“If you’re not Chinese, don’t even think about it, and even if you are Chinese, it’s best if you have great connections within the CCP and want to stay in China long-term.”

I could stop this article here at ~50 words, but sometimes it’s fun to indulge in a fantasy, so I’ll continue with the topic and cover:

• Deal types, investment strategies, and top firms.
• Recruiting and whether you can break in without “donating” your kidney to Xi Jinping.
• Careers, including the lifestyle, salaries/bonuses/carried interest, exit opportunities, and differences at domestic vs. international firms.

Private Equity in China: Deals, Strategies, and Top Firms

Traditionally, China has had the 3^rd highest level of private equity activity worldwide, after the U.S. and U.K., and slightly above countries like France and Germany (source: Statista).

“Private equity activity” here is based on the dollar volume of PE deals involving domestic target companies in the country:

You might look at this data and think private equity in China looks promising… until you read the fine print.

In China, traditional leveraged buyouts represent only 9% of deal activity, while “growth deals” represent 74% of all deals (source: Bain).

As with PE in many other emerging/frontier markets, it’s more like growth equity than traditional roles at middle-market PE firms and mega-funds in the U.S.

This may change due to factors like the “decoupling” with the U.S., poor stock-market performance, slowing growth rates, and an aging population.

But even if buyouts tick up, growth deals will still dominate the market into the 2030s.

In terms of industry focus, technology (especially “general IT,” Internet, and semiconductors) and healthcare have always accounted for a high percentage of deal activity.

But you’ll also see manufacturing, cleantech, consumer, energy, real estate, and financial services deals.

Here’s a good summary from this BDA report on Private Equity in China:

Tech still accounts for a huge percentage of deal volume in the U.S., but private equity activity is more diversified because growth deals represent a smaller percentage of the total.

Private Equity in China: The Top Firms

You can divide private equity firms in China into two main categories:

1. Domestic vs. International: Was the firm founded in China or another region, such as the U.S. or Europe?
2. RMB vs. USD: Does the firm raise capital in China’s currency (the RMB), or does it raise USD from Limited Partners overseas?

You might think the pairing is always Domestic/RMB and International/USD, but that’s not true.

For example, Sequoia is an international firm with USD and RMB funds in China, while domestic VC firms like Qiming Ventures have raised USD funds abroad to invest in China.

The general difference is that USD funds tend to have a broader focus, such as pan-Asia investing or all industries within China, while RMB funds might invest in one specific industry or strategy.

Traditionally, domestic firms did ~1/3 of all deal volume in China, but this has ticked up over time as international firms have become more cautious.

Some of the top firms, both international and domestic, include Blackstone, Boyu Capital, BPEA EQT (formerly Baring Asia), Carlyle, CDH Investments (formerly CICC PE), CITIC Capital, FountainVest, General Atlantic, GLP China, Hillhouse, Hony Capital, Hopu, KKR, Qiming Ventures, Sequoia, TPG, Vivo Capital, and Warburg Pincus.

You could add a few other names to this list, such as Xiaomi (its PE arm), Huaxing, and BA Capital for RMB funds, and Macquarie and Bain in the USD funds.

If you extend the list to venture capital groups, the VC arms of Tencent and Alibaba will appear, as will dedicated firms like DCM and DST.

The international firms in China have not been performing particularly well because the government wants to encourage domestic investment and help Chinese people, rather than foreigners, make money.

Domestic firms usually have better connections and are heavily involved in politics with the Chinese Communist Party at all levels, which gives them a big advantage in executing deals.

Carlyle may be the one international firm that’s an exception to this trend, but I could not find performance data for its Asia/China funds, so I’m not sure if this is true.

