity market in the world”. Given his enthusiasm, he must be delighted with the progress made to date.

But if the franchise is to grow further, keeping the authorities on its side is as important as ever. A provider of capital is less likely to suffer government interference than an internet search engine, so there are limits to what Carlyle can learn from Google's tribulations. Still, Rubenstein and his partners will need to tread carefully, for the road ahead remains unpredictable. “David, don’t be evil,” Page and Brin might caution. “Never,” might come Rubenstein’s reply. “But I will try to be profitable.”    

PS – Carlyle’s Asian growth capital team is among the contenders in our global Private Equity International Awards this year. IF YOU HAVEN’T VOTED YET, NOW IS THE TIME. Just click here and get started. Every vote counts – and the ballot box will be sealed on Monday.