The revolving door: Chinese LPs and talent retention

And, in some cases, it's not possible at all. On closer inspection, candidates have worked at two or more places simultaneously - and at none for more than six months.

When asked at interview why they haven't remained anywhere for a sustained period of time, there is a uniform response: "I'm talented, I was head-hunted." The more likely explanation is that these people are molecules bouncing around in a highly competitive recruitment market that - late 2008 and early 2009 excepted - is perennially bubbling over. Where you have strong economic growth or volatility, job volatility inevitably follows.

For China-focused private equity firms, identifying and then retaining talented staff is a major challenge. This is particularly the case for mid-level associate positions. Addressing recruitment issues properly might require a PE firm to review its corporate culture and compensation structure.

Chinese LPs are in a similar bind, as evidenced by the revolving door at China Investment Corporation (CIC) in the first half of 2012.

The resignations of James Ieong and Daniel Hu, managing director and director in the sovereign wealth fund's private equity department, in May, came on the heels of Collin Lau quitting as European PE head just four months after being reassigned from the real estate division. Lau's replacement in that department, Patrick Wu, departed earlier in the year.

Most land on their feet in the private sector. Ieong is now working for Queensland Investment Corporation while two private equity executives that left CIC in 2011, JingpingGuo and XiaoweiZheng, reportedly ended up at China International Capital Corp. (CICC) and CITIC Private Equity, respectively.

For some of these investment professionals, 2011-2012 signaled the end of three-year contracts with CIC. These were signed around the time of the global financial crisis when there was a lot less job security in the financial services industry. Come renewal time, the investment professionals - their rolodexes brimming over from fierce networking in China's state sector as well as in its PE community - found they could earn more money elsewhere.

It is difficult for CIC to address this issue given that staff are essentially government employees and therefore paid notoriously low salaries compared to their peers, according to numerous industry sources. Rethinking the compensation structure would require high-level government approval and the implications of such a precedent-setting move are enough to make even broadminded policymakers gulp.

The frustration for CIC is that high turnover in key positions makes it harder to develop sophisticated investment practices. Two recent anecdotes put this into perspective.

CIC picked up the bulk of $3.9 billion equity that supported Alibaba Group's $7.6 billion partial buyback of a stake in itself held by Yahoo. Three PE firms also participated, CITIC Capital, CDB Capital and Boyu Capital, with the latter involved from an early stage as an advisor to CIC. One industry participant familiar with the transaction adds that Boyu was instrumental in negotiating the terms of behalf of the sovereign fund.

"Particularly when they are negotiating with domestic guys, CIC is too bossy and talks often break down," he says. "So they needed an intermediary."

Staff turnover also means that fund managers approaching CIC as a prospective LP find themselves starting from scratch with a new group of executives every few months. One GP recalls dealing with 3-4 different teams from the sovereign wealth fund over a two-year period. By contrast, other large Asian LPs, including relative newcomers to private equity such as Malaysia's Employees Provident Fund, are said to be more consistent.

When CIC was set up, the Chinese government pointed to Temasek Holdings as a model to which it could aspire. Unfortunately the Singaporean approach to public servant compensation - it pays among the highest rates in the world and expects loyalty in return - is perhaps the hardest aspect to replicate.

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• Topics
• People
• Greater China
• LPs
• CIC
• LPs
• China
• Appointments
• Sovereign wealth fund