Recruiting: How to Break into Private Equity in China

The most important qualities for getting into PE in China include the following:

1. Pedigree (University/MBA) – PE firms always value your university degree and whether you attended a target school, but it’s even more important in China because of the “cultural values” around education and exam-taking proficiency. Also, many people report that a Master’s degree is a prerequisite to win interviews at some firms.
2. Investment Banking Experience at Bulge Bracket or Top Domestic Banks – As with PE anywhere, you need a few years of IB experience to be competitive in most cases. Working at the bulge brackets or elite boutiques is better for international funds, while IB experience at the top Chinese banks (CICC, CITIC, Huatai, Haitong, etc.) is better for domestic funds.
3. Government/Political Connections – Connections always matter in finance recruiting, but they are far more important in China because the government can make arbitrary decisions with no warning (see: Jack Ma).
4. Communication Skills and Some Technical Knowledge – Since most PE firms do growth-oriented deals, financial modeling and technical skill are a bit less important than communication skills – as you’ll need these skills to source deals and meet local entrepreneurs.

I don’t think we even need to state this, but you must be a Chinese citizen with native language skills to have a good shot of getting into PE in China.

Occasionally, there are a few exceptions, such as at international funds with a “pan-Asia” focus.

Also, you can sometimes win roles in fundraising and investor relations as a foreigner if the firm targets overseas investors for its Limited Partners.

But you have almost no chance for front-office, deal-based investing roles, even if you speak/read/write the language perfectly.

The international mega-funds tend to use something closer to the on-cycle recruiting process in the U.S., with headhunters, structured interviews, modeling tests, and case studies.

Smaller/domestic funds tend to follow the off-cycle process, so recruiters will contact you randomly based on open positions.

Interviews and case studies will be more open-ended, and since most of these firms focus on growth and VC-type deals, expect to pitch a market, industry, or specific company as part of the process.

One final difference is that the domestic and RMB-denominated funds may ask about your knowledge of China-specific rules and regulations, such as those in Chinese Company and Securities Law.

Target Schools for Private Equity in China

Degrees from the top target schools in the U.S. and U.K. are all highly regarded in China, so you can’t go wrong with any of them.

Ideally, you studied up through high school in China and then completed your university education at one of these institutions.

But you don’t necessarily “need” to attend a top U.S. or U.K. school because there are well-regarded, highly-ranked schools in China, such as Tsinghua University, Peking University, and Fudan University.

How to Network Your Way In

Unfortunately, most of the advice on this site about investment banking networking doesn’t work in China due to the many cultural differences.

As one small example, it’s less acceptable to cold email people – even HR staff or administrators – without going through the proper “channels” first.

Also, the standard process of conducting informational interviews to pitch yourself and learn more about firms is much less common.

These strategies may work if you find someone who worked overseas, moved back to China, and is familiar with the business culture elsewhere.

But if you’re targeting domestic PE firms, don’t hold your breath because you won’t find too many of these people.

Many professionals in private equity break in through personal and family connections.

“Family events,” such as birthday parties, graduations, picnics, etc., are typically the best way to get to know people and expand your network.

Other options include events such as the AVCJ conference in Hong Kong and the SuperReturn China Conference; these tend to be better if you have an international background.

Finally, private equity headhunters offer another route into the industry, but more so if you’re targeting the PE mega-funds or pan-Asia funds.

These firms tend to hire investment banking Analysts each year from abroad and prefer Chinese citizens who studied and worked in the U.S. or U.K. for a few years.

Private Equity in China: Salaries, Bonuses, and Carried Interest

Salaries and bonuses are significantly lower than in the U.S., but the discount is higher at domestic firms than international ones.

The source for this information is Robert Half’s China PE salary survey, which includes only the base salaries – no bonuses.

All the figures are in RMB, and, unfortunately, it does not separate compensation at domestic vs. international firms.

If we take the numbers in the Robert Half report and assume that bonuses are 75% of base salaries, the 25^th – 75^th percentile ranges for total compensation look like this:

• Analyst: $70K – $125K USD
• Associate: $90K – $175K USD
• Vice President: $140K – $280K USD
• Director: $230K – $420K USD
• Managing Director: $280K – $840K USD

Overall, you should expect a 25-50% discount to U.S. compensation at domestic firms (with the international firms paying closer to global standards).

