Why You Can’t Break Into Private Equity as a Foreigner in China
Despite my repeated warnings that emerging markets don’t care about you – only people who know the language, have connections, and are qualified to work there – this question won’t go away:
“I really want to work in China! How can I break into finance there? I’ve studied Mandarin for 5 years and I can read faster than Chinese people now! Show me how to get into PE!”
I’ve gotten tired of answering that one, so today you’ll hear from someone much better qualified to answer it than me: a reader who works in private equity in China.
He’ll tell you all about:
- How to network your way into the industry and how it’s different from PE in the US/Europe.
- Why foreigners are getting pushed out of the industry and why you’d have to be “crazy” to go work there these days.
- What you should do instead if you want to do business in China.
- How the pay and work culture differ from other parts of the world.
How It All Began
Q: Can you walk us through your background and how you broke into private equity in China?
A: Sure. I was a newly minted MBA, and back in 2005-2006, China’s PE market was much less developed.
I went to AVCJ’s annual conference in Hong Kong, networked like mad there, and got an internship helping a small fund with a capital raise. That fund later went on to become the #1 PE fund in China, and I rode their coattails to success.
I still believe that conference, among others, is the best way to break in but today it would be almost impossible to follow the same path if you’re a foreigner.
There are way too many local Chinese who work or study abroad and then return home, and too many bankers eager to move into PE.
And even though I’ve been here for years, even I have been getting pushed out of the industry – just like all other foreigners.
To be frank, I wish I had heeded the warnings of others and had spent the time breaking in to PE in the US/EU instead. Now, nearly six years later, I don’t think I’ve had the experience and training I would have had in the more developed markets.
So, if you’re a foreigner, be kind to yourself – don’t try to get into PE in China. If you absolutely must have your China experience, feel free to come over, but focus more on “bridging” roles, like investment banking, sales & trading, and so on.
PE is a local market, and in China, it is hyper-local. Five years of Mandarin won’t cut it; heck, near-native-fluent Chinese won’t cut it.
Even foreign-born Chinese, Taiwanese, Singaporeans, and people from Hong Kong have a tough time finding roles here because they’re also too foreign. You were either born and raised here, or you weren’t – and if you weren’t, you’ll always be an outsider no matter how much baijiu you can drink.
Now, if you are from mainland China, then there’s still a lot of opportunity.
I would recommend coming here in that case, because there’s more going on and if you can hack the local game you can get some great deal exposure and you might even make a fortune in the process.
Q: OK, let me stop you right there because I want to return to that topic of how you actually break in at the end.
So most foreigners would face a near-impossible battle to get in, but what is the private equity industry in China like?
What types of deals and companies do you focus on, and is it mostly local firms or international ones that make investments?
A: The industries themselves are diversified – you see manufacturing, state-owned-enterprise commercialization, consumer/retail, clean-tech, software and IT, energy, construction, infrastructure, healthcare and so on.
Many firms are still generalists with certain sectors of expertise / focus, but a few sector funds have sprung up as the market has matured – there are a few healthcare funds, a few clean-tech funds, a few technology funds, and a few consumer / retail funds.
Local funds and international funds are completely, 100% different animals.
The local funds staff huge teams – sometimes up to 100 investment professionals in a firm – and the pay therefore is lower, there’s often little formal training. You may struggle to get noticed and find a mentor, and it’s tough to navigate the political environment.
But the local firms do most of the deals, whereas international firms are having trouble closing anything.
Some of the regional funds (such as Barings, HSBCPE, Actis, etc.) are able to get some good deals done, but PE firms such as Carlyle, TPG, and so on, don’t see much action here.
- Local PE Firm: More deal exposure, but no structured training, and lower compensation.
- International PE Firm: Brand, better pay and training, but lower chance of closing deals – which will hurt your CV.
Friends here have been frustrated at both types of firms – those at local firms feel underpaid and under-appreciated, and those at international firms complain about never closing deals.
Q: Right, so you’re stuck between a rock and a hard place there.
What’s your average day like in terms of responsibilities and work? Is it mostly due diligence and modeling, or do you get more “random” tasks?
A: So far I’ve focused more on fundraising and investor relations than anything else. When I first joined this firm I started out as a deal guy, but once there were more skilled locals in the market, my role was shifted to fundraising.
I actually don’t mind that since I enjoy fundraising more than deals – analysis and due diligence can get repetitive, and you see companies at such a high-level that everything starts to look the same after awhile.
