The real opportunity lies with infrastructure and support companies

A
former lawyer, Rubenstein became deputy domestic policy assistant to the US
president before he founded the Carlyle Group. The group is now one of the
largest private equity firms in the world. Rubenstein spoke to DATAQUEST about
Carlyle’s investment strategy in India. Excerpts:

How big is the Carlyle group? What does it focus on?

Carlyle is probably the biggest private equity firm in the world. Our
current corpus is a little under $10 billion and we expect it to expand to $14
billion by the year-end. With about 325 people, we are spread over the US, the
Europe and more recently Asia. We are very active in buyouts, and venture and
technical investing. In buyouts we concentrate our focus and money in aerospace
and defense. In technical investing, we are on the look out for investment
opportunities in telecom software, IT and telecom infrastructure companies.

What are your plans for India?

We are looking at investing about $750 million in Asian technology companies
over the next three years. India and China are the two key countries that will
see a lot of our investments. Of the total amount, we intend to invest about
$250 million in Indian companies. We think that this is the largest commitment
any technology investment firm has made for India. We have already made some of
those investments in India and we expect to be a very dominant player in the
technology investment space.

What companies have you identified, for investment?

It has been around five months since we opened our Bangalore office. We have
already made, in six companies, about $20 million investment. Four of the
companies are placement.com–an IT job portal and an existing offline business
moving online, IT nation.com–a B2B IT products exchange, and Ritechoice
Technology–an online software company for the broking industry. Manmar
Technology and Convergence software are the other two companies.

Do you also include dot-coms in your technology firms definition?

We don’t know what a dot-com is and we don’t have much to do with this
phenomenon. That was a fad. The dot-com phenomena will be viewed by history as
an aberration and does not form a significant part of out investment. We are
more interested in companies developing technologies and products that work not
only in the domestic market but also across the globe.

So are you dismissing the Internet economy–and its dot-com boom?

Of course not. We do believe that the online economy will continue to
accelerate throughout the Asia-Pacific region in the next three-five years.
Independent research organizations point out to a 200-million Internet user base
in the next couple of years. However, as of date no one has worked out a
sustainable business model in the pure Internet economy. With the dot-com
phenomenon, people have been investing in technology as a business. We feel that
the real opportunity lies with infrastructure companies–telecom and
networking, and support companies–payment, gateway, services, security and
encryption. This is the core of our investment strategy in the Asian region. We
are looking at companies with solid market positions in focussed areas and are
looking at technology to either globalize them or to give some competitive
advantage in the market.

Some investors such as IdeaLabs and IncuVest incubate and invest in an
idea up to a point, and then bring in professional managers. What is your
approach?

Our entry point will be around the incubation level, and we would like to
remain strategic investors–not get into day-to-day operations of our portfolio
companies. We work with companies whose products or services have some level of
commercial standing, and help them to scale. We believe more on creating
economic networks rather than incubating ideas into companies. Our key strength
lies is our ability to match-make. We hold meetings to see how we can introduce
companies to one another and increase the market opportunities for our
portfolios. This is important to companies in India.

Will you consider models like CMGI’s (a US-listed
company which uses public money for investment), and list your company on stock
exchanges?

That’s one model of how companies can raise money for their investment
needs. No doubt the listing model has some strength but there are also a few
inherent drawbacks. For example, when Internet stocks were not seen as
attractive, the stock value of CMGI went down dramatically, thus reducing its
ability to make acquisitions. So such a model will be very susceptible to market
sentiments. The whole investment strategy becomes market-driven rather than in
the creation of value. We believe our model is better: we get private equity
investor participation in our funds. We can wait until the right time,
irrespective whether the market is high or low.

What is the average investment commitment you look at?

We have two key focus areas in Asia. In the infrastructure space, where the
companies are very capital intensive and relatively large, our investment could
be in the range of $10—30 million. With a $750 million corpus for the Asian
region, I think that our ability to do multiple investments of that size is
fine. In the other category, of support companies, we are looking at a range of
$2—10 million.

What is the usual time-frame before you exit from the investments?

Traditionally, venture capitalists have looked at investments maturing over
four to seven years. However, with the Internet, dot-com and such other
companies going in for listing within a year or two of their incubation, the
investment maturity time has come down. We think that this is an aberration and
the world will go back to the more traditional investment model, where companies
were made public after having earned some revenue and profit, and not just on
hype. We are in a business where it is important to find a good technology and
help it grow over a several-year period. So our exit time frame could range from
four to seven years. We are thus not so worried about the stock market and its
daily gyrations. If you make investments in good companies, eventually the
returns will be there.

Yograj Varma

in New Delhi