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In the last few months China’s Private Equity revolution got a lot of attention due to the Focus Media LBO, touted as largest to date. Apart from size alone, I do think the shift from minority non-control investments to LBOs is very interesting. While I leave the regulatory and financial engineering aspects of these changes to other specialists, I do think control will inadvertently bring a need for more active investors, operating partners and more effective operational methods. Maybe Brazil and India will follow…

In fact, as we work with several large indigenous Chinese PE firms we noticed a unique value creation approach. Instead of just tweaking operations, some PE houses use western best business practices to help grow businesses. In addition, some firms use IT to solidify and enforce business rules and optimal processes. As one operating partner described it to me, it is a lot harder to secure the necessary talent to upgrade management (job competition in major Chinese cities is enormous). Instead of just “hiring and backing good managers” as the traditional GP approach goes, more firms train managers in world class processes. As this experiment unfolds, China may invent a new approach to value creation in emerging markets that other GPs in India and Brazil will be hard pressed to replicate.

 

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