China Private Equity

Anyone seeking to succeed in investment banking in China should live by one rule alone: it’s not who you know, but how well you know them. In China, more than any other country where I’ve worked, the professional is also the personal. Comradeship, if not friendship, is always a necessary precondition to doing business together. If you haven’t shared a meal – and more importantly, shared a few hundred laughs – you will never share a business deal. Competence, experience, education and reputation all matter, of course. But, they all play supporting roles.

The stereotypical hard-charging pompous Wall Street investment banker wouldn’t stand much of a chance here. A “Master of the Universe” would need to master a set of different, unfamiliar skills. Personal warmth, ready humor and a relaxed and somewhat deferential attitude will go a lot farther than spreadsheet modeling, an Ivy League MBA and financial dodges to increase earnings-per-share.

I’ve been around a fair bit in my +25 year business career, doing business is over 40 countries and managing companies in the US, Europe and Asia. Everywhere, it helps to be likeable, attentive, courteous. We all prefer working with people we like.  But, since moving to China and opening a business, I’ve learned things work differently here. Making money and making friends are interchangeable in China. You can’t do the first without doing the second.

Investment banking is so personal in China because most private Chinese companies, from the biggest on down, are effectively one-man-shows, with a boss whose authority and wisdom are seldom challenged. Usually, there is  no “management team” in the sense this term is applied in the US and Europe. A Chinese boss is the master of all he (or often she, as women entrepreneurs are common here) surveys.

A substantial percentage of my time is spent getting to know, and winning the friendship, of Chinese bosses. This alone makes me a lucky guy. Without fail, the bosses I meet are smart, gifted, able, hospitable, warm. We don’t select for these qualities. They are prerequisites for success as a private business in China.

Bosses are also usually guarded about meeting new people. It comes with the territory. Anyone with a successful business in China is going to be in very large demand from a very large “catchment pool”, including just about everyone in the extended circle of the boss’s friends, relatives, employees, suppliers, political contacts. Everyone is selling or seeking something. Precious few will succeed. Being a boss in China requires enormous stamina, to deal with all those making a claim on your time, and a gift for saying “No” in ways that don’t offend.

For investment bankers, successful deal generation in China will usually follow an elliptical path. The biggest mistake is to start pitching your company, or a transaction, the moment you meet a prospective client. You need first to win the boss’s trust and friendship, then you can discuss how to work together. In my working life in China, it’s axiomatic that in a first meeting with a company boss, one or the other of us will say, “我们先做朋友”,  or “let’s become friends be first”. It’s not some throwaway line. It’s an operating manual.

The Chinese use a specific word to define the engagement between an investment banker and client. It speaks volumes about the way new business is won here. It’s “合作” or cooperation. You don’t work for a Chinese company, you cooperate with it. There’s got to be a real personal bond in place, a tangible sense of shared purpose and shared destiny.

I could probably teach a class in the cross-cultural differences of investment banking in China and the US. I’ve not only been active in both places, I’ve been on both sides of the table. Before starting CFC, I was CEO of an American company that retained one of the most renowned investment banks in the US to handle an M&A deal for us. At that company, we had a deep senior management team, including two supremely capable founders. We dealt individually and collectively with the investment bank, which had a similarly-sized team assigned to the project.

The relationships were professional, cordial. But, the investment bankers never made any real effort to become my friend, nor did I want them to. Rarely, if ever, did discussions veer away from how to create the conditions to get the best price. The bankers were explicitly pursuing their fee, and we were pursuing our strategic goal.

The deal went pretty smoothly, following a tightly-scripted and typical M&A process. The investment bank’s materials and research were first-rate, and they had no difficulty getting directly to decision-makers at some of the largest software companies in the world. They performed with the intricate precision and harmony of the Julliard Quartet.

I can count the number of times I sat down with the bankers for a nice meal where business was not discussed. Or the number of times when the meeting room rang with peals of friendly laughter. Zero. Both would be unthinkable in China.

Here, a deal is more than just a deal. Price is not the only, or even the main objective. Instead, as an investment banker, you must knit souls together, their lives, fortunes, careers, goals and temperaments. There is no spreadsheet, no due diligence list, no B-school case study, no insider jargon to consult.

Be likeable and be righteous. But. above all, do not be transparently or subliminally motivated mainly by personal greed. A successful Chinese boss will smell that coming from miles away, and recoil. You’ll rarely get past “ 您好” , the polite form of “hello”.

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I’m sorry, but there is only one proper way to say “I’m sorry” and “goodbye” in China. Unfortunately, fewer and fewer Chinese seem to agree with me.

The Chinese terms “zaijian (再见)” literally “see you again”, and “duebuqi (对不起”), meaning “I’m sorry”, have been among the most commonly-spoken phrases in China for hundreds of years. But, every day now, they grow less common, like forms of endangered speech.

