The private equity (PE) industry in Asia Pacific is recovering from a multi-year slump, with China
leading the resurgence. According to a recent PwC report, China saw a 170 percent increase of
PE/venture capital deal values in 2015 — compared to only 18 percent globally — reaching
U.S. $197 billion and seizing 48 percent of global market share. In this next phase, general partners
will be focused on healthier portfolios, paying particular attention to ownership structure and
governance. They are also beginning to pursue creative ways to improve portfolio companies’
performance while building path-to-control provisions into acquisition agreements to manage risk.
This more activist approach and emphasis on sustainable performance will likely continue in the
face of China’s slower GDP growth and ongoing evolution from an export-based economy to a
consumer-led one. In order for private equity to truly add value and drive performance in today’s
environment, strong leaders are needed for both portfolio companies and PE operations teams.
However, firms are facing a shortage of senior leadership talent on both sides. We will explore this
evolving landscape and how private equity firms are overcoming the talent challenge.
Adding value in China’s current landscape
Most of the deal themes in China are growth-related, with the
technology and consumer sectors accounting for more than half of
the deal volume. In addition, the country has seen a jump in
outbound deals and increased activity thanks to the opening of
state-owned enterprises to private investors, according to PwC.
Many are recognizing that private equity can add value to the
portfolio company by refining the portfolio company’s strategy
and, in a total buyout, refresh the leadership team to better align
with the company’s new direction. Even in scenarios where the PE
firm does not take a full ownership stake, it can help identify areas
for growth, fill clear skill gaps or help the company build
relationships it otherwise may not have access to, such as with
multinational corporations.
The most successful deals are those in which the operations team
is involved during the due diligence phase so that change
management efforts can begin immediately. “Early focus is key,”
said one managing director and head of China for a global PE firm,
“we call it ‘fast start,’ and it’s the most important lever. Our
operations team must earn credibility upfront. When there is a
change needed on the management team, if you have built a good
relationship with the CEO, then it’s not hard to have a respectful
discussion with his or her core team members about a change.” In
deals where the firm is the minority stakeholder, it needs to align
with key stakeholders early to pave the way for changes later. Trust
also has to be earned with investors, and he says that a key part of
earning that trust is providing a realistic picture of what the
operations team can — and cannot — help achieve: “We are not a
last-minute savior and cannot perform a miracle or conduct a
complete turnaround.”
Overcoming leadership and talent barriers
How PE and portfolio companies will fare going forward largely
hinges upon the leadership of each. A significant obstacle on
both sides of the equation is a shortage of experienced senior
leadership talent.
“China MNC heads are not true CEOs,” said a managing director
at a U.S. PE firm and former technology company CEO, “they often
get things done by influencing the matrix and engaging the
network, but don’t actually make any decisions or take ownership
themselves.” He observed that Chinese companies also tend to be
younger than MNCs, and the expertise level of their executives has
been outpaced by the rapid expansion of the country’s economy.
While these leaders recognize problems exist with their own
leadership or on their teams, they are unsure of how to address
them or develop talent, he added. Some organizations have the
opposite problem: Leadership verges on autocratic and, as a
result, prevents private equity from fully contributing.
While there may be an inclination to change existing leadership, as
minority stakeholders, PE firms have less influence, complicated
by the significant shortage of experienced senior executives in
China. Thus, according to a partner and managing director at an
Asia Pacific PE firm, it’s important for PE firms to invest in people
with whom they can successfully work by assessing the key players
during due diligence and after the close. Despite a resemblance to
Western models, Chinese entrepreneur- and founder-led
organizations typically reflect the unique styles of their leaders in
ways that are not easy to discern without full immersion, often
prompting “tissue rejection” of newly installed executives.
Many PE leaders advise against extensive team overhauls, as the
level of disruption they create can often outweigh the benefits.
Similarly, it is unlikely the operating team can replace the CEO in
these scenarios, as his or her influence shapes the organization.
One potential solution is bringing in a chief operating officer with
strong execution skills who can support the CEO, but also serve as
a potential successor down the line. Private equity firms can shape
talent decisions after they have earned credibility, but they will
need to do so in a way that allows outgoing leaders save face,
e.g., positioning a shift into a less integral role as a promotion.
The critical skills for today’s environment
For portfolio companies
Many PE players agree that the current economy demands a
different type of portfolio company leadership. According to one
managing director of Asia for a global alternative investment firm,
“The economy is tough at the moment. You need a team who can
deal with these changes and be open-minded — these attributes
used to have an amplifying effect, but they are a necessity now.” In
addition to adaptability and ability to deal with ambiguity, portfolio
company leaders need to be able to fit the culture of both the new
organization and the private equity firm.
