I've worked in PE and special situations investing in Hong Kong for >8 years, covering all Asia. Happy to drop some knowledge, but it's a very broad topic. Do you have some particular areas you'd like covered?

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I'm just starting to explore the possibility of doing some time in Asia and am generally looking to understand the below. By way of background, did 2 years of IB and am currently in the midst of a PE program. Also -- just some context behind this, I am really thinking about working in HK as opposed to other cities. I know Singapore is a similar expat option but I don't have as many ties to that city. While I like BJ / Shanghai, don't think my language skills would cut it there professionally so my scope is a bit narrow in focus. And I also understand that given my background, if i were to work in HK, it would likely be mostly on SE Asia deals as those don't necessarily require Mandarin fluency

1) Long term, if my intention isn't to live in Asia, but really just want to have a few years of international experience before moving back to the US, does it still make sense? And have you seen people make it back to the US after a stint in Asia? Was it difficult?

2) What are your views on global fund of funds that do direct / co-investing? Seems like that might be an easier path to break in to the region given my language deficiencies. They don't particularly attract me as platforms in the US, but maybe there is a difference in which they operate in Asia?

3) What are the typical avenues into PE, post banking? Headhunters I assume? And if so, which are the best ones? The equivalent of the CPIs, SG Partners, etc of the US

4) Is there anything about working in PE in Asia that might not be as readily obvious? Not really sure what the answer is to this question, but just thinking about IB and how I've heard that given the immaturity of the region that the analyst experience would be less analytical (less M&A, more ECM for example) and similarly in PE that there's less LBOs and more growth equity type investments. But anything about the day to day that may not be immediately apparent?

Thanks!

 
Best Response
  1. I'm an Australian working in Asia, so can't help too much on this one. You'll still pay US tax while you're here, which makes you more expensive than other ex-pats who benefit from HK's 15% top bracket tax rate. I think Singapore is something like 17%.

As for moving back, the question I have yet to face is whether the skills and experience I get here in Asia will get valued highly when I go to another market like North America or Australia. A few things to consider here.

You can't take your Asia network home to the US - As you move up the chain in a PE house or IB, you're expected to mature out of grunt execution and more into origination. The latter means having a deal sourcing network. If you spend time in Asia with the intention of returning to the US, any origination network you build up will be largely lost once you're back in the US. On the other hand, at your stage in your career, it may not have too much negative impact.

Deal exposure - the types of PE deal you'll see here in Asia will often be very different to the US. The LBO market is not as developed for various reasons, the M&A market is often non-existent in some countries, corporate governance is often horrible and there is a huge quality gap between the top end of the market and mid-market companies. A lot of the experience, execution and filtering skills you'll build up here in Asia are very different to what you'd build up in the US. You'll likely come back with lots of stories of strange and horror situations that make for interesting talk, but aren't necessarily job experience that would help a US-focused career.

(On the other hand, if it's all about your career, you're a sad person. I came to Asia to spend some time in this sort of wild west and have really enjoyed it, even if it means my comp will be lower when I move back to Western civilisation in the next few years).

  1. Fund of funds doing direct coinvests - I know a few guys in this position and you will get to see a lot of deal flow, a lot of opportunities and also build up a good network with PE funds.

On the other hand, my sense (possibly incorrect) is that your deal analysis/execution skills aren't going to be as deep as if you were at the coal face. For example, you'd be looking at someone else's model and tweaking it, rather than building your own from scratch. You'd be a term-taker on the legal docs, rather than leading negotiations. At your relatively early career stage, working at the coal face is going to get you more experience that will put you in a good position for the future. While FoF position builds a good network, see my comment above - you can't take that network back to the US.

(My role focuses heavily on shaping deals, leading negotiations with the targets/vendors and execution, so I naturally think that's important. Others may have a different idea).

  1. I got into PE/SSits in an unusual way, so can't help on this question.

  2. A few broad comments on Asia, which reflect my experience:

  • As I commented above, really underdeveloped M&A market, not a huge amount of LBOs (but that's starting to change) in some countries. Generally, the markets are pretty immature. There are exceptions eg Japan, Korea.

  • There is a high amount of liquidity here, both in the private equity space and in the debt space. In my experience, you end up getting less of the interesting deals in the mezz debt/pref equity space that you see in the US, as the straight equity + senior debt is often more than enough to cover the purchase price.

  • A lot of private equity money has gone into China and is stuck there, partly because the natural exit venue - HKEx - has had a very dry IPO market for the last 2 years, partly because there is a lot of shit companies in China where PE firms thought they could make the company better. The guy on this site http://www.chinafirstcapital.com/blog/ throws some numbers around about PE money stuck in China and associated issues. I'm not sure how reliable the numbers are and I think he overstates some aspects of the state of play, but a lot of the themes he talks about are true.

