That private equity is aggressively pushing into new territories is no surprise to David Rubenstein. The co-founder of the Carlyle Group, one of the industry's great visionaries, believes that with the asset class approaching a point of saturation in the economies of North America and Western Europe, it is only natural that limited partners are now turning to markets where they see untapped opportunity – Asia and Africa, Latin America and Eastern Europe. “If anything, I'm surprised it didn't happend sooner,” he says during an early morning interview at Carlyle's office in London's Berkeley Square in December.
An unprecendented amount of institutional capital is flowing into these economies because of the growth they are showing already or are widely expected to deliver in the years to come. Because “growth” is the unifying theme between them, Rubenstein says they should rightly be classified as “growth” markets. To speak of them as “emerging” is both unhelpful and derogatory, he argues, because many of them have already emerged to a point where they are challenging the West's economic hegemony. Indeed, some of them, such as China, India, Russia and Brazil, are now widely expected to dominate in the non-too-distant future. This, says Rubenstein, is why private equity investors will ignore them at their peril.
The Carlyle Group is clearly determined to avoid this mistake. The firm is already one of the most international operators in the industry. The majority of its 25 offices are situated in the mature economies of North America and Western Europe, but Caryle's global network continues to grow.
In Asia, it already has people on the ground in Beijing, Hong Kong, Mumbai, Seoul, Shanghai, Singapore, Sydney and Tokyo. In Japan, the firm has emerged as a leading player in the country's rapidly growing buyout market and is currently investing the $2 billion country fund it closed in July. It has not been very active in India, but it is among the most visible Western groups in Greater China, where it has dedicated teams to run separate funds for growth investments and buyouts.
Carlyle has already completed a number of buyouts in the region, but in China itself, the growth capital unit has advanced more quickly than the buyout team. The latter has spent the past two years trying to secure the necessary approval from the Chinese government to complete the agreed purchase of an 85 percent stake in Xugong Group Construction Machinery, a state-owned manufacturing company. In October, the firm agreed to change the terms of the deal to buy a 50 percent stake instead, and Rubenstein is hopeful that the ideal will now close.
Sub-Sabaran Africa is a region I am very interested in, and we are looking at doing something there before long
If it happens, it will not be a watershed transaction he cautions – “China's state-owned enterprises won't become readily available overnight” – but it will be an important step towards the development of a buyout market in the People's Republic.
Elsewhere in Asia, Carlyle has set its sight on the Middle East. In November, the firm formally launched its long-anticipated foray into the region with the opening of an office in Dubai, Rubenstein says that private equity in the Middle East and North Africa is still at an embryonic state and, like China, shouldn't be expected to deliver a wave of transactions straight away. But he also points to the region's ongoing economic transformation as a source of massive potential, where “complex transactions” will require the kind of funding that international firms like Carlyle will be well placed to provide.
Plans exist to set up regional offices in Cairo and Istanbul, and a campaign to raise a $500 million MENA fund, which will invest in buyouts, growth capital deals and listed stocks, is about to commence.
Another continent that has Rubenstein's attention at present is Latin America, where Carlyle currently has just one outpost in Mexico City. Brazil is high on the firm's agenda, he says, despite the fact that the country's indigenous private equity firms have so far struggled to deliver competitive results.
In Eastern Europe, Carlyle has watched other firms build lucrative franchises in the EU accession countries, but has not attempted to enter the region itself. An effort to raise a Russian fund failed twice. Rubenstein will not say whether the firm will try a third time, though he does acknowledge that a number of Moscow-based mid-market private equity groups have done well in a country in which “tremendous wealth has been created in recent years”.
Unequivocal on the other hand is his take on Sub-Saharan Africa: “This is a region I am very interested in, and we are looking at doing something there before long.” A Carlyle office in South Africa is a genuine possibility, be adds.
Such predictions are worth taking seriously. Carlyle, which currently manages more than $44 billion in funds investing in buyouts, venture and expansion deals, real estate investments and corporate debt, has a proven track record in executing on a geographic expansion plan. Its fundraising prowess is legendary, with 12 investment relations professionals led by Rubenstein marketing a number of different products at any one time. (“Have you raised any money today?” is a question that Carlyle people are fond of asking each other, according to an insider. “Not yet, but it's only 8:00 in the morning,” is the standard response.) There is no question that Carlyle knows how to channel meaningful quantities of institutional capital into a new series of emerging markets funds.
Unlike Western firms, emerging market firms don't have to defend their success. They have to demonstrate their potential
Local groups tend to have mixed feeling about the firm arriving in their home territories. Carlyle certainly has the wherewithal to compete for the best talent and poses a threat to those who can't afford to lose key personnel. On the other hand, Carlyle's presence in a region where private equity remains unproven tends to boost the region's credibility among international limited partners.
Says a private equity practitioner in Dubai: “Their arrival in the Middle East will raise the bar for everyone,” a statement that neatly illustrates the point.
The next big test for emerging markets private equity, argues Rubenstein, will come with the next economic downturn. He says: “That's the real issue: will it be boom and bust once again? Historically, when these markets turned and prices fell, investors ran and stayed away for five years. This time they may not, which would be a bigh change. But those who do will miss out on a major buying opportunity.”
In the meantime, he countinues, private equity groups operating in growth markets face a similar challenge to their Western peers – the need to improve their communication with the outside world. “The difference is that unlike Western firms, emerging market firms dont' have to defend their success. They have to demonstrate their potential.”
Rubenstein himself is deeply involved in both projects – lobbying regulators in the West and educating potential investors about the opportunities in emerging markets. He says he travels more than ever and spends about 260 days on the road every year. “Wherever you go, there he is,” his friend and rival Stephen Schwarzman at Blackstone once said about him. A private jet makes the logistics more manageable.
I ask him about his motivation. “There are few things more ennobling than giving interviews to journalists,” he deadpans, before talking about the pleasures of seeing portfolio companies grow, making money for LPs and working with the young and talented people that private equity attracts.
He also appears to have a genuine passion for being part of private equity's current move into fast-growing markets. The interview ends after 30 minutes, and Rubenstein rushes off to a Mayfair hotel around the corner to address the “Emerging Markets Private Equity Forum”, an annual conference hosted jointly by PEI and the Emerging Markets Private Equity Association. The night before, he made an appearance at the event's cocktail reception.
You'd think the last thing a man as busy as Rubenstein needs is a cocktail reception attended by fellow professionals at the end of a long week. But there he was, chatting with delegates and speakers. Rubenstein, who helped create Carlyle in 1987 and has watched it grow into one of the most powerful players in the industry, still has a business to build and an industry to promote. One day he will retire. When he does, they will remember him for services to private equity almost everywhere.