PE leaders say results orientation, drive, intellectual curiosity and
entrepreneurial spirit are also vital today. Adding value quickly
requires that these senior executives partner effectively with the
board and collaborate with the CEO and peers. Beyond strategic
mindset, portfolio company CEOs need to excel at talent
development amid the current shortage. Regardless of role,
portfolio company leaders need realistic expectations when it
comes to how quickly they can effect change and the number of
stakeholders who need to be involved in key decisions.
Some find that securing talent with these skills is only the first part
of the challenge; the next issue is assessing whether leaders
actually possess these attributes. “It is one thing to see things on
paper, but another to get to know them as characters. How we do
this is a challenge,” said one PE leader. Leaders increasingly
recognize that cultural alignment can greatly impact business
performance, and that poor cultural fit is the most common
reason why newly hired executives fail in their first year. In addition
to business results, a regional PE firm evaluates portfolio company
CEOs on whether they can recruit and develop talent and fit with
the organizational culture.
For operations teams
With such multi-faceted challenges facing their portfolio
companies, PE firms are increasingly looking for generalists with
macro perspective and strong business acumen. “It is key for
operating teams to focus on the bigger picture,” said one managing
director and head of China. “Anticipation of changes is the number
one criteria for our team so that we can be peers to the CEO.”
When assessing a candidate with a strong track record, he advises
that PE firms discern which achievements were the result of
individual contributions versus the byproduct of the strong
organizational processes that typify MNCs. There can be a danger
that executives from system-heavy environments think at too high
of a level, set the direction and then assume the issue is resolved.
PE leaders need to translate strategy into action. At the same time,
one managing director observed that leaders who only have
consulting experience can lack vital firsthand perspectives from
the corporate world; the best operating teams blend talent from
both sides. Many noted the importance of relationship-building,
especially when the operations team has to have difficult
conversations about leadership changes at the portfolio company.
The PE environment in China also requires leaders who have the
Executive Intelligence — comprising business, contextual,
interpersonal, learning and conceptual intelligence — to grow in
the face of new challenges. These dimensions are central to a
leader’s capacity to be successful in new, unfamiliar and complex
situations — exactly the type of situations in which portfolio
company CEOs and operating team leaders are tested.
Finding talent with these myriad skills has been a challenge,
spurring some to think creatively about how to fill gaps. A senior
managing director and a founding partner of a Hong Kong-based
alternative investment and advisory company has a team of
entrepreneurs-in-residence constituting former executives and CEOs
from different industries to help with deal sourcing and portfolio
management. The organization also has functional experts who can
help support the portfolio company in areas where it is unable to
dedicate sufficient resources, such as human resources.
What can be done to develop leaders
and the talent pipeline?
Leadership is not a topic that is typically addressed in the Chinese
education system, an oversight that can manifest itself later in the
corporate world. It can become challenging for PE firms to advise
and coach portfolio company leaders on transitioning from the
organization’s original scale to lead the more complex structures
that come with growth, as well as elevating the entire leadership
team’s skills to match the company’s current stage. Resistance to
external feedback is also common, presenting another obstacle to
leadership development.
“PE can try to help fill in the gaps, such as helping the executive
to go from a product leader to a people leader. This requires
helping the entrepreneur mature and navigate issues such as
conflict resolution,” said a PE firm managing director. “Many
entrepreneurial CEOs know they have limitations, but don’t know
exactly what is off and where to get help. They probably had very
little feedback in the past.”
Onboarding is an integral component of leadership development,
but one that can be overlooked in favor of immediately diving into
the day-to-day operations. One PE senior executive recommends
checking in with the newly installed leader on a monthly basis to
both facilitate onboarding and mitigate early issues. Onboarding
should be tailored for the role, the executive’s specific
development needs and the situation. For example, if the newly
installed CEO comes from outside the industry, the onboarding
process can include immersion with the product development and
marketing functions.
Looking Ahead
It is anticipated that private equity investment in China will continue its upward trajectory. However, PE
firms will need to find ways to address the severe talent shortage in order to seize the opportunity.
More PE firms are partnering with search firms to not only identify leaders, but also to build their
knowledge of the talent market and to improve their talent development processes. To bridge the gap,
firms may need to bring in less conventional candidates — and place greater emphasis on
assessments for fit with organizational culture in addition to tailored development plans to ensure
long-term success. Successful integration of new leaders for both PE firms and their portfolio
companies requires they build trust, empower objective decision-making and emphasize the role of
strong teams versus individual contributions in delivering results. Finding and cultivating leaders for
operating teams and portfolio companies with broad business perspective and experience navigating
ambiguity will be critical to adding value.