by Brian DeChesare Comments (26)

Investment Banking and Private Equity in Mainland China: Land of the Surefire 100% IRR?

China Investment Banking & Private Equity

We’ve covered a surprising amount on finance in mainland China over the years, from foreigners getting into the industry against all odds to foreigners getting forced out of the industry, to undergraduates randomly getting month-long internships

But one common scenario is missing: what it’s like to grow up in China, work at a local Chinese investment bank there, and then continue on into private equity, also at an actual local firm.

That’s exactly what our interviewee today will explain in detail: how you get into the industry, why it may not be the best idea to work at a local investment bank, and what it’s like working at a PE fund there (plus, what the industry’s future holds).

Let’s go:

From Non-Target to Top Local Bank in China

Q: Your story, please.

A: Sure. I grew up in mainland China, but I went to international schools my entire life so I’m a native English speaker and learned Mandarin as my second language.

I attended a non-target college in the US and did a lot of alumni networking to win a referral to a top local investment bank here – where I then completed a summer internship and received a full-time offer.

Q: Any major differences in the recruiting process?

A: Not really – they still did on-campus recruiting at top schools in both the US and China, which included multiple rounds of interviews with both fit and technical questions.

Of course, you need to know the language to have any chance of working in the region and you’ll get interview questions all in Mandarin, but other than that, there weren’t big differences.

Q: Given that you didn’t end up staying at this firm for years and years, I’m guessing that it was quite an “interesting” work environment…

A: Yeah, that would be a nice way to put it.

We mostly worked on IPOs, other secondary equity offerings, some debt offerings, and occasionally M&A.

It’s similar to the work that China teams at bulge bracket banks in the US do, but with one key difference: with local Chinese firms and some international banks, such as GS with their China JV (Goldman Sachs Gao Hua Securities), you work with onshore equity and debt products as well.

Foreign banks don’t have the licenses to do that and do not meet the regulatory requirements to underwrite onshore products, so they focus on helping Chinese firms raise capital abroad.

To your original question: the main problem was that 90% of the job consisted of pitch books, memorandums, and conference calls, with very little time spent on modeling / technical analysis.

We do spend some time on due diligence, but generally for junior people that means “take a lot of notes at meetings.”

Part of that is because equity capital markets is inherently less modeling-intensive – pricing for IPOs is mostly based on comps, so even in developed markets there isn’t much complex Excel work.

Clients here also care less about using technical analysis to support the prices of their offerings.

And then there’s the Chinese government: in certain industries, bureaucrats determine the valuations at which companies can raise capital.

In commercial banking, for example, the China Banking Regulatory Commission says that state-owned banks cannot do offerings at valuations below book value, regardless of the merits of those banks.

So those types of regulations limit the usefulness and impact of your work as an analyst.

Q: So it seems like the government, plus the nature of clients’ expectations, creates a very different work environment.

A: Yes. I would add that there was a ton of “random work” (to put it nicely) from clients and even potential clients.

As one example, one time we were pitching a reinsurance firm that wanted us to research how international reinsurance companies operate in China, how going public helped previous companies, and the advantages and disadvantages of listing on 5 different exchanges.

Of course, they were just trying to get free work out of as many banks as possible; you see that in developed markets as well, but clients tend to have more grounded expectations.

Even outside of these random and time-consuming requests, working on an IPO is fairly dull at the junior level: you listen to a lot of calls and write long documents summarizing the meetings, all to ensure that clients understand the requirements.

All the work is done in Chinese (even if we’re doing offshore deals), and when you’re working with state-owned enterprises (SOE) or other huge clients, you have to use extremely formal language in these memos.

Occasionally, we’ll get an English-speaking client or we’ll work with a foreign bank on a deal, in which case we might write in English.

The end result is that many of these tasks take more time than they otherwise would in other geographies.

Q: So were there any benefits at all to this job?

A: I improved my Mandarin skills (both written and spoken)! That may seem like a silly point, but it’s very important to get as close to native-level as possible if you want to work here in the long-term.

Other than that, I had to learn a lot of the modeling and technical side on my own because so much of what I did on the job was qualitative.