China is still cheaper than major U.S. cities, but it’s not that much cheaper, and rent can be quite high in places like Beijing and Shanghai.

Also, you don’t have nearly the same tax advantage you’d get in Hong Kong; the effective rate is in the 30-40% range, like the U.S.

Some of the major PE firms offer carried interest, but this becomes more of a factor when you reach the senior levels.

Carry is far less standardized than in other markets, and you’ll see everything from the Founding Partners taking all the carry to MDs clawing it back from juniors who leave.

If your firm performs well and you stay for 10+ years and you survive all political issues at work, carried interest can potentially multiply your compensation at the senior levels.

But don’t hold your breath because most people switch firms or leave the industry before reaching the Director level.

Careers and Lifestyle

The “on the job” part of private equity in China isn’t that much different, but note the following:

• Domestic vs. International: You’ll close more deals at domestic firms, but you’ll also get less structured training and lower compensation. International firms offer a better brand, training, and pay, but you have a lower chance of closing deals.
• Hours/Work Ethic: Expect 12-14-hour days at many firms with less time off on weekends and fewer holidays. It is a “sweatshop” culture, which is common in China even outside the finance industry.
• Hierarchy: Domestic Chinese firms are very hierarchical, so key decisions get made at the top and then passed down to everyone else. As a result, mid-level managers are not always held accountable, and people can get away with underperformance… if they have the right connections.
• Government Relationships: Expect to deal with local CCP officials on everything from land leasing agreements to tax credits.
• On-Site Work: More so than in developed countries, you’ll often travel to portfolio companies or prospective portfolio companies because verification is very important in China. You can’t necessarily trust documents at face value, and there are issues with multiple versions of “the books” and other key data. You’ll often evaluate deals based on the people before even looking at a CIM.
• Deal Structures: Because of these trust/verification issues, many PE deals have “ratchet” or valuation adjustment mechanisms where the company grants the PE firm more shares if it fails to meet a financial target.

That said, there are some positives of the culture and lifestyle.

For one thing, it’s easy to visit other places in Asia since it’s just a few hours to Seoul, Hong Kong, Tokyo, or Manila.

It’s a great place for short trips if you have the occasional weekend off.

Also, working in private equity in China is a great way to expand your network since you’ll meet all sorts of entrepreneurs, executives, and other investors.

It’s much more of a “Wild West” environment than the U.S. or U.K., so people often leverage the experience to move into very different jobs based on the connections they’ve made.

Private Equity in China: Exit Opportunities

On that note, the exit opportunities are similar to private equity exit opportunities anywhere else: an MBA, a different PE/growth equity/venture capital firm, credit firms, hedge funds, family offices, portfolio companies, start a company, etc.

The main differences include:

1. Prevalent Industries – Some of these firms, such as hedge funds, are far less common in mainland China. You’ll have better luck aiming for HF roles if you go to Hong Kong.
2. Skill Transferability – Since most PE firms operate more like growth equity or VC firms, you might have trouble moving to one that does traditional leveraged buyouts.
3. Leaving Hotel California China – Recruiters in other regions will tend to discount your experience, so if all your work has been in mainland China, don’t expect to leave and find an equivalent job in the U.S. or U.K.

Finally, some finance professionals in China also leave and join the Securities Regulatory Commission (the equivalent of the SEC) and even take a pay cut to do so – since this can lead to very powerful positions in the government.

These roles may not pay much “on paper,” but if you leverage your role properly, you could still become wealthy (use your imagination).

Private Equity in China: Final Thoughts

So, if you’re a plausible candidate for private equity roles in China, should you recruit for them?

Is there a reason to turn down opportunities in the U.S. or Europe and work in China instead?

My answer would be “no” – but with a few exceptions and caveats.

The basic problem is that you’ll usually earn less in China while still working the same amount (or more), and you’ll get more limited deal experience that doesn’t translate well to other regions.

And if you’re not a Chinese citizen, it’s not even worth considering these roles in most cases.

Back in 2000 or 2005, some foreigners got into the industry and rode the wave to great success – but 20+ years later, this no longer happens.

