VCCircle

Emerging economis like India "If in 2007 economies begin to grow more slowly, stock markets decline a bit, and debt becomes more expensive and harder to secure, we will be ready."

That was Carlyle last year's annual report, which highlighted an explanation for Carlyle's cautious approach. The private equity biggie claims further in its just released annual report http://www.carlyle.com/Annual%20Report/Carlyle_Annual_Report_2007.pdf
that their investment professionals heeded their advice, and they were able to close all eight of the deals with committed financing in their buyout pipeline at the time the credit markets collapsed. However, Carlyle was not immune to the credit crunch.

"The credit crunch marks the end of the period of extraordinary liquidity that began in 2003. For Carlyle, the implications are threefold. First, LBO debt has become harder -- and more expensive -- to secure...Second, the slowdown in economic growth resulting from the credit crunch will likely create a more challenging operating environment for some of our portfolio companies. And third, depressed asset prices may constrain our ability to exit from some of our current investments."

In 2006, they established Carlyle Capital Corporation (CCC) to invest primarily in mortgage-related securities which went bust with its value impaired by the unprecedented meltdown in the mortgage market. "We regret that CCC did not perform as planned."

The Washington based private equity biggie, however, points out that this failure of CCC
"demonstrates the difficulty that companies with mortgage-related securities in
their portfolios—even those rated AAA and issued by U.S. government-backed agencies—have experienced during the global credit crunch."
Among the report's highlights were:
2006 and 2007 were Carlyle's best two years ever as it returned $19.1 billion in equity and profit to limited partners in that period.
Carlyle raised nearly $31 billion for 17 funds in 2007.
It invested $17.6 billion in new deals in 2007.
Carlyle Asia Growth Partners III , L.P. invested $262 million in 18 new and follow-on transactions in eight sectors in China, India, Japan and South Korea.
Carlyle's investment in Housing Development Finance Corporation, India's leading housing finance company, in July 2007, was then the largest equity investment in India measured by the amount of equity deployed.
Established in 2000, Carlyle's growth capital investment group in Asia advises three funds: Carlyle Asia Venture Partners I, L.P., launched in 2000 at $159 million; Carlyle Asia Venture Partners II , L.P., launched in 2001 at $164 million; and Carlyle Asia Growth Partners III , L.P., launched in 2006 at $680 million.
Continued to expand internationally, opening offices in Madrid and São Paulo, and establishing a team in Mumbai.

The investment strategy post credit-crunch

"We believe that the fast-growing economies of Asia, Latin America, Central and Eastern Europe, and the Middle East and North Africa (MENA ) region are likely to generate many of the most attractive investment opportunities in the years ahead. Moreover, investments in these markets generally involve little to no leverage, making them largely immune to turmoil in the credit markets. In 2007, we hired a team to invest in Central and Eastern Europe and expanded the firm's presence in Asia, the MENA region and Latin America."

Vik Ghei, an ex- Goldman Sachs executive and working with a hedge fund in the U.S explains why it has been easy to do PE in the U.S than India and that a downward trend in the Indian stock markets will help deal making.

Will all private equity firms follow the same route

Vik said that in the U.S., PE firms relied so much on debt to finance their acquisitions, and with the current "credit crunch" cheap debt is not available. "PE firms are having trouble but they are sitting on warchests of money and are no doubt trying to deploy it if they can make good unlevered returns in India. If the market corrects downward in India, that can help dealmaking. PE returns have been great the last decade in the U.S and so investors looking at the past have sent these firms tons of money to deploy but the problem is the credit crunch literally stopped everything cold since last August in the U.S, and there are no signs of abating those firms need to find a way to make money without leveraging their target portfolio company 8 to 1 or 10 to 1 . if they have to put in a huge equity check in the U.S., the returns will be sub-par so they can't afford to do that, the investors will not tolerate returns less than 20% So that was why in the past it has been so much better to do PE in then U.S. than India."