China’s private equity talent war

Chinese financial institutions are on a recruitment drive, aggressively enticing senior personnel from major global firms to abandon their safe sinecures in favor of new positions in Hong Kong, Shanghai and Beijing. For some, it's an easy choice to make. China's banks and their equally cash-rich domestic clients have a seemingly insatiable appetite for offshore assets. Work for them and access to lucrative deals is all but assured.

Chinese private equity, however, though active, healthy and attracting a lot of attention, still seems woefully understaffed. "Many people have jumped into the market, but we don't have many qualified investment professionals so some deals are poorly executed and this brings reputational risk for the industry," John Zhao, CEO of Hony Capital, told AVCJ earlier this year.

Following the banks' lead and poaching talent from global firms isn't really an option. If anything, the trend in private equity is completely the reverse.

As the industry matures and becomes increasingly competitive, success depends on getting access to good deals quickly. This is difficult without a familiarity with all the stakeholders involved, from the entrepreneur selling an asset to the regulator responsible for approving the transaction.

According to Steve Mullinjer, head of the Asia Pacific private equity practice at global executive search firm Heidrick & Struggles, PE executives hired from overseas might have excellent technical skills, but they don't offer any immediate advantage unless they also understand how China's deal-making environment operates.

A more appropriate hunting ground for private equity players seeking on-the-ground expertise is among existing local funds or other Chinese enterprises. Available talent, however, is limited.

"There is definitely a shortage of good quality human capital in China," says David Wei, CEO of Vision Knight Capital, a firm he set up last year after stepping down as head of Alibaba.com, tells AVCJ. "On the supply side, private equity is still a relatively new industry and so does not yet have a solid base of professionals; whereas on the demand side, the country now has over 10,000 firms."

China private equity fundraising has grown exponentially in recent years, from $13.7 billion in 2007 to $38.8 billion in 2011. In the past four years, a total of 736 new vehicles received commitments from LPs, according to AVCJ Research. If development is to be sustainable, where will they find the people to deploy all this capital?

Drilling deeper

The answers are various, depending on the tier of personnel in question. Derek Sulger, managing director of China-focused Lunar Capital, says these principally fall into three categories leaders, doers and helpers.

The leaders are a handful of senior professionals charged with heading up investment teams. They are imbued with the firm's vision and culture and set the strategy according to the fund's focus. Moving down one level, the doers are the 50 or so people who've been with the firm for 3-5 years, typically starting as analysts and then rising up through the ranks. They have been around long enough to grasp how the firm operates.

Finally, there are the helpers. Sulger sees these as the most important piece of the puzzle. "For the things we do you need a lot of manual labor," he explains. "For example, the investors say we want to invest in more babywear companies. The doers say here's where we're going to find them, and this is what we've got to do. And then the helpers go out and do initial meetings with 50, 100, 200 companies. Through ‘manual labor', they absorb the culture, processes and strategy."

At Lunar, the helpers tend to be analysts. They are usually sourced via the firm's systematic ranking of fresh university graduates through its own test regime. Lunar is linked to a university network on which it advertises vacancies, mostly in China, but stretching out into North America and even Europe. The ratio of people sought and hired is roughly 100-1.

Sulger says the approach is based on advice he received from a senior partner at his former firm, Goldman Sachs: Build a deep bench of people you train and mentor through a strong firm culture, rather than spend too much time making lateral hires.

These networks - plenty of other private equity firms have them, formally or informally - are vital to building the bench strength of China's PE industry. And it will take time to reach a critical mass, with various sources suggesting 5-10 years.

Earlier this year, Hony closed its fifth US dollar-denominated fund at $2.4 billion, $1 billion larger than its predecessor, and also attracted $1.6 billion for its latest renminbi fund. In the last 12 months, the firm has recruited 50 new people, at least 20 of whom are investment professionals with the rest performing consulting and back office functions. These individuals weren't hired to work on the new funds, however. Zhao estimates it will take 2-3 years to train them up into investment managers, which means they won't be ready until Hony Capital Fund VI. By this point, may only just have reached doer level.

Several of the global buyout firms have China recruitment policies that are also slanted towards university graduates or first and second year analysts who can be developed in house. This approach is seen as vital to creating long-term team stability.