That said, private equity in China could still make sense if you have the right background, want to live in the country long-term, and can leverage the experience into something else.

For example, it might be a good career move if you use it to win a high-level government role, start your own company, or launch your own PE fund.

And if you have great connections with CCP party officials, even better.

Just make sure you keep a close eye on both your kidneys before diving into the recruiting process.

The post Private Equity in China: The Worst of Both Worlds? appeared first on Mergers & Inquisitions.

No!

Despite comments from previous interviewees about how “small” the industry is, buy-side roles do exist.

And if you want more hands-on experience, private equity in Canada might just be a better bet than pension funds – as our reader today found out:

Breaking into Investment Banking in Canada

Q: You know how this works. Your story?

A: I did an undergraduate degree in Canada at a non-target school, became interested in IB late in the process from a friend I met on a study abroad, and then completed a Master’s degree.

After the Master’s program, I won an investment banking Analyst role at a “large bank” (Think: A bulge bracket or Big 5 Canadian bank) and worked there for a few years.

I liked the experience, but I decided to move into private equity for all the usual reasons: Work/life balance, more interesting work, and the chance to get some “skin in the game.”

Q: Canadian interviewees have said that the investment banking industry there is small and incredibly difficult to get into.

How did you beat the odds?

A: I’m not sure if I have any magical tricks, but the most important points for me were:

• Prepare with Humility – There are so many resources out there that you have no excuse not to get the easy questions right. But, with that said, I found that a little humility went a long way when it came to answering the questions.

You can’t walk in and act like you know everything just because you’ve read several interview guides; if you show too much bravado, interviewers will grill you.

• Perfect Your Story – It must be both concise and memorable. I used a study-abroad experience for my “memorable” point. And I spent a lot of time cutting my story down to its bare essentials while still making it interesting and giving examples of my work ethic and desire to be there.

If your story goes on for more than 300 words, that’s too long! Most people tend to ramble and fail to explain how the bank and group relate to their long-term goals.

• Use Deadlines at Networking Events to Maximize Your Results – Banks usually host drink/appetizer events right before or after final-round interviews. At these events, everyone surrounds the senior bankers, and it’s tough to get their attention.

So, I used a simple strategy: I found an excuse to leave the event early, and I used that excuse to speak with senior bankers on my way out.

For example, sometimes I said I had to run to catch a flight because of an obligation the next morning, or I said I had to leave for an exam.

That trick allowed me to speak with everyone at least once and ensured that more bankers would remember me.

Private Equity Recruiting in the Great White North

Q: Thanks for those tips.

What was the private equity recruiting process like?

A: To be clear, I can only describe the process *I* went through. You should not take my story as a universal commentary on all private equity recruiting in Canada.

My process was less structured than the one you’ve described for New York-based roles; it was closer to off-cycle recruiting.

The main Canadian firm that uses a structured process is Onex, the largest non-pension PE fund in the country.

PE firms here rarely hire recent graduates, and they typically expect you to know how to model, write memos, and make investment recommendations from day one.

That limits the pool of candidates to bankers, pension fund professionals, and a few Big 4 professionals.

Recruiters also have less power here, so many firms fill positions through referrals. Independent networking can be tremendously helpful.

At the firm I interviewed at and eventually joined, I met every member of the team in groups of two or three on different days, and I went through four interviews total.

They focused on my deal experience in banking, my story, my leadership experience, and the “Why private equity?” question.

I did not complete a case study or modeling test, but that is the exception rather than the rule.

Q: Yeah, it sounds like it. If someone interviews at your firm, what should he/she expect in the case study?

A: Typically, we invite candidates to our office, give them a CIM from a company we’ve already exited, and ask them to build a 3-statement model for the company.

We ask them to justify each assumption and draft a few PowerPoints slides recommending for or against the deal and explaining their reasoning (think of it as a mini-Investment Memo).

Your modeling ability is important, but equally important is your ability to think through a business, its strengths and weaknesses, its growth opportunities, and its risk factors.