Many of my fellow analysts and associates, at least those who had attended top MBA or undergraduate programs in the US, were also unsatisfied with their experiences and eventually lateraled to foreign investment banks.

Q: Speaking of that, what were your co-workers like? Were they typically Chinese citizens who had studied abroad?

A: Actually, I would say 75% came from the top Chinese schools and had lived here their whole lives, with about 25% from schools overseas. But even the ones who graduated overseas were originally from China.

In my class, the ratio was a bit more skewed toward overseas students because my firm was trying to do more business overseas at the time (that didn’t work too well, so they have since dropped that strategy).

Into Private Equity and Beyond

Q: OK, so you had a mediocre experience at this local bank, but got something to write about on your resume and improved your language skills in the process.

How did you think about your next steps at this stage?

A: I thought about moving to another bank, but I looked around at other opportunities in mainland China and decided that I’d be happier just moving into private equity directly.

The PE recruiting process is very random in China and doesn’t follow a specific cycle as it does in North America.

I had been contacted by headhunters from Day 1 of my job all the way up through the end, mostly via LinkedIn, and I had received random interview requests without doing much networking.

That said, most people I know who moved to other jobs did leave right after bonus season.

The foreign mega-funds here will still target analysts at the top banks (GS/MS/JPM and a few of the other bulge bracket banks) and analysts/associates at other PE firms. And they’ll often use headhunters to do this.

The interviews themselves vary quite a bit depending on the firm, with the ones at larger / more international funds more closely resembling the traditional process at US-based firms: multiple rounds of interviews, a take-home modeling test and case study, and an investment committee presentation.

In all the interviews I had – at both local and international funds – the discussions outside of the case study always focused on my deal experience and the “pitch me an industry / investment / stock” question.

Q: So it sounds like you had a few options on the table, or at least you made it quite far into the process at many of these funds.

What type of firm did you end up joining?

A: I joined a pan-Asia fund with a diverse team – most people came from bulge bracket banks or the top consulting firms, but they were from all over the world (the US, Europe, Hong Kong, and Southeast Asia).

I felt the most comfortable with the team there and didn’t want to limit myself to only deals in mainland China, so it made the most sense.

Q: And what has the job been like so far? An improvement over your IB role, I’m hoping?

A: Yes, it’s definitely much better than the IB role. I’d say the overall breakout of my time is:

  • Modeling: 30%
  • Investment Committee Documentation and Company Introductory Materials (the PE equivalent of pitch books): 30%
  • On the Road for On-Site Due Diligence or Meetings: 40%

Q: I’m glad that the “presentations” component has fallen from 90% of your time to only 30%.

40% of your time spent on the road seems like a lot – is that just because due diligence is even more important in China?

A: Yes – it’s huge because very few small-to-midsize companies here are mature, and fraud is commonplace.

While “financial projections” are always suspect, of course, they’re even more questionable in China and you really need to vet the historical and forward numbers thoroughly.

As a result of that, nearly every PE transaction in China has some form of protection for the financial sponsor in the form of a valuation adjustment mechanism or “ratchet” agreement.

For example, the company might need to hit a certain financial milestone such as net profit of XX, or it will need to compensate the PE firm with more shares / a lower valuation multiple.

Then there are countless other problems you could encounter, from actual business issues to legal troubles and “accounting oddities.”

Q: Previous interviewees have mentioned that traditional LBOs in China are rare, and so most funds are still growth equity-oriented – is that still true?

A: Yes, pretty much. Traditionally that has meant minority investments into companies with significant historical and potential growth, with an IPO as the usual exit.

Usually, this IPO will be offshore in the US or Hong Kong if your fund is an international one denominated in USD, and onshore in China Class A shares if you’re at an RMB fund (though there is some overlap among these).

Q: You said “traditionally” – does that mean that the nature of private equity there is changing?

A: Yes, definitely. No country can grow its GDP at over 10% forever, and China’s slowing economic growth has been widely reported.

As a result of that slowing growth and a more saturated market (there are several thousand private equity funds in China alone now), it’s no longer possible to hire well-connected Partners, find fast-growing companies, acquire a minority stake, and then wait around and do nothing until the IPO.

Since competition has heightened, you’re seeing more small-cap buyouts, cross-border deals, and “operationally”-focused deals.

