• Thu
  • Aug 28, 2014
  • Updated: 7:25pm
Mr. Shangkong
PUBLISHED : Monday, 29 July, 2013, 12:00am
UPDATED : Monday, 29 July, 2013, 7:45am

Connections trump everything in world of private equity in China

Job ad reveals how some in industry rely on offspring of political elite to find deals amid grumbling about fairness from less-connected rivals

Private equity doesn't have a long history in China, but it has grabbed attention over the past few years, partly because of the individuals standing behind the businesses. In other words, people are key in China. I mean, well, those special people.

How special is special? What kind of people are private equity funds looking for in China? Here is a job e-mail I received from a headhunter last week who is helping an unidentified "well established private equity firm with both US-dollar and yuan-denominated investment platforms" to hire a vice-president-level investment professional.

The e-mail was very straightforward about what kind of person the equity firm was looking for. First, it arrogantly stated that the employer didn't have a specific job description for the role. Secondly, it said, however, the fund did have some "key requirements" for any candidates to be considered. The first, a little to my surprise, was that ideally the candidate should be from the so-called "second powerful generation, who may have good resources".

For readers who may not be familiar with that unique Chinese-English term "second powerful generation", let me explain. It basically means someone who comes from a family where his or her father or mother is a senior government official or a rich business person. That's where power comes from. Politics is power. Business is power too.

In China, a senior official can help make deals happen for a private equity fund, and, sometimes, the fund can do great business and earn handsome returns just on account of those connections.

A business person may desire to sell his or her business at a discount to the fund, or even contribute some money to it to become one of its investors.

Some industry players do not like such opaque practices, which are often on the brink of breaching laws. Most accept it as reality with many even choosing to join the game.

When I saw that job e-mail, I couldn't help but think to myself: "Are today's private equity businesses in China so openly arrogant that every fund is just trying to show off how many 'second powerful generation' it employs?"

In fact, some private equity firms have already gone beyond the "second powerful generation". They want to hire the "third powerful generation" - that is, the grandsons and granddaughters of those very important persons. This trend has accelerated following the once-a-decade leadership transition that happened in Beijing earlier this year, as some "old generation" leaders retired.

Privately, some industry players have complained about the increasingly unfair deal-making environment in China and how difficult it is to close a deal. They say that an important person often intervenes at the last moment and steals the deal away from them. The job e-mail listed some other requirements from candidates: being "perfect in execution"; "obedient to the boss"; and, this is key, being humble about money. If that sounds funny, I guess the employer doesn't really understand China yet.

How could they ask a member of the "second powerful generation" to be humble about money?

 

George Chen is the Post's financial services editor. Mr. Shangkong appears every Monday in the print version of the SCMP. Like it? Visit facebook.com/mrshangkong

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