PE in China

In this post, I will attempt to provide a snapshot of how PE firms in China currently conduct business. I will not be discussing the recruiting process, so the content is more useful for finance professionals interacting with Chinese PE firms and companies that are backed by them.

Standards of Practices
PE activities are increasingly regulated due to reports of misconduct. The practices are far from US standards, however, as the PRC does not currently have the incentives to heavily regulate and emulate the private sector according to US norms. One significant roadblock is accounting standards. Yes, almost every promising and emerging company adopts IFRS as default, but book manipulation is far too easy to perform. Chinese companies require registered capital, but not all founders put in the capital in the beginning if there exists an understanding that it would not be necessary. One of the portfolio companies at my PE firm which received funding diverted the money for personal use. We recently shut down the division but clawing back the money proved to be much too difficult. The founders started a new similar company just several floors above the original one. Our complaint of conflict of interest did not do much. As such, investing in and from PE firms are heavily reliant on trust.

Culture
PE is extremely relational. From sourcing to managing all the way to exiting are conducted on a personal basis. GP's generally conduct business over the dinner table before even looking at marketing material, which flow in abundantly, and in many cases fraudulently. Professionals thus developed qualitative assessment of people before business. One needs quite a strong network to access and safely disburse capital. This is a quite visible barrier of entry to smaller to medium PE firms, even given favorable deals.

Exit
Chinese stock market is reaching $10 Trillion. The IPO process for the Chinese public market is quite rigorous, with high requirements barring many companies that could easily list on an US exchange. High growth companies or low risks companies thus flock to foreign exchanges. Hong Kong and Singapore are two hotspots access to the public market, but US exchanges are favorites of Chinese businesses. Through a VIE structure, Chinese companies are able to be listed on US exchanges. Such formats recently came under scrutiny by both regulatory bodies and investors, though the pipeline shows no signs of slowing down. We can expect the Trump administration to tighten the requirements for future listings from China without completly ending the practice. As with private exits, we can see bigger, even foreign PE firms purchasing shares and interests from smaller entities. There is a healthy deal flow going but not many centalized database exists for these activities.

Growth
China is growing and growing fast. The rising middle-class blended with Chinese culture to save much more in comparison to Western cultures means that there is much more money that is just waiting to be productive. Chinese efforts to internalize R&D, production, and consumption will continually pump out Huawei, Tencent, and DJI grade companies. As PE firms continually to refine and standardize their businesses, and as Chinese people become more informed about the variety of investments, growth in Chinese private equity is inevitable.

This is my first post. I will keep posting more on the subject matter if people find this area useful or interesting.

Feel free to shoot me a WhatsApp: +1 (845) 978-7810
My name is Kevin and I am more than happy to answer and China-related questions you may have, especially in the field of PE. I am working on a few projects right now so I am also open to discuss opportunities, with a preference toward Sino-American activities.

 
Most Helpful

Hi Kevin, thanks for doing this. I'll be starting full time in a lower tier BB (DB/RBC/WF) in NYC but eventually I'd like to transition back to China. Just wondering what the PE recruiting process would be like for IB analysts based in NYC, and what's your advice in terms of preparation. Do you think if it would be necessary for me to lateral back to a BB in HK or staying in the US for the first 2 years would be fine?

 

It's a pleasure. Firstly, congradulation on your starting full time in a BB. If you do decide on DB, I have a friend who is starting at DB just like you; maybe I can connect you two? PM me if wanted.

The recruiting process is quite varied. If you have a degree from a top institution, that's a great starting place as top Chinese firms generally place a great importance, more than justified, on the prestige their employees' education institution. Your financial modeling skills are def important, but I'd say a firm grasp of Chinese culture and language may be even more so. Once you're in the upper tier, every candidate has honed their skills to a great degree, so it boils down to what you have that are unique. When working at your BB, request and take on more Chinese projects, get their wechat contacts. Maintain your connection back in mainland. This will make sure you get exposed to a lot more headhunters. If lateraling back to HK BB is needed to get you exposed to Chinese projects, that wouldn't hurt if you're in no rush.

As for HK, you will be fine with the guides and experiences shared on WSO. When the time is nearer, feel free to drop off your cv to us :) if you choose someone else then a mock interview wouldnt hurt.

 

Thanks for the informative post! I will be interning at a top tier BB(GS/MS/JPM). I am thinking about transitioning to PE in China eventually as I am a Chinese native. Just wondering will IB analysts from NYC be at a disadvantage compared to IB analysts from HK, as they have built their networks during their analyst years? Also, what is the career progression like? How hard it is to move up the ladder?

 

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