HongKongers in HK Private Equity - Can you survive in a mainland-Chinese dominated labour market?

I’m not a HKer or a mainlander, but can offer some of my thoughts from my business and personal relationships within the China/HK PE scene.

There’s a lot of reasons for much fewer numbers of HKers in China PE:

(1) Much smaller HK talent pool. Most of the IBDs in HK hire primarily from US/UK schools, and there’s just a lot more mainlanders coming out of those places than HKers. There are some spots for HK schools, but even then, HKers are competing against all of the mainlanders shipped over to those schools. This initial education inequality leads to just overwhelming numbers of mainlanders in HK IB and China IB (from the onshore securities firms and mainland offices). This will then filter into China PE.

(2) Comp / relocation / cultural differences. However, there are still more HKers in IBD than in PE. A lot of that comes from personal choice. There’s no unified comp structure for China PE, but overall, it pays at a significant discount to IB. And the pathway to partnership is much less clear than almost any other major market, given most China PEs are still being controlled by the original founders. Also, people really don’t want to move to mainland China where most of these PE opportunities are. The quality of life is terrible, and the tax rate is extremely high (with heavy controls on currency outflow). Even before all of the current geopolitical issues, the largest cities were not international at all, and (even though HK is on the precipice of becoming another Chinese city) HK is still much more free. The working environments of a lot of China PE firms also suck. The partners came out of pseudo-government backgrounds and/or onshore securities firms and have no idea how to manage or what they are actually doing. HKers naturally enjoy living in HK. A lot of the HKers I see moving to mainland don’t really work in finance/law, and only do so because their incomes go further in China. Those who make good money in IBD and have a good lifestyle don’t really want to move to China for less pay. The calculus is different for mainlanders in IBD. Most don’t like HK or HK culture (which can be pretty prickly to non-cantonese speakers) and are happy to head home.

(3) Hiring decisions. I think this contributes least to the demographic construct in China PE, but still has an impact. Buyout PE is a tiny portion of the overall market in China, and generally investment processes are not as driven by heavy modeling as in developed markets. Most PE firms operate like macro private market hedge funds and focus on top down analysis, so sourcing abilities are much more important. US/UK schools are expensive, so most of the mainlanders from those schools come from well-off families, likely with some degree of CCP connections to some extent. Sourcing, relationships (euphemism for corruption and family’s communist standing), and diligence abilities are the most important for most China PE firms as opposed to deal execution ability (not that many bankers in HK IBD actually work on M&A deals). So hiring will tend towards those connected mainlanders. That being said, the road to partner is pretty unclear, and most mainlanders I know that want to continue in PE all have aspirations of raising their own fund (at least before the current economic situation), which is going to be pretty hard to sell to LPs if you are a regular HKer without the right sourcing networks.

Overall, I’d say personal choice probably plays a lot more into the lack of HKers in China PE. The only area where the equation changes is for the megafunds/large regional funds and the fund-of-funds. Their pay is generally in line with US PE pay, and many have solid-sized deal teams in HK that would look at take-privates from SEHK and larger buyout or traditional growth deals. If you look at those teams, you would see a much more balanced ratio of mainlanders to HKers. So once you equalize pay with banking and have the option to stay in HK, there will be more HKers. With the fund-of-funds, the pay is generally less, but you get better WLB and also get to stay in HK.

That being said, with the way things are likely to continue, the China PE market (at least on the USD side) will be nonexistent soon, and what remains on the RMB side will be more obviously government directed. The more institutional ones are pivoting to SEA with mixed (generally shitty) results and are considering shutting down. The BJ-friendly ones will increasingly come into the fold of Winnie the Pooh. The ones that were in between will have to make their choices (namely IDG choosing to go the latter route).