Why? Because their English equivalents are taking over, everywhere.  Day by day, China is becoming a country where everyone says  “bye-bye” and “sorry”, rather than using the Chinese equivalents.

“Bye-bye” first started to gain popularity a decade ago. Today, it is rampant. Most probably, “bye-bye” entered the vernacular in China via Hong Kong, where it’s long been a main way Cantonese-speaking people say farewell to one another. I’ve never quite gotten used to hearing it in China, and still resolutely refuse to use anything other than “zaijian”.

I have never once knowingly used “bye-bye” anywhere outside China, so I’m certainly not going to use it inside. My own preference, in English, is for either “see you later”, or a simple “bye”.

I always liked the fact that Chinese traditionally bid farewell in the same way as many Italians and French do, by saying “see you again”. By contrast, “bye-bye” has no particularly clear underlying meaning, and sounds rather childish.

In Chinese internet slang, a common way to end an online chat is by writing “886”, in China pronounced “ba-ba-leo”, meant to approximate the sound of “bye-bye” with the addition of the modal particle 了，which indicates an action has been completed.

Cute slang, as some suggest, or a degradation of the beautiful Chinese language?  I know where I stand.

“Sorry” is not nearly as widely used as “bye-bye”, but it’s becoming more commonplace all the time. The first few dozen times I heard it, I assumed the person was shifting to English to be sure I understood the apology. Then I started overhearing it said between Chinese, as they bumped into one another on the subway, entered a crowded elevator or tried parting a throng of people.

This change aggravates me to my core. Along with its other merits, 对不起 is one of the more euphonious common phrases in Chinese. For non-Chinese speakers, it’s pronounced “dway boo chee” . It was among the first ten phrases I learned in my first Chinese class 31 years ago, and certainly among the most useful.  It is also precise in its meaning. The phrase literally acknowledges one’s act of rudeness.

“Sorry” is a kind of bastardized shorthand, far more commonly used in the UK than in US. Like “bye-bye” it seems to have smuggled itself into China via the ex-British colony of Hong Kong. When I lived in London, I heard “sorry” often and generally thought it hollow and insincere. Americans prefer to take personal culpability and say “I’m sorry”, or “Excuse me”.

Hearing Chinese say “sorry” , I feel it’s an alien presence, diminishing the level of common courtesy in China.

Mine is probably a minority view in China. New phrases gain currency in China very quickly. I’ve seen it not only with “bye-bye”, but another import from Hong Kong, the two-word phrase “mai dan”, meaning “give me the bill”. It’s a Cantonese term. Over the last ten years, it has all but exterminated across much of China the traditional Mandarin “ 算账”.  Again, it’s an example of a perfectly good, age-old Chinese phrase being pushed out by an inferior foreign import.

In France, the Academie Francaise has the specified role of preventing English terms from seeping into the French language. A lot of this can seem silly and pedantic,  like urging French to drop the use of English technology terms like “software”, “email”, in favor of clumsy, made-up French terms.

China has no such body, nor will it likely ever have, since Mandarin is spoken with so many different regional dialects and accents.  Still, I’d like to see more effort made to halt the spread of English terms.

The Mandarin spoken today is in many core ways similar to the Chinese language spoken seven hundred years ago.  Chinese language is the connecting rod linking China’s ancient past and present. It survived intact through upheavals, invasions and colonization. “Sorry” and “bye-bye” should be deported back to Hong Kong.-

As far as linguistics experts are concerned, there is no direct relationship between English and Chinese. The world’s two most-commonly spoken languages emerged independently, not from some common root in the way, say, Sanskrit is a basis for many of the world’s other European and Asian languages. 

Any examples of common syntax in English and Chinese are rare, and a source of fascination for me.  I always liked, for example, the fact that both English and Chinese have at least one metaphorical saying that is nearly identical, word-for-word, in both languages. In English, we say “speak of the devil” when a person we are talking about unexpectedly arrives. In Chinese, the phrase is “说鬼子鬼子来” and while less common than the English counterpart, it’s meaning and word choice is basically the same. 

As far as anyone knows, neither language borrowed this phrase from the other one. It likely arose independently in both English and Chinese. 

I’ve now found another, even more pleasing example of this parallelism in English and Chinese.  In English, we use the verb “to bullshit” in two different senses. It can mean to chat amiably with a friend, and can also be used to describe someone exaggerating, lying or intentionally deceiving, as in “you are bullshitting me”. 

In China, a similar phrase is used to capture both meanings. It is 吹牛，chuiniu (CH-WAY NEE-YO), or, literally, “blow the bull”. It also has both meanings, of having a friendly chat, and also as an accusation when someone is talking nonsense, or deliberately trying to deceive. So you can say, “let’s get together and qiuniu”, and also say to someone who you believe is trying to con or mislead you, “you are chuiniu-ing me”. 

