TOKYO -- The Carlyle Group's CEO, Harvey Schwartz has described the performance of the U.S. private equity investor's previous Japan fund as "extraordinary" in an exclusive interview.
Carlyle launched the new 400 billion yen ($2.5 billion) fund for large-scale acquisitions of Japanese companies in May. It was the investor's fifth Japan fund.
In the same month, it made an offer to take the Tokyo-listed fried chicken chain KFC Holdings Japan private for roughly 130 billion yen.
Schwartz, who took the CEO position in 2023, shared with Nikkei Carlyle's strategy in Japan as well as his views on the global investment environment.
Edited excerpts from the interview follow.
Q: Carlyle launched its fifth fund dedicated for corporate acquisitions in Japan. The size of the fund was 1.7 times bigger than the fourth one. Why are you boosting investments in the country?
A: Our fourth Japan fund has a net 28% internal rate of return. I think it's extraordinary no matter how you look at it. Today, Carlyle has $425 billion in assets under management. We take a very local approach and we leverage the benefit of the global franchise.
Q: Due to business restructuring, large Japanese companies are making a series of divestments of their businesses. Do you find them as full of opportunities?
A: Our fourth fund was launched in 2020 and has yielded high investment returns, but the environment in 2020 versus now is completely different. I've been coming to Japan for a few decades. When you see the government policies and the nature of global macro markets, I think this is all coming together.
Carlyle invests across multiple industries like technology, telecom, consumer and media in Japan. We think about where the opportunities are, because we have the flexibility to invest across various industries.
Q: From a private equity fund's perspective, how do you view the Japanese government's promotion of the country as a leading asset management center?
A: From everything we can see, it seems thoughtful and methodical, encouraging business activity at a very thoughtful pace. The question is not whether the policy is good for investment funds, but whether it is good for business and value creation. If it is, then it's good for economic growth.
Q: Yet Japan's growth has been subdued, and a number of uncertainties like the yen weakness exist. Would you expect Carlyle's investments in Japan to be long-term or short-term?
A: Our Japan business next year will celebrate its 25th-year anniversary. What you see in the recent fundraise is not a moment in time. Carlyle and our Japan team have really differentiated themselves by staying committed to and focused on Japan, so they have a very powerful brand.
We obviously think about the importance of geopolitics, our commitment to the region and the importance of local relationships. In geopolitics, there is almost always an opportunity to put capital to work in an area that needs capital, and businesses that need partnerships for growth. But really in the end, it's about helping businesses grow and providing them with capital.
Led by Schwartz, the Carlyle Group announced a tender offer in May to take Tokyo-listed KFC Holdings Japan private. (Photo by Manami Yamada)
Q: While funding has become tighter globally, private equity investors have ample cash reserves, often referred to as dry powder.
A: Carlyle has dry powder of about $70 billion, and there's dry powder in the industry. The important thing is that there is capital available.
Q: Using the cash reserves, Carlyle and other investment funds are extending their business into direct lending, known as private credit. How come?
A: Private credit has been growing steadily for 15 years. A big driver behind that is bank regulation after the global financial crisis. Bank regulation created a dynamic where as capital providers we could be the most efficient form of capital.
The words "private credit" have to really evolve to just "credit." From investment-grade credit to non-investment-grade credit to asset-based finance, all these parts of Carlyle are some of the fastest-growing parts of the business.
Q: Interest rates of private credit are higher than those of commercial bank loans. What are the advantages for customers to borrow using private credit?
A: It's really about the question of who can provide capital most efficiently. A number of factors such as cost, terms and partnership all contribute to that.
From companies' perspective, they can work with banks, they can work with Carlyle -- they just have more opportunities to work with more partners. So they have more flexibility to get the most efficient capital they can possibly find. That's the most important thing for the macro system.
Q: You served as the co-chief operating officer of Goldman Sachs until 2018. What are the differences between banking and private equity?
A: We are investing and managing money on behalf of fiduciaries. We have, for example, 2,200 employees and we manage $425 billion of assets. J.P. Morgan Chase probably manages $3 trillion - $4 trillion. We have parts of our business that engage high net worth investors, and it's a very fast-growing part of our business, but we don't take bank deposits and we don't have branches. It's a very different way of deploying capital.
Q: How does the U.S. economy maintain a strong momentum despite having the Federal Reserve's policy rate above 5%?
A: One factor is the structure of the mortgage market in the United States. We have a mostly fixed-rate mortgage market, so homeowners benefit when rates rise. My relative bought a home in New Jersey two years ago with a mortgage at 2.5%. The mortgage rate today is something like 7% plus. The benefit to homeowners from fixed rates must be on the order of $500 billion.
Another factor is the nature of the structural fiscal deficit of the federal government. We used to run a 3% deficit against the gross domestic product. It will be 6% this year and 7% next year. There is massive investment in capex onshoring the building out of data center infrastructure. These are huge stimulative factors in the economy.
The third factor, I will say, is that management was very proactive reducing capex and costs, as many expected rising interest rates might result in a significant slowing of the economy. All these things come together to produce a surprisingly strong economy.
