Western operational expertise still valued in Asia

When it emerged that managing director Josh Kahn had left Hamilton Lane early this year, the firm’s motives for his departure were unclear.

It turned out that Kahn, a well-respected professional who had come over to set up the fund of funds’ Hong Kong office in 2008, had been given the opportunity of transferring back to the firm’s headquarters in Philadelphia. But he no longer had the option of staying in Asia, because the firm was making a conscious effort to pack its investment team with local professionals.

“In a way, Josh’s departure is quite unexpected. [But they felt] they need to localise and find the right people to grow,” one industry source said at the time.

This “need to localise” has become a recurring theme in Asian private equity, with foreign GPs going to great lengths to ensure they have local professionals and native speakers in their team.

But has the trend gone too far? In the wake of Kahn’s surprise departure, some industry professionals told Private Equity International that some firms were potentially being too hasty in reducing or abandoning their use of expat leadership talent.

“The industry [in Asia] is still not really mature in terms of the number of people locally who know how [private equity] operates. We need to rely to a bigger extent on expats. If you look at most funds of funds, yes they’ve been here for a while, but they’re still not really local,” one Singapore-based industry source tells PEI.  

What’s more, in China, the need for operating partners that have expertise from the West is actually increasing, according to Jonas Lindblad, managing director at fund of funds Jade Invest.

“In mainland China you cannot do private equity without a local execution team,” he admits. “You cannot go out to local entrepreneurs and negotiate efficiently with the natives – it is not even enough to know the language reasonably well.”

However, he argues that as China’s growth has slowed and business costs in China have increased “explosively”, relationships and connections are no longer enough. “What is becoming more and more relevant is the need for real, technical expertise.”

As such, expats – who were “quite irrelevant” in China until quite recently – are suddenly becoming more relevant again, he says. That’s why Jade Invest, which invests in China-based GPs, has been helping its funds’ portfolio companies find experienced people from the West to come over to China and go into companies on a consultant basis.

For example, almost all China’s successful operators of high-end restaurant chains are struggling today because of a lack of operational expertise in the management team, he suggests.

“If you can get someone who has been running a successful food and beverage business in a country with very strong regulatory implementation such as the US and Western Europe, that person will have a wealth of information and know-how that [few] entrepreneurs in China will have today.”

CVC Capital Partners took a similar tack when implementing a new IT system at its Chinese portfolio company Jintian Pharmaceutical Group. The firm brought in its head of IT in Europe, who visited the company a number of times to help with the implementation of its new system.

“Our experience in Europe was certainly very helpful,” Sunny Sun, senior managing director at CVC, told PEI.  

Lindblad believes that China firms are increasingly realising the need for Western help in this area. “Operational expertise is really what is lacking in China.”