For example, some funds might focus on finding sizable companies where they can more directly influence daily operations by acquiring larger minority stakes.

(For more on this topic, please see our tutorial on the equity method of accounting).

That used to be rare because there were so many fast-growing companies that “operational improvements” were less relevant.

A few funds that do this include CITIC PE, Hony Capital, CDH Investments, and FountainVest.

And, of course, you also see the mega-funds looking for larger buyout opportunities in China (a few regional funds will do this as well).

So the industry is definitely changing, and over time I think it will start to resemble PE in developed markets more and more.

Q: Awesome. Thanks for your time!

A: My pleasure.

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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Read below or Add a comment

  1. Hi Brian,

    Do you think it would be easier to break in if I applied for a transfer to a chinese office from my bank?


  2. Hi Nicole. Really insightful post!

    Right now I’ve got a few internship offers for this summer. Could you help me choose which one should I take so that I have a better chance securing a FT position at BB IBD (HK or China) when applying this Autumn.

    The positions are all in China (I from China too). One is IBD from a state-owned security firm (CITIC, or BOC International)
    One is a small new VC firm but the founder is the former boss of a top state-owned VC in China.
    And another is a PE firm and according to some magazine it ranks top 50 among all Chinese PE.

    Thanks a lot.

    1. M&I - Nicole

      Congratulations on your roles! I’d probably go for the PE firm since it may give you more connections at a smaller firm, especially if it is amongst the top 50 PEs (assuming it is well known amongst banks). Otherwise, I’d go for the IB role though it may not necessarily be easy to transfer to BB unless you prove that you have solid presentation, communication and valuation skills (along with deal experience). I may forget about the VC role for now unless you want to break into VC.

      1. Thanks a lot Nicole!

        Actually, one of my concerns about the PE firms is that although it is reported to be top 50, it seems that not many people (from both internet and friends) know it.

        And I’m sorry that in the last post I haven’t made it clear but actually the VC firm has its PE and even M&A advisory business (one of it’s PE fund is raising money at the moment I assume it’s a good sign?), quite weird. So I may have the chance to be staffed to a PE project?
        Another reason that I think that VC is very appealing is that the president is so connected in the industry though I do doubt whether I even have the chance to talk to him.

        So I’m really struggling.. I personally lean towards the VC firm but still worry that I may miss something important that may make this offer much less helpful to break into BB than I thought.

        Thanks again Nicole!

        1. M&I - Nicole

          Yes you may have a chance. If that guy you talked about is very famous, it maybe worthwhile to join the VC firm to gain more responsibilities and connections you may otherwise not have at the IB. Yes access to senior members is important…

          I’d speak with the VC and IB firms again to get a sense of which one you fit in best, and which ones you think “need” you the most i.e. they have less members which means you have more responsibilities…

          1. Great! Many thanks Nicole.

          2. M&I - Nicole

            You’re welcome!

  3. Hi, it’s great to have this point of view from around the globe, as China especially is attractive!

    I actually have an internship planned for this summer in Shanghai in corporate finance, and would be grateful if someone who’s got the opportunity to pass by had any advice. As I still plan to come back to N.America,

    1) How to best use this experience when discussing background and work experience? Do advice in interview-related articles apply just the same or would you BS a more “fancy” way and add different value (say, due to location) ?
    2) Beside working, what would you do / have you done to best take advantage of the trip, provided I don’t speak mandarin, in a networking-learning-or-whatsoever perspective? I thought meeting western bankers would be great but is it even possible?

    Sorry, those are quite fuzzy questions, please don’t lose your mind if it’s too vague.
    Thanks again, really enjoy the readings,


    1. M&I - Nicole

      1) I’d say that you learned a lot in SH. You worked in SH because you wanted to gain overseas exposure. Having worked there, you realize that you want to work in NA and this is your long term goal
      2) Yes there are western bankers and I’d try to network with expats there given the language barrier. You may also want to interact with locals/Chinese from overseas who speak English too because they’re likely to know even more about the culture and you can potentially learn a lot from them.

  4. Thanks Brian and Nicole, especially for the super prompt replies.

    1. M&I - Nicole

      You’re welcome.

