Private Equity in China: The Worst of Both Worlds?

As with investment banking in Hong Kong, I can summarize private equity in China in one sentence:

“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 Year-Over-Year (YoY) 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.