The good part about fundraising is that I get a lot more exposure to Limited Partners than if I were in the US or EU – there’s a lot of potential there for future networking since they all know who I am now.
Sometimes it does get repetitive telling the same story to potential investors, but that’s true of any sales job or even if you’re the CEO of a company.
Q: So they’re pretty much limiting the investment/deal work to locals?
A: Yes. Again, I would actively discourage foreigners from trying, unless you really have native-level Mandarin (beyond just “fluency”).
The nature of the job for locals or returnees, however, is compelling.
The deal professionals get to explore very interesting companies across a whole spectrum of industries, and the work includes due diligence and business analysis, which involves researching an industry by speaking with experts, interviewing the company’s management, and speaking with competitors.
You do some financial modeling, but it’s not really meaningful – at least not in the traditional sense.
Most businesses are growing so quickly that standard models are meaningless. With 50-100% revenue growth rates, analyses like the DCF break down and even valuation multiples don’t tell you much if the company is growing at that rate.
Investors spend their time on industry and management team analysis, and most of their time is spent deciding which industry is best to invest in, whether the target company can become a market leader, and whether or not they can trust the management team.
Trust is still a major issue in China, and you can’t depend on legal documents to be truly binding – they are a framework, but interpretation and enforceability are questionable.
So half of your due diligence time might be spent understanding the psychology of the management team – particularly the founder. If you’re depending on your closing documents to protect you, then you’re already in trouble before the ink is dry.
What about the pay and work culture there? I’m assuming that pay is lower on an absolute basis, but higher relative to the cost of living?
A: Pay varies greatly between local and international firms. Foreign firms here pay about average global pay for PE – so between $150K and $250K USD all-in for associates.
Local PE firms pay less – maybe around $90K USD for new associates.
In 1990 or 2000 those figures might have been a ton of money in China, but over the past 10 years the cost of living here has skyrocketed and places like Beijing and Shanghai aren’t as cheap as they used to be.
They are still less expensive than New York, and so you won’t starve on $90k per year. But it just isn’t the bargain it used to be. The tax rate is also higher than in Hong Kong – up to 30-40% vs. about 15% in HK – so that also eats up a good chunk of your pay.
Bottom-line: you will make less in PE here compared to the US / Europe, and you’ll make significantly less working at a local firm. You have to decide if it’s worth it, and that trade-off makes little sense unless you’re truly committed to staying in this market for the long-term.
Q: What about carry? Since the market is less developed do they give that to associates or anyone less senior than MDs?
A: Carry is almost always restricted to the senior MDs here.
There is a very patriarchal/monarchical feeling at many of the firms – you’re either a rain-making MD who brings in deals, or you’re commoditized execution.
This may sound just like the US and EU, and to a certain extent it is – just a more extreme version of the usual investment banking hierarchy.
It’s not unheard of for just a few guys at the top to get all the carry and for everyone else to get nothing. That creates a situation where the guys at the top are making literally millions (or billions) and everyone else below them is making base pay, keeping their fingers crossed for bonuses, and hoping to climb up the pyramid for a shot at some equity… hopefully… someday… maybe.
That said, those who did manage to get a slice of the carry are probably looking at returns that could easily fund a comfortable retirement in just a few years’ time. Many of the funds have returned 3-5x, and have had IRRs of over 100%, so the carry really is making some people incredibly wealthy.
Again though, carry is not awarded to the non-MD investment professionals. Yes, it can be similarly lopsided in the US/Europe, but at least as you move up you’ll earn progressively closer to what MDs and Partners make, and eventually you will get carry even if you’re not the top person at the firm. In China, carry is just shared among a small number of hands.
Foreigners, Abandon All Hope?
Q: Let’s go back to why it’s so tough for foreigners in the China PE market. Do you have any foreign co-workers, or are they all locals from mainland China who worked or studied abroad and returned home?
A: There are fewer than 10-15 foreigners working full-time in the entire PE industry in China, and we all know each other. Most of us have been pushed out from deal work and, like me, focus more on fundraising and investor relations.
Q: OK, but I’m sure there must be a few foreigners there in high-up positions? One of our other interviewees mentioned that the MD at her firm was foreign.
A: There are some exceptions. For example, a few foreigners got in 5-10 years ago as founding MDs of their firms, so they have unique positions.
But the rest of us – other investment professionals – have been mostly pushed out. There was one other guy who was relocated to Asia by a major international PE shop, but he was then axed to free up the position so that a local could be brought in instead. And he was a senior officer with 10 years+ of PE experience and fluent Mandarin.
