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Carlyle CEO sees China opportunities from decoupling as it raises $130bn

Lee highlights Chinese economy's consumer pivot amid US friction

Carlyle CEO Kewsong Lee sees "so much opportunity" in China despite its economic decoupling from the U.S. (Photo courtesy of Carlyle Group)

NEW YORK -- Even with Beijing and Washington still trading barbs under U.S. President Joe Biden's administration, private equity giant Carlyle Group and its CEO Kewsong Lee see "massive opportunities" in the Chinese market and throughout Asia.

The Washington-based company, which boasts $260 billion in assets under management worldwide, aims to raise another $130 billion-plus by 2024 for funds under its umbrella, with its sights set on growth investments in markets including China, India and Japan.

Asia has been a major focus recently for Carlyle, which plans to invest more than 1 trillion yen ($9.2 billion) in Japanese businesses over the next three to five years and hired a key member of former Prime Minister Shinzo Abe's economic brain trust as a senior adviser there.

Lee, who was appointed co-CEO in 2018 and became the sole CEO last year, sees particular promise in China as its economy shifts focus from exports to domestic consumption. The firm's investments in China include the likes of ByteDance, operator of the wildly popular TikTok video platform, and unit JD Logistics, the country's top integrated warehouse and delivery company.

"China is at a place where local companies with local entrepreneurs can meet with Carlyle on a local level, partner together, and grow locally, and they can be fabulous investments," Lee said.

Edited excerpts from the interview follow.

Q: There are a lot of unspent cash reserves building up in the fund industry, and competition for deals is intense. Will you be able to use the $130 billion effectively?

A: I am not worried about dry powder. Our deal flow right now and the number of opportunities that our private equity franchise is seeing have never been higher. And the reason for that is everywhere around the world, in every single region, in every single industry sector, change is unleashing opportunities: digitization, e-commerce, the importance of the growth of the tech sectors and the health-care sectors around the world, it cuts across every single industry. And as a result, especially with a younger generation of entrepreneurs, the opportunities that are being created because of change are just enormous.

The trends in the world from technology to geopolitical tensions to the disruptive elements of technology in every single industry, the changes in consumer behavior because of COVID, all of this is unleashing opportunities, and private equity is perfectly positioned.

Q: You closed Carlyle Asia Partners V in 2018, and according to a SEC filing, there is another Asia-oriented fund in the market. Can you talk a bit about your strategy in Asia?

A: For SEC reasons I can't be specific about any funds that are currently in the market. We've been investing in growth for the longest time in Asia and see tremendous opportunities for private-equity growth investing in Asia. In fact, most of the deals I see and we look at in Asia are much more growth-oriented as opposed to focusing more on mature economies.

With respect to China, I think it's fair to say the massive opportunities that are being created because of the digitization of their economy, the demographics of their population, the use of mobile, their fintech payment systems, their ability as a country to potentially leapfrog in certain areas like in climate and maybe in health care, these are all a wonderful backdrop for growth opportunities. But perhaps the most important trend happening in China is the increasing importance of the consumer and domestic consumption as China recalibrates to being much less export-oriented and much more focused on growing the consumer.

For example, we invested in leading color cosmetics brand Perfect Diary last year, which in four years has quickly scaled up by leveraging technology to drive its online e-commerce business, tapping the deep penetration of social media platforms and the influence of key opinion leaders to promote its products. The company went public on the New York Stock Exchange in late 2020.

Q: The friction between the U.S. and China does not appear to be subsiding under President Joe Biden's administration. Have you heard any concerns from pension funds or other customers about investing in China?

A: I think of course everybody is always concerned and curious about U.S.-China relations and the risks. But we're in the long-term business, and over the long term, the number one and number two largest economies in the world will be trading with each other and will be interacting with each other. It's just too important and too intertwined in the global economy for there not to be constructive engagement and mutually beneficial trade.

There's going to have to be a lot of continued discussion between these two great countries as leadership engages.

I think too many folks focus on headlines and are worried about the present moment when in light of the bigger picture of the trends of what's happening, there's just real opportunity. I'll just remind everybody that with respect to Japan, China is now the largest trading partner with Japan, not the U.S. And it's not an either/or. Japan shouldn't be focused on either China or the U.S. Japan should be focused on both because that's where the opportunities are going to be.

Q: Won't China-U. S. decoupling hinder Chinese investments?

A: I actually think that these types of situations are creating as much opportunity for companies in China because, like I said before, they are focused more on the domestic consumer.

We're seeing so much opportunity right now.

We've been active in China since 2000, with a large local team of over 30 investment professionals who are dedicated to China, all with local backgrounds and industry specialization and networks. We've invested over $10 billion of equity in more than 110 investments as of March 31, 2021, which has included many of China's leading companies.

Twenty years ago, it might've been a matter of how do we take a Chinese company and expand it into Europe or into America, or how do we view China [and] this company as an important element of the supply chain and it'll grow as global companies around the world grow? Those are still very legitimate ways to think about opportunities. But increasingly I think what's going to be more important in the future with the U.S.-China drift is an appreciation to understand that China is at a place where local companies with local entrepreneurs can meet with Carlyle on a local level, partner together, and grow locally, and they can be fabulous investments.

Q: You plan to expand your private credit business -- lending capital to businesses. Is there demand among borrowers?

A: On the demand side, companies appreciate private capital. We are able to provide secure financing on very good terms, very fast, with a high degree of certainty, partnership, and commitment when traditional sources of public markets or even the banks cannot be there because of disruption, because the markets are more volatile.

We're finding that the banks are becoming less and less important to the types of borrowers who want to move quickly, who want really customized terms, and who want the certainty of a partner being there no matter what. And we're seeing access to public markets. Sure, the public markets are open, but the execution, the confidence around execution in the public markets may not always be there.

Q: Regulators around the world have expressed concern about risks posed by the rise of "shadow banks" outside the formal banking system.

A: We do not take depositor money. We're not a bank. The money we raise is from very sophisticated limited partners and these institutions provide us with this capital and then we invest that capital in private credit. And as a result, there's very little systemic risk if something bad were to occur. And the regulator should be focused on systemic risk.

I look at this very carefully and the honest answer is not really, I don't see it. Because what you have to understand is yes, folks are borrowing, but interest rates are so low, cash-flow coverage is exceptionally strong. And as a result, you can't just look at the nominal levels of debt. You have to be looking at it from a coverage perspective with respect to your debt obligations. And when you look at it through that perspective, I don't really see signs of systemic bubbles or overleverage.

Q: How long do you expect strong economic growth in the U.S. to go on for?

A: When you put all three things together, low interest rates, government stimulus, and unleashing of consumption and animal spirits because of the vaccine, you're going to see the U.S. economy heat up and grow very solidly this year, probably into next year. So I think the macroeconomic backdrop for growth in the United States will be quite strong over at least the next 18 months to two years.

Q: Are you interested in setting up special-purpose acquisition companies?

A: I would just tell you, we're carefully looking at SPACs. Who knows, we might decide to try to do something in a focused strategy. But where we have engaged with SPACs is when we sell companies to SPACs. Sometimes a SPAC is the best buyer for one of our portfolio companies that's looking to go public sooner rather than later or to look for a way for an exit, and we have engaged with SPACs on that front.

I think it's very easy to raise money with a SPAC, but what everyone is forgetting is how hard it is to invest well.

I think the general message you're hearing from me is that I understand a lot of money has been raised by SPACs. I think SPACs are here to stay. But I think it's a little bit too early to really assess how this will all play out because over the next two, three years, a lot of money's got to be invested and it's going to take a while to understand if it's going to be invested wisely or not. It's not easy.

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