As a private equity (PE) fund manager, I think the entire business model is about four words: financing, investment, management and exit.
A PE fund raises money from different investors — the limited partners (LPs) — invests the money in good projects, manages and improves the performance of those projects, and reaps the returns when it exits the projects.
It’s obvious that financing is the most important step.
I know many PE fund managers of the older generation. They may have good track records, but when they try to raise money for their own funds, they, too, have difficulty.
Some spent one or two years on fundraising but still failed to reach their initial target. It is hard to attract large-scale LPs.
My friends who are in senior positions in LPs or family offices told me that the general partners (GPs, referring to the fund managers) always offer them treats to build a tighter connection with them; otherwise, the LPs’ doors will not open for them when they have to raise funds.
The exceptions are top PE funds like Blackstone Group or KKR & Co.; investors chase after them.
In addition, to attract large LPs and other investors, fund managers sometimes offer lower management fees or a bigger voice for the LPs. This tactic also has shortcomings.
Some funds that specialize in China will show off the “localization” of their team when seeking investment from LPs.
They have tried every method to make this claim look plausible. Some will only hire mainland staff with overseas backgrounds, rejecting candidates from Hong Kong or Singapore.
Some are backed by famous “guan er dai (官二代)”, the offspring of senior government officials. It will be easier to find good deals and raise funds with their support.
However, since President Xi Jinping started his anti-graft campaign, those funds have adopted a relatively low profile.
Some other PE funds will need help from agents. There are numerous intermediaries in the industry.
Usually the people in charge have good connections with local family offices, pension funds, college endowments and funds of funds.
So, many GPs will offer these agents about 2 percent of the total financing amount as remuneration. That’s actually expensive.
Because the competition has been intense in the industry in recent years, more and more GPs are using placing agents.
In a PE market as mature as that of the United States, over 70 percent of deals are made through such agents.
I think it will also be a trend in Hong Kong and the rest of Greater China.
This article appeared in the Hong Kong Economic Journal on Dec. 28.
Translation by Myssie You
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