Carlyle Group Funds Chinese Construction & Media Opportunities

Filed in archive Private Equity on October 31, 2005

With China's construction projects moving the Middle Kingdom's earth at a record pace, it's no wonder that the monolithic The Carlyle Group last week poured US$375 million into purchasing Chinese construction machinery manufacturer Xugong Group Construction Machinery. The deal, which gives Carlyle 85 percent controlling interest in Xugong, is viewed as a major step for China's private equity industry and for foreign investors seeking controlling stakes in big state-owned companies.

Carlyle recognizes that cheaper machinery is needed, especially in Asia, and at the present rate of globalization, giants like Kubota, Caterpillar, Komatsu, may end up outsourcing all of their manufacturing to companies like Xugong simply to compete for a sliver of the construction boom.

China's construction machinery market is estimated at $12.5 billion. The country's strong economic growth is fuelling global and domestic demand for mining and construction gear.

According to blogger Silicon Hutong, " it's interesting that Caterpillar and JP Morgan lost out the bidding war for Xugong against Carlyle. Cat has been dancing around with Xugong for years, and arguably knows where the value is in the organization, and their bid came up short. Carlyle has some capable investment bankers (they pulled the China Pacific Life deal - a smart investment - out of a tough stalemate), but common sense suggests the Boys from Peoria probably know their business better than the suits in Washington and Beijing."

The Global private equity firm has an established an office in Beijing, its third fully staffed office in China. Carlyle now has 57 investment professionals operating out of seven offices throughout Asia.

Since 1999 Carlyle has conducted buyout, growth capital and real estate investments in the pan-Asian region from offices in Hong Kong, Seoul, Singapore, Shanghai and Mumbai. Carlyle's three Asian funds have more than $1 billion in assets to invest in the pan-Asian region.

Wayne Wen-Tsui Tsou, Managing Director and Head of the Carlyle Asia Growth Capital group, has previously addressed the compelling reasons for their China focus: "In addition to being the Chinese capital, Beijing is the national headquarters of key strategic Chinese industries including telecom, media, IT, banking and energy. Furthermore, the 'Zhongguancuan' district of Beijing is the 'Silicon Valley' of China and houses the highest concentration of new-industry high-growth entrepreneurial companies in China, many of which have been among the first private Chinese companies to list on the NASDAQ."

Additionally, like other VC funds Carlyle also has confidence in the Internet space despite the government's restrictive media policies. With these investments, Carlyle's two Asian growth capital funds - CAVP I and II -- now have 23 active portfolio companies.

Some of Carlyle's latest China investments are:
� ZCom Company Limited; US$10 million; China
� Sunco Zhiye Group; US$15 million; China
� Target Media Limited; US$5 million follow-on investment; China

Founded in 2004, ZCom designs and provides digital content delivery platforms based on peer-to-peer technology. It has the largest digital magazine delivery platform in China based on its accumulated distribution volume of more than 20 million magazines. Currently it has more than 1.5 million registered users.

In an interview with ChinaVentureNews, Tsou adds, "We invested because it's an interesting emerging space and ZCom is the first mover in this new space in the PRC. Yes, we are examining other Internet-related opportunities in China, among many many other areas."