Tang was born in Shanghai in 1968 during the decade-long Cultural Revolution. His parents had been engineers before the revolution started in 1966 and effectively shut down the mainland's industry. His first job after graduating from university in Shanghai was helping a Shenzhen textile factory set up a Hong Kong joint venture. Thanks to a loan from a wealthy Taiwanese uncle, Tang was able to go to Columbia Business School in New York in 1992. He joined Goldman Sachs in early 1994, among the first batch of Chinese recruits the US investment bank hired to begin capitalising on China's growth.

How do you choose Chinese companies to invest in?

We do a lot of reference checks. It's important to find out how exactly the entrepreneur first made his money. Where did that initial capital come from? And does he have a good circle of people around him? What is the opinion of local government officials who know him?

What are the red flags that potential investors in Chinese companies should look out for?

You have to do the financial due diligence. If a company's operating margin is 30 per cent and the competitors are all making 10 per cent, obviously something is wrong. But financial due diligence is not sufficient. You have to really get to know the person who runs the company. Again, it's really important to network. To find a circle of people around the entrepreneur who trust him. If you cannot find that circle, then you worry.

Do you think non-Chinese investors in the mainland could do all that necessary networking so well?

So far, all our team members are mainland Chinese. They come from a range of industries, for example, finance, food and beverage or pharmaceuticals. It's a diverse group, but they are all mainland Chinese. We like people to be very familiar with the culture, to build very strong relationships with the companies we invest in.

So would you hire a foreign financial expert for your fund?

If they could bring unique skill-sets. But they would need to speak the language. That is a must. The culture can be learned, but if someone doesn't speak the language that will make investing in China incredibly difficult for them.

What is the most common problem you have had to solve in your portfolio?

Privately owned enterprises [those that are not owned by the government] usually underspend on everything. US buyout funds hire people to go in and cut costs at their portfolio companies.

In China, we go in and tell them: you underspend on everything. You are underspending on research and development, IT systems and people. We tell them: you pay cheap, you don't get good people. You don't share your shares, you don't get driven, ambitious people [who are attracted by stock options]. There is a lot of underspending. So usually we try to tell them, now you have the capital, think longer term, build infrastructure, pay people and get the best talents.

Are there any other common issues?

Financial control is usually weak. Often they don't have a modern system for budgeting. Every year they look at how much money they make and how much cash they have and figure out what to do next year. So we develop a proper, longer-term budgeting system by looking at the key drivers of the business.

There have been many recent, high-profile cases of fraud and accounting scandals at privately owned mainland companies. Do you think that sector is riddled with fraud?

Oh, no. There will always be some bad apples but mostly the entrepreneurs are driven, they really want to make money and see their businesses grow.

Some cut corners, and this creates problems. But the privately owned economy would not have grown to such a significant percentage of [gross domestic product] from almost nothing in the early 1990s if most entrepreneurs had not been truly successful.

The US Securities and Exchange Commission has set up a special taskforce to probe fraud at US-listed Chinese companies. Is that harming the reputation of entrepreneurial Chinese companies?

It is a distinct problem. You get three kinds of companies that [launch initial public offerings in the United States]. The first are the internet companies, such as Baidu, who feel the US market better understands their business. Then you get the companies that go to the US to do a reverse merger [buying the listed shell of a dormant public company then injecting assets into it and avoiding the scrutiny of a full IPO] because they cannot raise money any other way. The third type is those, well, potential crooks, the ones who do not have a business. They combine with bad brokers and that is a deadly combination.

What can Chinese firms teach Western businesses about management?

Private companies are very good at inspiring their staff. At many companies I visit, the reception usually has a stack of company magazines. In these, you'll see the chairman has written something, and that regular employees have written a piece about something they did well recently. Chinese companies are very good at building a culture. Some may see it as brainwashing, but Chinese managers are also very paternal. It's usual for the chairman to send money to workers' relatives if they are sick, or to invite relatives to the company for parties or family days.

How has the Cultural Revolution affected the way older Chinese managers run their businesses?

It had a profound impact on everybody. I think not least in the rush business people are in these days to grow their companies. Everyone thinks there was such a missing period [of time]. I think everyone is in a rush in China because they feel that right now is the time to go forward.

2007

The year Frank Tang founded FountainVest Partners with a group of former colleagues at Singapore's Temasek Holdings