China private equity

Private equity: The search for China's Mitt Romney

Beryl Chu, executive vice-president at DHR International, discusses the challenges of staffing China's private equity boom.

Executive hiring in China’s private equity (PE) sector has grown as PE firms in China have emerged strongly during the past three years.

We speak to Beryl Chu, executive vice-president at DHR International, a Chicago-headquartered executive search firm, about the trends in C-level jobs in China’s PE industry. Chu spent most of her career in executive search in various industries, including private equity, and has been in Shanghai since 2003.

What specific type of executive candidates are PE firms in China looking for?
In 2005, investment banker candidates from overseas were much-needed when there were few candidates in China with overseas IPO experience and who were able to deal with investor relationships overseas. CFO [chief financial officer] candidates from Morgan Stanley, J.P. Morgan and Goldman Sachs were in great demand. Typically candidates were hired six to 12 months before IPO to prepare roadshows and all documents.

When the solar industry took off in China, COO [chief operating officer] candidates were even searched from the semiconductor industry as there had been nearly no candidates in China with solar industry experience and Chinese language skills.

Today, local industry experience weights the most. When clients look at investment bankers, deal-sourcing abilities and local connections count the most. Improving operations and driving growth are more important than financial engineering.

How does executive pay in China’s PE industry compare to the US and Europe?
The US and Europe are more regulated markets, whereas China is a developing and growing market with almost no fixed formula for how to compensate executives in hot demand. It depends on the size of the fund and how many partners share in the carried interest. For example, a big fund like Blackstone may have 1,000 junior and senior partners sharing the carried interest.

In venture-backed companies, the lucrative part is on pre-IPO stocks. According to a survey of companies listed in Hong Kong, pre-IPO stocks for CEOs [chief executive officers] are around 1% to 2%, while some even go up to 5%.

The cash part is on average around $200,000 to $300,000 in China. Some candidates may even earn a base pay of $1 million but with less equity, due to the complications PRC citizens face in holding overseas IPO stocks.

But in the end, everybody looks at the upside: how long will the company exist and how much will the C-level candidate learn from the opportunity? This is more critical than just looking at annual cash compensation.

Do you expect strong growth in demand for senior executives in 2012?
CEOs, COOs and CFOs are in large demand. Even though the supply side has increased as middle management in China has matured, demand is still stronger since deal flow increased in the fourth quarter. We are looking for rare talents every day.

In the US, private equity firms face an evolution. Huge returns are harder to find as the buyout business becomes less profitable and in some way less barbarous. In 2011, private equity firms paid acquisition prices averaging nearly nine times Ebitda. In China, PE prices are usually very high, at between 10 to 20 times. Some industries, like energy and finance, went down to eight times PE (price-earnings) ratios on the A-share market at the end of 2011, but FMCG [fast-moving consumer goods] and medial/pharmaceutical companies still maintain PE ratios of 20 times.

What are the most important attributes you consider in a candidate?
Communication and culture fit are two major elements when we look at executives either for venture-backed companies or local companies/multinationals. Even with candidates who have a very good track record and background, we ultimately look at their suitability in terms of soft skills and how well he or she fits into the new company.

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