  • If you're ethnic Chinese, you'll be expected to speak Chinese. If you're technically strong, you can get away without that. However, everyone (particularly mainland Chinese) will expect that you "think" Chinese eg get all the saving face and other cultural stuff. If you're largely culturally severed from Chinese ethnicity (eg what the Cantonese sometimes call "juk seng" - cut bamboo ie severed from your roots), it can be a frustrating and you won't get the cultural pass that foreign devils like I get.

  • Governance in China - terrible stuff and you have no legal system to back you up. Any PE investor taking non-controlling stakes in a company with majority control by a Chinese chairman is in for a world of pain. Most PE firms these days are smart enough and take controlling stakes, particularly as there are quite a few companies that prepped for IPO, can't IPO as HKEx IPO market is dry, and have chairmen/chairladies now willing to sell out most of their stake and go retire. Even so, it's still tough and you cannot rely on people to tell you the truth. As my ABC wife tells me, in Chinese culture - someone who tells the truth is at best a fool, at worst someone who will get everyone else into trouble. Also, government. Whatever the government wants is the #1 priority, not the foreign investor. This can have a big impact at all levels of the economy.

  • I do the rest of Asia as well, although about 60% of my experience has been in China. Some limited comments:

Japan market has low returns, you're competing with local money that has a lower cost of capital and the speed of deals are really, really slow there. No decision is ever made within 6 months in Japan.

India - I've found it a tough market and it's currently getting whipped. PE market has been active, with Indians running the PE firms. I've heard conflicting stories about what the current state of play is. If you're not ethnically Indian, you're not going to get a job there and probably won't want it either.

Finally, working in Singapore - not an exciting city. A lot of ex-pats with kids. Along with Malaysia, has the worst English accent in the world. You're focus out of Singapore would likely be SE Asia and India, which aren't my #1 markets in Asia right now except for some limited sectors. There are some shops that cover China out of SE Asia, but most firms serious about China have HK, Beijing and/or Shanghai office. Ethnic Chinese Singaporeans regularly get burned in China in business (I can only think of a handful of Singaporean cos which have done well in China, like Capitaland and Mapletree - real estate and logistics/real estate) and anyone trying to tell you that Singaporean Chinese have special insight into China is full of shit. Good food, though.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

SSits - awesome summary, SB'd.

jman - I don't have much to add to SSits' post, except on hiring. If you're foreign, or ethnically Chinese, but not fluent in Mandarin (or simplified Chinese when read/written) your chance in PE in HK these days are incredibly slim. Gone are the days where a junior professional with top tier IB experience (but no mandarin fluency) can get a PE job anywhere because firms valued their international/US training. That was probably before 2007-2008. Now, if you see someone who is non-Chinese in PE in HK, they either 1) are fluent, 2) did an internal transfer from their US/Other office to HK, 3) are fairly senior (to the point where their experience/relationships/etc override the importance of language), or 4) got in early (before language became such a big factor) or are extremely extremely lucky.

Most PE offices in HK are China-market focused, so it makes sense that if they are looking for a more junior hire (analyst, associate, sr. associate) they want someone who has the language skills to handle the documentation, can attend meetings in Mandarin and so on. And there's really no shortage of local talent (HKers) who can speak mandarin and come from a top banking group. And even they would face difficulties because the hiring has dwindled, and unlike in the US, PE hiring in HK doesn't run on a very regulated, structured process. It's more an 'as-needed' basis.

Ideally, firms want someone from a PRC-background (so that they can "think Chinese" and understand the culture of mainland), but who went to top schools in US (or UK, or other "1st tier" international markets), worked in US in IB (GS/MS/JPM/top boutiques/other large banks) or MBB, and is looking to come back to HK (or even easier, has US and HK exp).

One area where one is more likely able to land a buyside job in HK without the language requirement is with a hedge fund, focusing more on public markets and debt. That is one area I've seen where a job post doesn't always say "mandarin is mandatory". Another is if the group is focused on SE Asia or the developed markets like Japan or Korea. But the former is most likely based in Singapore, and some groups that had that focus seemed to have relocated there or also have offices there in addition to the HK one, so you have to wonder which location's investment professionals is the driving force behind deals, so to speak.