Q: OK, point taken – but wouldn’t knowing the language give you a big advantage and let you compete more effectively with people from mainland China?
Becoming 100% fluent in written and spoken Mandarin has about a 1% chance of helping you break into private equity here.
These “exceptions” I’ve referenced were already 100% fluent in the language and could read and write extremely well, and they were still pushed out.
Most of the foreigners here are now in fundraising roles, even if they worked at bulge bracket investment banks before and earned MBAs from top schools.
No one is interested in foreign professionals anymore, and it’s not even about the language – it’s that the work culture and deal environment here are so local.
It’s not like some countries (the US and UK) where anyone who can learn the language can advance to the top. They heavily favor locals and will tolerate foreigners, but will never fully accept them.
That’s why I’m making such a strong recommendation against coming here to work in PE – it’s just not realistic with the current state of the market.
You could spend years studying and learning the language, then more years struggling to break in, only to find yourself sidelined and underutilized because they don’t care how good you are or how much experience you have, only that you’re not a mainland Chinese who can bring in deals and charm the local entrepreneur.
Q: Not exactly the rosiest picture there…
Let’s say that someone is really interested in doing business in China – would you tell them to just give up altogether, or just to forget about PE?
A: If you’re from here originally, have family/connections, and want to go back home, China is great. There are opportunities in PE, banking, consulting, and entrepreneurship – you name it. The rapid growth engenders opportunity.
But if you’re a foreigner, and you absolutely, positively can’t get China out of your mind, then you can take your best shot.
However, if you want to make the leap I would steer clear of PE and focus on other areas like investment banking, investor relations, consulting, or being the CFO of a company.
In those areas, international experience/exposure is more valued and you don’t actually have to be Chinese to fulfill the role.
Oh, yes, and make sure you get to 100% fluency in Chinese – reading, writing, speaking, and listening; obviously reading and writing are the hardest parts and will consume 95% of your time.
Q: Out of curiosity, why do you think there is such a strong bias against foreigners in PE?
A: Similar to venture capital in the US, Europe, and other markets, private equity is a hyper-local business here. You need to be here on the ground communicating directly with management teams to have any chance of winning good deals.
They favor locals because they know that they have connections and are better able to reach local businesses; plus, they understand the culture implicitly and won’t get “rejected” by entrepreneurs nearly as much as foreigners.
Also, both the local and international firms must project an image of being local from a marketing standpoint – whether they are showing their local chops to entrepreneurs, the government, and especially their own LP investors.
Q: So we’ve established why you don’t want to work in PE as a foreigner in China.
But let’s say that someone reading this is from mainland China, has studied or worked abroad, and is returning home – how would he or she go about breaking into private equity?
A: It’s all about networking and conferences here. You need to go to the AVCJ conference in Hong Kong and the SuperReturn China conference, and then do a lot of networking with people you meet there. Bring 300 or so business cards, meet everyone, and try to set up side-line meetings in advance.
You should also connect with friends who work at the firm you’re interested in and who can help you get in touch with the senior staff (MDs or CEOs). Business school classmates and alumni can also help.
Some of the larger domestic firms have also been going to business schools lately to recruit there, so that’s another option as well.
If you’re returning home and want to be here long-term it’s still a great time to get into the industry, since you can join a fast-growing firm and rise to leadership. The competition is tough, but it’s possible to break in and advance, and the rewards are certainly there.
It definitely gets more competitive each year, but since most PE firms are looking for people with very specific profiles you have a much better shot of getting into PE here than you would by competing with the broader market in the US or Europe.
Q: Are there any differences they should be aware of with recruiting, CVs/resumes, and interviews?
A: The main difference is that you don’t need investment banking experience to get into private equity here.
Technically this is not true in developed countries, either, but let’s be honest: the majority of people who break into PE have done banking or something similar like management consulting or Big 4 Transaction Advisory Services.
But in China, most PE professionals are not from an investment banking background, so they don’t expect you to have that experience either.
It’s really about networking, meeting the right people at conferences, following up with them and being persistent until they give you interviews.
CVs/resumes are not much different, and in interviews they’ll ask similar questions though there’s obviously less focus on modeling and deal experience; it’s more about “fit” and your general knowledge of how to analyze businesses.
Q: Great, thanks for your time. And I hope your situation improves and that you can find a better role in the future.
A: No problem – enjoyed sharing my story even if it sounded a bit pessimistic at times. And yes, I’m working on other roles right now….
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