What was your experience like on the fundraising trail?
Carlyle has its own fundraising team which has an ongoing and constant relationship with investors so the fundraising was not a “lumpy” process. We started with the LPs from our previous funds and asked whether this fund would be a fit for them. It was a very smooth period over 12 to 15 months. Our previous European technology fund was an “interim” fund which only had a two-year investment period. All the investors from that fund came into the new one. We were also successful at attracting a variety of other investors. The bulk of the fundraising was completed by May 2008 – the documentation meant it took longer.
Did you set out to diversify the investor base?
Because of the interim nature of the previous fund, it was below the size bracket of some investors which were interested in the strategy and wanted us to come back to them when we were raising a larger fund. Two-thirds of the new fund's capital was accounted for by the previous fund's investor group and the balance was a) those whose size bracket we now came into and who were interested in the European technology story and b) bigger institutional investors that were persuaded by our track record. The investor base was around 50 percent European, 30 percent North American and 20 percent rest of the world.
So what are the attractions of European technology?
The fact that the fund sits within the Carlyle Group family makes it unique. There's no other fund with our size and focus that has the ability to help portfolio companies grow into North America and China in the way that we can. Also, there is a very strong base of technology companies in Europe – there are over 3million with an enterprise value less than €200 million. So it's a huge market opportunity. Europe is full of world leaders and“hidden champions”, especially in Germany and the UK. Furthermore, while the venture industry finds it very tough in Europe because there is no natural exit market, there are still quite a number of venture companies that do well, and when they have reached profitability we can take them on to the next level.
Your first investment from the fund was in UK aerospace firm Gardner Group. What attracted you to the firm?
Carlyle has done a lot of deals in the aerospace sector and we think we understand trends in the industry pretty well. Ever since the sector emerged 70-odd years ago it has experienced five- to six-year cycles. Therefore, it's a sector we take a long-term view of. It's in a trough now but we see the turning point in 2012/2013. The sector is characterised by big OEMs such as Airbus and Boeing serviced by tier 1 suppliers such as GKN and Spirit where there has been some consolidation. But at the tier 2 supplier level, where Gardner Group operates, there has been little consolidation. We see an opportunity to consolidate in Gardner's two main areas of business: aero-structures and engines.
How is the global macro-economic climate impacting you?
We're not dependent on leverage. We use it when it's available but our average gearing over the last three years has been 35 to 40 percent. We're also quite flexible in our approach – we'll happily do all-equity deals or take minority stakes. Of course, that doesn't guarantee the companies will perform well but it does mean you can do deals. Our view is that 2009 and the first half of 2010 will be pretty painful. When we look at business plans we're not interested in seeing growth predictions for 2009 unless that growth is already locked in. We see a small level of growth in 2010. What that means is that you have to look at a four- to sixyear time period.