China portfolio management: Accounting on the wild side

Candidate one: The gray hair. A seasoned executive in his late 50s, who spent years with a multinational, climbing the ranks of the finance division before bowing out when his career began to flatline. A headhunter subsequently repackaged him as a CFO for Chinese companies looking to list in the US. He has been through the process a couple of times.

Candidate two: The upstart. Now in his late 30s, this individual was hired out of a Chinese university by one of the Big Four accounting firms. He spent five years qualifying as a certified public accountant (CPA) and polishing his technical skills, then moved into the corporate sector and worked for two mid-size companies over a period of about six years. No previous experience leading an offshore IPO.

Gray hair versus upstart is an intentionally extreme example of the choices confronting a private equity firm that is seeking a CFO for a portfolio company. But where GPs position themselves on this sliding scale - and how it might differ from the situation two years ago or even five years ago - is indicative of the changes in strategy and expectation.

A company that was once on the fast track to a public listing may now be treading water, obliging its private equity backer to draw up development plans that stretch beyond the three-year horizon. The typical investment target might be 1,500 kilometers further inland and two years further back on the evolutionary scale than was previously the case, making it harder to hire the right people to fix it.

More broadly, the PE agenda has shifted from financial engineering to operational value-add, a result of tougher times for exits and fundraising.

"The standard window for a private equity investment is 3-5 years but traditionally it's been shorter in Asia," says Dominic Orchard, a partner in KPMG China's post-deal services team and previously an operations director with 3i Group. "The emphasis is now on 5-7 years. There are less opportunities for a quick fix and exit. You have to work with the portfolio and deliver a growth agenda in a challenging market environment."

The slump in growth deals usually relied upon to deliver speedy exits is plain to see. According to AVCJ Research, private equity investment in Asia came to $26.2 billion in the first half of 2012, its lowest level since 2009, with China deal value reaching $10.3 billion, down more than 25% on the previous two six-month periods. Growth transactions for the region amounted to $7 billion, compared to $8.3 billion and $12.8 billion in the first and second halves of 2011.

Cash considerations

While the slowdown has forced many firms to focus on their portfolios, the emphasis on operational value-add in Asia dates back to the global financial crisis. Asian companies, particularly those involved in manufacturing, faced a cash crunch: banks were refusing to issue letters to all but their top-tier customers and suppliers wanted to see the money before making shipments.

"The PE investors wanted to know what their portfolio companies' cash positions would be six months or one year down the road but many didn't have this kind of forecasting ability," recalls WaikayEik, a partner at PricewaterhouseCoopers (PwC) and co-head of the China and Hong Kong delivering deal value team, which focuses on the operational aspects of deals.

The first private equity mandate Eik's team received in 2008 was from a firm that bought a packaging business about a year earlier. There were 30-40 plants nationwide and capital was needed to open up new product lines. The investor wanted to know exactly what and where its financial vulnerabilities were before committing the capital. "When you have a new owner on a buyout deal you really need to focus on the cash position," Eik adds.

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• Topics
• Advisory
• Portfolio management
• People
• Greater China
• professional services
• China
• Appointments
• Lunar Capital Management
• China New Enterprise Investment (CNEI)
• KPMG
• PwC