The best bet is probably Singapore where the market isn't China focused so Mandarin isn't nearly as important. Though, interestingly, now you'll see some PE groups wanting people that speak Bahasa given the growing importance of Indonesia as a market. The Asian experience is kind of a nice to have, but if your goal is to be in PE in US, I would suggest just building it in the US because relationships you may form (esp. at the junior level) won't be all that helpful and is probably fairly localized. IF the goal is just wanting to experience the 'wild west of Asia', then by all means. It's an interesting place, and you get to see it as it is taking an interesting turn - China moving away from being a cheap-labor market and coping with slowing growth, and some of the emerging markets in its formative years. Though, something to take into consideration is the potential difficulty of moving from Asia back to US, because it's difficult to conduct interviews while overseas. You want to make sure you have enough great experience in US/western markets so that a transition back won't be an issue. And/or, that the PE shop in Asia is a reputable name and the experience there can stand on it's own. There's still some stigma about the quality and best practices of Asian transactions vs. ones in Western markets. And much of it is just by the nature of the markets (much of Asia is growth equity driven, after all).

 

Great posts. I just have a few questions specifically on doing PE focused on mainland China:

1) Is documentation as heavy as documentation in US PE? Will documentation typically be completely in Chinese? A post-MBA doing PE in the US would be expected to lead doc negotiations, so was wondering if the same applies in a comparable role there. If I can speak Mandarin fluently and well versed in cultural nuances, but have rusty reading/writing, would I be able to survive if I were lucky enough to get a post-MBA role doing PE in China? I know some ppl who had rusty reading/writing but picked it up after 6-12 months of living there.

2) Just an update on M&A in China now. I know it has slowed down considerably but want to know if anyone has a view on if it is picking up. If so, what's driving it? Any specific sectors that are most active?

3) I have very little knowledge of the credit landscape in China other than that state-owned banks are basically the only banks there. With that said, I'd be interested to know who typically provides debt financing for the LBOs there. Chinese banks or foreign banks? Who are active institutional debt investors there, if any? How much leverage (debt % of TEV) is typically placed on mid-cap LBOs there? Is it typically just one or multiple tranches? What are yields like on those debt instruments (will vary based on many factors, but interested in ball-park figures assuming a growing, CF positive, mid-cap business)?

4) What's the greatest challenge in doing PE in China, for anyone with experience there.

Thanks in advance for any responses!

 
  1. Typical documentation is usually a shareholders agremeent and share purchase agreement, plus perhaps some guarantee side letters and/or collateral held against guarantees and puts. I've never seen US style PE agreement (I always use UK firms), but I assume it's much the same.

However, in most cases you're investing in an offshore holdco while all the assets and business are onshore. That makes documents in many ways irrelevant as many Chinese companies will hide behind the Chinese legal system - good luck in enforcing offshore agreements against onshore assets.

The cliched China wisdom is also that Chinese promoters don't see the legal documents as being important as Westerners do. My experience is that cliche is important, but not because it's all about the relationships and more because that's a rational perspective for Chinese business men to take in a country with an unreliable legal system.

Your lawyers will help you out on documentation and you're not expected to negotiating in Mandarin. That said, I'm a white guy of an older generation and you see a lot of US-educated ethnic Chinese in PE these days (often doing very optimistic deals).

  1. Most LBOs are acquisitions of offshore companies, so LBO banks are the usual people lending in US$. Most international PE funds don't have an RMB fund and can't acquire onshore companies, so onshore leverage is not available for LBO, although it is available for gearing the operating subsidiaries.

I haven't looked at LBOs for Chinese businesses that much this year. I did see on LBO proposal for a quick service restaurant business which was 2.5x EBITDA (edit) of debt (/edit)

  1. Greatest challenge is that you're dealing in an unreliable legal system with a generation of promoters who:

- Grew up in the Great Leap Forward and/or the Cultural Revolution and/or the corruption of the 1970s - Hence learned from an early age that the only way to get materially well off was to be a corrupt politician or a criminal - Now have Westerners throwing money at them as Chinese resurges/becomes centre of the world again/other Han nationalistic crap

So when times get tough, you can throw your downside protections out the window. Even when things are good, you'll only get a small segment of the real story.

It may change in a few generations, but for now it's tough.

There are opportunities, but far less decent opportunities vs the number of deals getting done.

It doesn't help that you have a very large number of directors at PE funds - particularly ethnic Chinese who have a better read of what's going on - who will cover problems up and do deals just to get the money out the door and start their 2% pa management fee on deployed capital working for them.

Those who can, do. Those who can't, post threads about how to do it on WSO.
 

my understanding is that

  • most asia (top notch) PEs requires mandarin capabilities. some even specify native speakers only. I have some Singaporean friends who speak perfect mandarin but got turned down even before first round...
  • be aware of hours. I have friends who work IB analyst hours (100+) even 3-4 years into their PE career
 

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