Successful appiicants will typically start by joining an initiation program so they can understand the firm and its culture. This is followed by a thorough grounding in analytics and other technical tools used to assess businesses as well as time spent working with seasoned deal-makers on actual transactions. Involvement grows over time to the point where they are devising business development initiatives and dealing directly with entrepreneurs.

KKR, which has seen its China team treble in size in the last four years, endorses cultivating a strong sense of company culture and getting recruits working on deals with experienced executives as soon as possible. But it all starts with hiring people who have local knowledge and a sense for business.

"While we benefit from KKR's global resources, our team is as local as any of the domestic private equity firms," says David Liu, CEO of KKR China. "Our core team has been investing in China for 19 years and our team members grew up in China. If our people didn't truly understand China it would be a disaster. Combining our global resources with team's local knowledge and operational focus is the key to our investment strategy."

Mid-level leaders

Even with an array of bright young talent, private equity firms require leaders right now, capable senior professionals who can guide less experienced team members. These individuals started out well before domestic PE players emerged in China.

Classically, the most able professionals won admittance to business schools in the US or Europe and on graduating took positions in prestigious international PE houses where they sharpened their skills. "Joining a foreign firm was like a continuation of their education," says one global headhunter. "By contrast, joining a local Chinese firm straight from school is unlikely to provide the same sort of career growth."

The best candidates in China, even today, are still those who have been educated in the US and Europe. This is as much a case of cultural value-add as anything else. A prospective Chinese PE professional at an Ivy League school will become comfortable moving in circles where only English is spoken; develop a wide network of business associates; and imbibe, by osmosis, a cogent understanding of international business and the extent to which Chinese private equity will follow or drift from this model.

The combination of local and international skills, in terms of language and business practices, has in the past lent itself to fast ascension up the ranks of a global firm's regional operations. PE executives who are equally comfortable dealing with the entrepreneur in China and the investment committee in the US are still highly prized.

The problem is when these professionals, after some years in harness, find themselves contemplating a glass ceiling. This is not strictly speaking a Chinese feature, our headhunter source adds; rather it is typical of all high-growth markets, and was true of Western markets a decade and more ago. With the top-level executives looking to stay put for some years to come, career frustration creeps in among those at the top of the second tier, and they begin to look elsewhere. Emerging local firms that can offer seniority and greater autonomy are an obvious next step.

"Firms don't tend to lose the big PM guys. Rather they lose the VPs and directors who weren't too tied in," the headhunter says.

At the same time, the skills required of these capable senior professionals are evolving in tandem with the industry as a whole. Deal sourcing is increasingly local and PE firms must go further afield to tier-three and tier-four cities, now that the low hanging fruit in the top two tiers has been collected. More time must be spent relationship-building and convincing entrepreneurs that, in an increasingly competitive market, a particular GP offers the most value-add. The arrival of renminbi-denominated funds has accentuated these changes.

"Local knowledge, networks and connections have more currency than a Harvard MBA," says Mullinjer of Heidrick & Struggles. "This is also true in portfolio company management. The ability to translate and adapt leading-edge turnaround disciplines and management approaches to local family owners' psyches is a major challenge."

Five years ago, a Chinese private equity firm might have opted for a sole senior hire, someone who could serve as a figurehead and one-stop relationship connector who provided deal access and links to government stakeholders. A well connected ex-investment banker or ex-SOE CEO often sufficed.

Nowadays, such an approach doesn't really fit. First, transactions tend to be done with a diverse group of companies, ranging from private to state-owned enterprises (SOEs). Second, investee companies are becoming much more sophisticated in negotiating with PE firms. And third, the competitive nature of the market, and the fact that funds often have more capital to put to work than before, means PE firms require several leaders to share a larger workload.

Operational expertise

This need for a breadth of talent also points to another gaping hole in some local private equity firms' offering: the operational side. "Not many PE players realize the importance of operations people," says Vision Knight's Wei. "It's also difficult for operations people themselves to understand why PE firms need them."

