Talent Shortfall Amid Private Equity Boom
A S I A PA C I F I C T H O U G H T L E A D E R S H I P S E R I E S
After a long period of low activity, Asia’s private equity market has heated up in the last 18 months owing to some high profile profitable exits. In Japan, Ripplewood has made an extraordinary return with its investment in Shinsei Bank, so has Cerebus with Aozora Bank. In Korea, both Newbridge and Carlyle have profitably exited from their respective investments in Korea First Bank and Koram Bank. Even China has seen some successful exits: Internet companies such as Shanda and Ctrip, invested respectively by Softbank Asia Infrastructure Fund and Carlyle Asia Venture, and dairy company Mengniu, led by Morgan Stanley Private Equity Asia and CDH Investments, have all had successful IPOs. Given this buoyant environment, many funds are raising money, and major players from the west like KKR, Bain Capital, APAX, and Oaktree Capital Management are studying the Asian Market, with some starting to build teams. This is ratcheting up demand for private equity executives throughout the region. The private equity industry has a relatively short history in Asia. In the early nineties, during the first wave of China funds, funds concentrated on hiring professionals with “guangxi” or relationships at high levels of government to secure a flow of “good” deals. This approach has proved disastrous, particularly in China when officials move around: an official who is an asset one year could well be a liability the next. The first wave of China private equity funds have, at best, had returns that are in the single or lower double digits – not nearly enough to justify the risks taken. Being successful in private equity is about getting the basics right: having access to investment opportunities locally, having commercial judgment about investments, being able to show how as an investor can add value, being able to price and structure a deal properly, and being able to help a company grow. As Steve Schwarzman, the founder of Blackstone said recently in a meeting: “If you can catch the trend, invest when it is cheap and have a great management team – then you will have a great return.”
By
Alice Au
Managing Partner, Hong Kong
CANDIDATE SHORTAGE
In Asia, private equity firms need people who are chameleons. They need professionals who are as business and deal savvy as any of their western counterparts, and yet can behave and act as indigenously as any local in their home country, with a vast network of contacts at the highest level of government and in the local corporate world. A typical profile is a Japanese, Korean, Chinese, or Indian who is bilingual, and who has an MBA from a top US or UK/European university. He will have worked in a major international investment banking firm or a top private equity firm and have experience investing in his home country. But given the relatively short history of the industry in Asia, there are very few players with meaningful track records. Managing Directors at major funds are usually relatively young, aged from the mid thirties to the mid forties. Many market entrants lament at the level of compensation versus the level of candidates’ experience, both in business and in investing. Poaching staff from existing private equity players is difficult because of the ‘carry’ system, under which private equity executives ultimately earn their wealth. A carry is defined as the share of the profits an executive will earn if a portfolio he works on is profitable. The economics can be huge, from US$1 million for a relatively junior staff member, to tens of millions for some Managing Directors. The recent performance of some Asian deals has made the carry a serious wealth generation mechanism – but also a golden handcuff. Unless a fund replaces a candidate’s carry, or gives him substantially more carry, the candidate is unlikely to move. Although carry makes it particularly difficult to hire the top executive of a fund, some managing partners at regional funds might be interested in being associated with a global platform. Some of the major funds now looking at the market have the
ability to raise considerably more funds than a regional player, and the same percentage of a larger fund will mean better potential economics for the individual. A bigger platform may also mean better access to information in an increasingly global economy. The next tier MDs, immediately below the Managing Partner, are generally more vulnerable. Moving to a newly established fund might mean better economics, a bigger platform with more opportunity to direct the investment strategy and visibility. A good example of this is Wayne Tsou, who in 2004 left the number 2 post in Warburg Pincus for the head post of Carlyle Asia Venture. Many investment bankers are keen to enter private equity. Just in the last 6 months, Rajiv Ghatalia, co-head of investment banking at Goldman Sachs in Asia, has joined Warburg Pincus in Hong Kong, and Rajeev Gupta, head of investment banking of Merrill Lynch, India has moved to Carlyle to lead the buyout group’s charge into India. Nonetheless, few bankers have successfully made the switch into private equity, particularly at a senior level. Those who have enjoyed success have an extraordinarily commercial mind, great business judgment, and longstanding relationships with many business leaders in the region.
saw that he had good deal experience, and since he was originally from China they reckoned he could assimilate back into China and build his network quickly. Finally, candidates can also be found in corporations, particularly in Japan and Korea. The big corporations in these countries have people who do a great deal of M&A work and they are definitely worth considering for private equity. Given the limited pool of truly outstanding candidates who have a track record in Asia, a good solution might be to build a small team of professionals with complementary skills. In building teams, a big mistake some firms have made is going for big names, and ignoring team dynamics. Teams with executives who work together and trust each other’s judgment will have a better chance of long term success. The last thing a firm wants on a team is two big deal makers who won’t talk to each other. The private equity business in Asia is still relatively untapped. There is plenty of room for creative firms to create new models. TPG/Newbridge, for example, recently teamed up with Lenevo to buy IBM’s PC business and create a global branded PC business. Some of these models may not look like models these firms are used to at home. Asian CEOs are also paying more attention to the sector, with more and more considering the possibility of leaving a multinational to take a private equity funded business to the next stage. Those firms which can put together creative and disciplined investment teams have a bright future ahead.
BE DECISIVE
Another possible place to find talent is in the field of management consulting, particularly at firms like Bain with its strong private equity practice and McKinsey with its strong corporate finance practice. For example, Jim Hildebrandt, who has been with Bain consulting in Asia for over 20 years, has just moved over to head up Bain Capital’s charge into Asia. Consultants typically bring very different skill sets to a team. They tend to be very good at analysis and have a strong understanding of processes and systems. It is important, however, to identify a consultant who is not only good at analysis, but also who can make good decisions based on imperfect information. In the fast paced world of private equity, sometimes there is insufficient time or information to do all the analysis one would normally wish for. It is also useful to look for candidates overseas (particularly among private equity firms and investment banks) who have been well trained and who originally came from Asia. Unless the person is established and up to date with his network in the region, he is best placed as a team member rather than as the top person at a fund. Recently Barings hired a vice president for China who came from a Doughty Hanson & Co, a big UK buyout firm. Barings
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Alice Au is Managing Partner for Heidrick & Struggles in Hong Kong. Alice assists clients on executive search assignments for board directors, CEOs, Presidents and other senior-level executives for start-up ventures, mid-cap companies and multinational organisations. Her clients are primarily in the technology and financial services industries and are a mixture of locally-grown and foreign-owned enterprises. She can be reached at aau@heidrick.com or (852) 2103 9386.
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