Recipe for succession

The departure of TPG Capital’s top man in China highlights an unsustainable emphasis placed on key men.

It’s doubtful the departure of TPG Capital’s China partner Weijian Shan last week surprised anyone, given he was the latest in the long line of big-name Chinese finance professionals to strike out alone and launch private equity funds.

Notable precedents include former Goldman Sachs China head Fang Fenglei, who launched his own firm Hopu Investment Management in 2007; and, most recently, Fed Hu, former Greater China chairman at Goldman Sachs, who retired this April amid a flurry of media reports that he was also setting up his own fund.

What Shan’s departure did do was once again highlight the tendency of private equity firms in China, whether domestic or foreign, to build their businesses on the shoulders of one very prominent local business or finance professional. Though private equity firms worldwide hang their reputation on their key men, the Chinese key man (singular) phenomenon has been exaggerated to the extreme in a country where it’s almost impossible to do business without the right name to get you through the door.

For TPG it was Shan; for The Blackstone Group it is Antony Leung, a former financial secretary for Hong Kong. CDH Investments leans on key man Shangzhi Wu, who led the firm’s spin out from China International Capital Corporation; and recent market entrant CITIC Private Equity Funds Management found fundraising success with former China Life Insurance CIO and politically connected Liu Lefei at the helm. 

The appointment of a superstar is necessary to secure deal flow, but brings with it the inevitable question: what happens to the firm’s fortunes when the superstar leaves?

In the case of TPG, while the departure of the man who led deals such as the pioneering 2004 investment in Shenzhen Development Bank has led everyone to ask the question, there are few who doubt the firm’s ability to carry on successfully. After all, TPG has been in China since 1998 and now has a team of 25 supporting its business there.

However, TPG may be the exception to the general rule. As one European LP told PEI Asia recently, he would love to commit more money to Asian private equity, but there’s only a “limited number” of groups around that can provide comfort about organisational and team stability. That is to say, he questions most GPs’ ability to hold on to their key people and replace them if necessary or remain a functioning entity if the key person leaves. 

The risk inherent in the exaggerated key man system, however, is not only on the key man leaving. The generally high turnover of private equity professionals seen in China can in part be blamed on the “over-shadowing” effect the presence of a superstar has on the rest of the team.

As one placement agent put it: “A lot of Asian firms are dominated by a few big names. Private equity is not for small egos. If you’re not number one or two, you’re looking to go somewhere you are number one or two.”

This effect is exacerbated in a business culture where the concept of partnership has little precedent. In China, company structures tend to fall into two camps, explained Frank Tang, CEO of FountainVest, in the most recent issue of PEI Asia magazine: family-owned businesses led by a single person (the owner), or state-owned enterprises where nobody is an owner and “everybody is an appointee”. Translating a Western-originated partnership culture is therefore no easy task.

It’s no surprise then that team stability and succession plans have become a primary concern for LPs eyeing Chinese GPs. At April’s PEI Forum: Asia, the need for the rapid “institutionalisation” of many Chinese firms was raised in various sessions.

And with some of the pioneering China private equity teams reaching a ripe age, succession issues need to be on the agenda sooner rather than later. 

PS – The interview with Frank Tang, CEO of FountainVest, appears in the June issue of PEI Asia magazine and can be found here.