Carlyle closes CAP III at $2.55 billion

Holding the title for the biggest Asia-targeted fund to close since the advent of the global financial crisis, CAP III tested the waters with LPs, asking them to continue to believe in the buyout megafund model in spite of lessons learned from the recent crisis.
   
XD Yang, Managing Director and Co-Head of Asian Buyout at Carlyle, told AVCJ, “In absolute dollars, it’s very sizeable, especially in the context of a very challenging fundraising environment,” noting that on a global scale, the fund was “a very large share of the closings this year” in the buyout space.

However, the long path to closure for the fund illustrates the travails of the industry since the GFC. When CAP III first launched in February 2008, some sources indicated that Carlyle was expecting to close the vehicle by mid-year. The process took two years, though this still falls within the 18-24 month range that is the norm for certain fund types.

Fundraising through difficult times

Yang explained that Carlyle was no special case when it came to the LP community’s change in attitude beginning in 2008. “Clearly LP appetite and attitude has paralleled the global economic crisis,” he said. “For a time, fundraising virtually shut down.” However, he added, “the worst is over. In the last six months, people have clearly stepped up.”

The appeal of Asia Pacific, especially China, played a major part in the fundraising achievement, Yang said. “Asia is in some ways leading the private equity industry out of the doldrums of a year ago.” He cited continuing fund overhang in the US and Europe, with plentiful dry powder and protracted economic recoveries. “The investment environment has improved, but as far as new commitments for new funds are concerned, it’s not as exciting as Asia.” LPs have been thoroughly responsive to these broad macro trends where new commitments are concerned.

With a strong representation across classes and types of LPs, he also said there have been more Asian investors in this fund than in previous funds. LPs known to have contributed to the fund include the California Public Employees' Retirement System (CalPERS), with a $300 million commitment, and Taiwan’s CDIB, with $20 million, as well as Dancap Bank for an undisclosed amount.

But even with strong support for the Asian story and for Carlyle as a firm, it is understood that much of the capital may have been locked into the fund through commitments made prior to the worst of the GFC. Sources have indicated to AVCJ that Carlyle had already raised over $2 billion for the fund by September 2009, with some indicating around $1.8 billion as early as May 2008. A regulatory filing in March 2009 reportedly indicated some $1.927 billion raised from 89 investors. Carlyle declined to comment, but described the earlier indications as market speculation.

Carlyle did not use a placement agent for CAP III. Simpson and Thatcher was the legal advisor on the fundraising.

Opportunities and investments

As for the opportunities to put the new money to work, Yang said “the best time to make investments is during the recovery years [from a recession]. We do think 2010 is a year like that: in the early stages of regional economic recovery and growth.” Sectors of interest include consumer-related businesses, especially in China, and propositions such as healthcare and financial services that also play to rising domestic incomes. “All national governments realized that it is very important for [economic growth over] the next decade… to concentrate on stimulating domestic demand.”

Carlyle has already executed three deals through CAP III, all of them in China. These were baby foods company Guangdong Yashili, chemicals producer Jiangsu Sinorgchem Technology – an $87 million deal for a 40% stake and the fund’s first investment – and skincare business Natural Beauty Bio-Technology.

Carlyle, an early mover in the RMB fund space, signed an MOU in January with the Beijing Municipal Bureau of Financial Work to create an RMB-denominated fund domiciled in Beijing. According to Carlyle, this RMB fund will invest alongside CAP III in China.

As regards potential conflicts between the RMB fund and CAP III, a Carlyle spokesperson noted that the RMB vehicle would actually benefit its sister dollar-denominated fund, as it, “opens up more opportunities for the USD fund, some of which are probably not normally available.” Carlyle will apparently evaluate investment opportunities to determine whether either fund should invest separately, or both should invest together. “There is really no conflict - it is just better,” the Carlyle source said.

Even with the size of this fund and overall Asia-focused capital still in the market, Yang felt that the next few years would provide ample opportunities for CAP III. “I believe there’s more demand for private equity than the capital raised for Asia [indicates], because of the size of the economies here and the need for capital,” he said. “The absolute dollar amount raised for Asia is still very small.”

However, on the fundraising side, “it does take longer,” he cautioned. “LPs have less [capital], and even those with resources are trying to delay their decisions. They want to wait and watch.”

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• Topics
• Funds
• Fundraising
• Buyout
• The Carlyle Group