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Carlyle Trims Its China Exposure in New Asia Fund

Story Highlights

For new investments, China appears to be losing its luster to Carlyle, whose holdings include TikTok’s parent company.

The U.S.-based asset manager, Carlyle Group (CG), plans to cut its investments in China in its new Asia fund. Carlyle’s shares rose more than 3% on July 7, but the stock is still down almost 40% year-to-date.

China has long been a favorite investment destination for American investors pursuing foreign opportunities. For many years, Carlyle has ranked among the top foreign investors in China, pouring about $10.5 billion into the country. Its Chinese investments include stakes in the local businesses of global restaurant chain McDonald’s (MCD) and TikTok parent ByteDance. The group has also invested in Chinese biotech and logistics businesses.

Carlyle Trims Chinese Exposure by as Much as Half

Carlyle’s new Asia fund, its sixth for the region, has $8.5 billion. That is 30% over the fifth fund’s $6.55 billion. The group plans to allocate as little as 20% or up to 40% of the new fund to China investments, according to a Bloomberg report. If the group sticks with the minimum, it would mark a sharp drop in China’s allocation from an average of 40% to 50% in the previous funds.

Why Is Carlyle Recalibrating Its China Exposure?

Certain recent developments are causing foreign investors like Carlyle to question their future in China. Apart from the COVID-19 pandemic clouding China’s economic growth prospects, investors are also concerned about regulatory and geopolitical risks. 

On the regulatory front, China launched an extensive crackdown on its technology sector, which halted product approvals for game developers like NetEase (NTES) and forced Jack Ma’s Ant Group to delay its IPO. The crackdown may have left foreign investors with many questions. 

On the geopolitical front, U.S.-China tensions have persisted. Apart from passing a law that would allow the SEC to delist Chinese stocks over audit issues, the U.S. is also pushing to thwart China’s tech ambitions. For example, the U.S. has sought to block the sale of semiconductor chipmaking machines to China.

Where Is Carlyle Taking Its Money, if Not China?

As it cuts exposure to China, Carlyle is increasing investments in other promising Asian economies. It is doing more deals in India, South Korea, and countries in Southeast Asia. According to the report, India has particularly become a favorite China alternative for the group, with 45% of the fifth Asia fund invested in the country. That more than doubled from the 20% allocation for India in the fourth fund. 

Ranked as one of the fastest-growing major economies, India has become an irresistible investment destination for many investors. U.S. technology giants, from Amazon (AMZN) to Google (GOOGL) and Netflix (NFLX), are all betting big on India.

Wall Street’s Take

Consensus among analysts is a Strong Buy based on nine Buys and three Holds. The average Carlyle price forecast of $60.92 implies upside potential of 86.4% to current levels. Shares have gained 152.3% over the past year.

Smart Score

Carlyle scores an eight out of 10 from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Key Takeaway for Investors

While it plans to cut its China exposure in the new fund, Carlyle intends to remain active in China. That is important because China is one of the world’s top economies, with plenty of investment opportunities. At the same time, the diversification of China is important in case the investment situation in the country deteriorates. Finally, Carlyle pays dividends, with the stock currently offering a dividend yield of 3.31%, compared to the sector average of 2.11%.

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