How private equity firms are poaching from banks in China

Private equity firms are poaching young analysts from investment banks the world over, but if you want a job in China, the key is experience. Private equity is not a training school for investment bankers wanting out of the sell-side, but it is increasingly attractive for bankers in Asia.

“People are moving out of foreign banks to local private equity firms, " says one Beijing-based headhunter who focuses on PE and Venture Capital (VC) sector. "Most of these movers have five to eight years’ experience, with an average age between 30 to 33."

China's private equity (PE) sector is booming. The total amount of capital spent on new investments in 2014 amounted to US$73 billion, up 101% year-on-year, according to a recent report from PwC. This is a record high since the financial crisis.

The headhunter says that she has placed five people from banks into private equity firms over the past six months. “This is a good number,” she says.

Lesley Li, founder of Shanghai-based Matrix Search, an executive search firm specialized in PE and VC, adds: "Almost 70% movers have investment banking background. The rest could be from management consulting or Big Four, whose experience is also welcome by PEs."

Moving from an international investment bank in China to a private equity firm could be a culture shock. This is further complicated by the fact that most PE firms are based in Beijing rather than Shanghai to be closer to China;s State Owned Enterprises (SOEs). One of the reasons for the PE boom was the reformation of Chinese SOEs, according to Jianbin Gao, PwC China's private equity group leader for Central China.

SOEs are generally gigantic in size and complicated in ownership structure. Any reforms PE wish to take part in would involve government bodies and regulators. So by basing themselves in Beijing, PEs will therefore find it easier to do business.

Apart from SOEs, China's new industries, particularly those driven by technological innovation, such as the TMT (technology, media and telecommunications) sector, are mostly based in Beijing because of the clustering effects of universities and R&D capabilities. PEs have been very active in these sectors.

Anyone working for a PE fund in China needs a curious mix of local knowledge and a global outlook. PE firms want the best of both worlds – international education and experience combined with an ability to deal with complex domestic situations. Not surprisingly, barriers to entry are high.

“The normal hit rate for one replacement is 1 out of 50 applicants,” says Li.

There’s one reason not to join a PE fund in China, however – pay. Salaries within PE firms are often on a par, if not smaller than investment banks and bonuses also do not compare favourably, suggest headhunters without providing figures.

Li explains that an associate-level banker at a typical Chinese PE normally only gets 6-12 months' base salary as bonus. Only those who are VP or above are entitled to earn carried interest, but that is highly dependent on the overall business performance. "I have seen associate earning only RMB300k a year at local PEs, " says Li.