You may occasionally get a “take-home case study,” but they tend to be less common here.

Q: On that note, what is the private equity industry in Canada like?

A: If you exclude the pension funds, there are fewer than ten private equity firms with over $1 billion in AUM.

The U.S.-based mega-funds barely have a presence here: A few have a location or two (e.g., Blackstone and Apollo in Toronto, or KKR’s former office in Calgary), but most have no offices in Canada.

Some domestic Canadian PE firms include Onex (and ONCAP, its middle-market group), Brookfield, Birch Hill, TorQuest, Hillcore / Abacus, ARC Financial (Energy focus), TriWest, EdgeStone, Catalyst, Ironbridge, Azimuth (Energy focus), and Cordiant.

Those are some of the larger firms, but there are dozens of smaller firms as well.

If you count the pension funds as private equity, firms like Teachers’, CPP, and OMERS also have a big presence in the industry.

Many firms in Western Canada focus on energy and natural resources, but the rest of the country is fairly diversified.

There might be around 200-300 PE deals in the country each year, with foreign firms responsible for almost half the deals; 80% of those foreign firms are U.S.-based.

It’s difficult to generalize deals, but a few high-level differences include:

• Less Leverage – If the average Debt / EBITDA for leveraged buyouts is 5-6x in the U.S., it might be 3-4x, or even less, in Canada. There are also more restrictions on cash flow sweeps and additional debt incurrences, and covenant-lite loans aren’t the norm.
• Lower Purchase Multiples – Deals here tend to see less competition, so multiples are not bid up as high as in other markets; with that said, multiples have been creeping up as more foreign firms invest in Canadian businesses.
• Friendlier Environment – It feels like there’s a more collaborative attitude here and less of a “corporate raider” mentality. This last one is my own impression from working on deals in the industry, so I don’t know if there’s hard data to back it up. Also, it may not be true at the larger funds here.

Source: Torys and their articles on Canadian private equity (PDFs from previous years have more data as well).

Q: Great, thanks for that summary.

Are there any issues with currencies and FX risk since the CAD has fluctuated so much against the USD historically?

A: It depends on the firm – if I had to guess, I would think that many PE firms do not hedge currencies.

Some of the larger firms with more North American or global investment mandates have raised funds denominated in USD, as they expect to see more U.S. deals than Canadian deals because of the market size.

Pension funds are comfortable with USD exposure since they invest worldwide and have so much capital to deploy.

Q: OK. And on that note, you’ve compared private equity with pension funds several times now, but what are the advantages of working in private equity rather than pension funds?

A: The main ones, at least from my perspective, are:

• Skill Set – You will learn more about how businesses operate if you go to a middle-market, operationally-focused PE fund, as I did.
• Responsibility – Teams tend to be smaller at PE funds, so Associates get much more responsibility, and junior team members play bigger roles.
• Advancement Opportunities – Since people tend to stick around at pension funds for a long time, it may be a bit easier to advance in PE.
• Compensation – You would earn $150K – $200K as a first-year Associate at a pension fund, but $175K – $250K at a middle-market PE fund or $300K+ at Onex.

(NOTE: All compensation figures are in CAD and as of 2017.)

These points are not universally true – a lot depends on your group, your firm, and your ability. The list above includes what I perceived to be the advantages of my current firm.

I also chose my firm because it had just raised a new fund, so I knew the team would be active.

If you’re interviewing around, always check when the firm last raised a new fund or when they are planning to raise a new fund, and be very cautious if the firm is struggling or has struggled to raise capital.

Do not leave an IB job for a PE firm that has no capital available and that cannot raise a new fund.

Q: Thanks for sharing those tips.

So, what are your long-term plans?

A: I’m happy where I am right now, so I don’t anticipate any major changes.

Many Canadian firms let you stick around after your first two years (vs. the two-years-and-out model in the U.S.), so I might just do that.

Q: Thanks for your time!

A: My pleasure.

—

Want More?

If you liked this article, you might be interested in reading about The Private Equity Fund of Funds.

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