Wei is well positioned to comment. When he set up Vision Knight he recruited a hand-picked team from Alibaba.com because of the operational expertise each could offer in his target industries: consumer, internet and e-commerce. Lunar Capital's Sulger endorses Wei's view, adding that he is just as focused on running companies as investing in them. This is not only the case for control deals, but equally for growth capital investments where the GP is actively involved in operations.

"Our responsibility to our investors is to make sure we have people from a broad group of backgrounds who not only contribute to our own team, but also contribute to manage our investees effectively," Sulger says.

This isn't an isolated perspective. Vanessa Moriel, Asia Pacific managing director with executive search firm AIMS-International, has seen a sharp increase in business from private equity firms looking to place staff into the portfolio companies, arguably a function of international players taking their Asian set-ups more seriously. AIMS has been called upon to find staff ranging from local hires to expatriates brought in from the West - all of them operations people.

The company recently worked with a private equity client that wanted to replace one of its portfolio company's incumbent arms-length distributors, and ended recruiting new staff for the entire Asia Pacific headquarters.
"We did all that recruiting for them, first line and the whole second line, 10 people in all; merchandising director, HR director, finance director, PR & Communications director and more," Moriel says. "Their aim going forward is to operate directly."

This trend broadly covers all stripes of PE players, from the international buyout firms to the smaller overseas niche players to some local Chinese firms. For the latter category, requirements can vary. It is not unusual to see the recruitment of foreign operations staff with no China experience whatsoever but who offer expertise in a specific area such as design.

In companies planning to go public, a perceived management upgrade of this sort is regarded as a value-add; and private equity firms tend to view such personnel acquisitions as an investment against future gains, not merely a cost. Interestingly, the compensation levels for foreign operations professionals, who could once demand 2-3 times what was paid to Chinese, is now broadly comparable to that of locals.

While compensation is important, industry participants claim that retaining quality staff in a competitive environment relies on a broader set of factors. Professionals must feel valued and empowered and offered the opportunity to develop their skills, elements that are underpinned by a strong corporate culture.

In China, you lose good people at your peril: good investment strategies can only be executed by good teams. "It's difficult to get the right people and having qualified people is everything in private equity," says KKR's Liu. "People are our main asset and you are only as good as your team."

SIDEBAR: Indonesia - China in waiting?

Until relatively recently, there were only four established GPs in Indonesia: Northstar Pacific Partners, Saratoga Capital, Ancora International and Quvat Management. In the last 12-18 months, at least six new managers have hit the fundraising trail. It places an inevitable strain on human resources.

Fund managers speaking at AVCJ's Indonesia Forum said they expected the country to mirror China in terms of people movements. There is already anecdotal evidence of start-up PE firms trying to poach professionals from existing outfits and spinouts will no doubt emerge in due course. One Singapore-based headhunter tells AVCJ that he may relocate to Jakarta, such is the demand for his services there.

"GPs need to have a solid investment track record, with quality deals done," Doug Coulter, head of private equity for Asia Pacific at LGT Capital Partners, said at the forum. "But just as important is the ability of a GP to build a firm that isn't going to be around for just one fund; but rather for funds two, three, four and five. Continuity is key."

Domestic private equity firms aren't the only ones looking for deals so they aren't alone in scouting for talent. Hedge funds and investment banks are increasingly active while global PE firms, recognizing the attractions of a market that offers true scale, have made some significant hires.

Notably, KKR recruited Ridha Wirakusumah, former CEO of Bank Internasional Indonesia, while Standard Chartered Private Equity hired Benjamin Soemartopo, formerly head of McKinsey & Co. in Jakarta, as head of principal finance for Indonesia.

At the heart of the issue is securing proprietary deal-flow, which is challenging in a market that is governed by local relationships and where many of the prime assets are controlled by a coterie of family-owned conglomerates.

"It is all about knowing who to approach, and certainly not going to the most obvious candidates like investment banks and securities houses, by which times it's probably too late," says Patrick Alexander, co-founder of Batavia Investment Management. "If you want to have good deal flow you simply must have people who are in and of this market."

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• Topics
• Greater China
• People
• GPs
• Southeast Asia
• China
• Appointments
• GPs
• Indonesia
• KKR
• Lunar Capital Management
• Vision Knight Capital