  5. That’s a crystal clear layout, thanks Nicole. I imagine Excel skills can be acquired via study/tutorials/practice. For Valuation & Financial Statement Analysis Skills; (with no finance/business background or education) I’m inclined to believe the ACCA is the way to go as those skills aren’t just picked up as a basic foundation is necessary. Is this assumption correct? Seeing as to me it would help with concepts like EBITDA, DCF and also modeling to a varying degree.

    1. You could, or you could take a modeling course or even read a modeling book on those topics – you don’t really need a certification to learn those skills. I’m not going to be self-promotional and link directly to our courses but they are an option for learning as well (see the side of the page), plus books (there have been several good ones on the topic over the past few years).

    2. M&I - Nicole

      I prefer CFA over ACCA in finance. This is more relevant for the buy-side though

  6. Thanks Brian. My lack of work experience is established and will change as the offers coming dripping in. I know somewhere buried in my residual memory lay the skills necessary to impress IB firms. Could you pls refresh me on them? Thanks.

    1. M&I - Nicole

      -Excel Skills – You mostly need to use Excel in the context of financial statement analysis and creating projections.
      -Financial Statement Analysis Skills – You should understand how they link together, how to find charges that must be removed, and how to use the statements to create a valuation for a company (e.g. by calculating metrics such as EBITDA).
      -Valuation Skills – You should know how to pick the appropriate set of companies for use in valuing a company or asset you’re analyzing, and how to apply the DCF analysis to this.You should know the basics of how to model M&A and LBO deals and how to present the analysis.
      -Other Skills: Writing, communication, and presentation skills are also very important. You must know how to present an argument about a company or proposal for what it should do clearly, in both PowerPoint and written form.
      Beyond that, administrative skills such as tracking potential buyers / investors, setting up meetings, and so on are all important because you do a lot of that at the entry-level.

  7. Hey Brian. Congrats on the interview, it was very informative. Forgive me for going off topic but…as regards qualifications to help with breaking into banking your site downplays the importance of the CFA except for those working in or planing to work in non US/UK/Euro markets (especially from a non-finance background). How do you view the ACCA for breaking into IB seeing as how (in my vastly limited experience) 50% of the knowledge required to succeed is accounting (the language of finance)?

    1. Knowledge of accounting always helps, but bankers in general just don’t care about certifications that much, at least in developed markets… if you have the time and need to do the ACCA for some other reason, sure, go ahead, but in general work experience and skills tend to trump certifications for IB roles.

  8. Hi Brain,
    I’m now totally convinced that it is impossible to break in china as a foreigner without near-native language skill as far as PE and IBD sector is concerned. What do you think about trading and HF’s etc. Are they open to foreigners?

    1. Well, there aren’t that many HFs in mainland China from what I have seen and heard… there are some smaller trading places where you can just know English and get by, but it all depends on what they’re trading as well (if they trade foreign equities or other instruments, it’s more do-able).

      In general, though, China is just not the place to be unless you’re a native speaker or very close. And if you’re not, you’ll have to consider other roles like fundraising where you’re working more with international investors.

  9. Hey Brian,

    Great article. I was wondering if you are planning to cover Indian PE/VC industry as well sometime soon.

    1. Thanks! Yes, there is an upcoming article on PE in India very soon.

  10. Brian,

    Great article – just wondering: did the interviewee offer any insight on salaries for junior bankers/PE guys in mainland China/HK? Heard the local Chinese banks (CITIC,CICC) pay at a huge discount compare with the BBs…

    1. Thanks! He didn’t give specific numbers, but yes, I think you’re right – there is a big discount at the local banks, which is yet another reason to think twice about working at those places.

  11. Hey Brian great article, very informative.
    Out of interest, what is the state of Chinese Investment banks i.e. are they healthier than american and European banks? I
    lets say you work for a Chinese Investment bank in uk or usa, Are the salaries different compared to native american BB? Do you get payed more or less?

    1. I wouldn’t say “healthier,” they just have different sorts of problems (see: shadow lending, even unhealthier government intervention, etc.).

      You generally get paid less at a local Chinese bank in mainland China… cost of living also used to be a lot lower, in, say, 2000-2005 but that has changed a lot in the past 15 years and cost of living has skyrocketed.

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