While I was excited to discover this similarity in syntax, my CFC colleague Ryan arrived at the even more pertinent point. As he put it, “what is about bulls? Why does anyone use this animal to describe these kinds of behaviors.” 

Of course, as anyone who knows even a little Chinese can attest, there is another, more commonly used phrase using “niu”. Note, though, this same Chinese word, “niu”, is used for both bulls and cows. 

This other phrase is 牛逼 “niubi”, which is the word for cow genitalia. In Chinese, “niubi” is commonly used to describe something as being truly outstanding, of the highest quality, as in “that movie we saw is niubi.”

I can’t hear that phase “niubi” without laughing, and without wondering how this particular body part of this particular animal has become a form of high praise and approbation. 

And no, I’m not “chuiniu-ing” you.

What are the most reckless and self-destructive words to use while doing business in China? “Let’s skip lunch and continue our meeting.”  Of course, I’m kidding, at least partly. But, there’s nothing frivolous about the fact food is a vital ingredient of business life in China. This is, after all, the country where people for hundreds of years have greeted each other with not with “Hello” but with the question “Have you eaten?”. 

China is no longer a country where food is in any way scarce. But, perhaps because of memories of years of scarcity or just because Chinese food is so damn delicious, the daily rhythms of life still revolves around mealtimes in a way no other country can quite match. This is as true in professional as personal life. 

It’s a certainty that any business appointment scheduled within 1-2 hours of mealtime inevitably will end up pausing for food. In practical terms, that means the only times during working hours that a meeting can be scheduled without a high probability of a meal being included is 9-10am, and 1:30-2:30pm.

At any other time, it’s understood that the meeting will either be shortened or lengthened so everyone participating can go share a meal together.  Any other outcome is just about inconceivable. Whatever else gets said in a meeting, however contentious it might be, one can always be sure that the words “我们吃饭吧” , or “let’s go eat”, will achieve a perfect level of agreement.  

Everyone happily trudges off to a nearby restaurant, and talk switches to everyone’s favorite topic: “what should we order?” Soon, the food begins to pile up on the table. Laughter and toasts to friendship and shared success are the most common sounds. The host gets the additional satisfaction and “face” of providing abundant hospitality to his guests.  

And yet, there are some modern business people in China that can and do conceive of meetings taking precedence over mealtime. Thankfully, they are quite few in number, probably no more than a handful among the 1.4 billion of us in China. I just happen to know more of them than most people. 

In my experience, those with this heterodox view that meals can be delayed or even skipped are mainly Chinese who’ve spent time at top universities in the US. There, they learn that in the US it’s a sign of serious intent to work through mealtimes. It’s a particularly American form of business machismo, and one I never much liked in my years in businesses there. Americans will readily keep talking, rather than break for food. Or, as common, someone will order takeout food, and the meeting will continue, unbroken, as pizza or sandwiches are spread out on the conference room table. 

Heaven help the fool who tries to change the subject, as the takeout food is passed around, to something not strictly related to the business matters under discussion. If as Americans will often remind you, “time is money”, the time spent eating is often regarded as uncompensated, devoid of value and anything but the most utilitarian of purposes. 

Is it any wonder I’m so happy working in China? I love food generally, and Chinese food above all else. It’s been that way since I was a kid. These days, I often tell Chinese that adjusting to life in China has had its challenges for me, but I know that every day I will have at least two opportunities for transcendent happiness: lunch and dinner. 

So, not only do I accept that business meetings will usually include a break for a nice meal, I consider it one of the primary perks of my job. But, I do meet occasionally these US-educated Chinese who don’t share my view. They will ask if meetings can be scheduled so there won’t be the need to break for a meal, or if not, to make the mealtime as short and functional as possible, so “work can resume quickly”. 

This is misguided on so many levels that I worry how these folks, who I otherwise usually like and admire, will ever achieve real career success in China. The meals are often the most valuable and important part of a business meeting – precisely because they are unrushed, convivial and free of any intense discussion of business. 

Trust is a particularly vital component of business in China. Without it, most business transactions will never succeed, be it a private equity investment, a joint venture, a vendor-supplier relationship. Contracts are generally unenforceable. The most certain way to build that trust is to share a meal together — or, preferably, many meals together. 

To propose skipping a meal is a little like proposing to use sign language as the primary form of negotiation for a complex business deal: it’s possible, but likely to lead to first to misunderstanding, frustration and then, inevitably, to failure.

“Risk and Reward.  They are the yin and yang of investing.”

So begins the latest of CFC’s Chinese-language research reports on risk and reward in private equity investment in China. The 18-page report (titled 风险与回报 in Chinese)  has just been published, and is downloadable via the CFC website by clicking this link:  http://www.chinafirstcapital.com/Riskandreward.pdf

The report’s goal, as stated in the introduction, is to “summarize the ways PE firms evaluate the risks of an investment opportunity so that entrepreneurs will better understand the decision-making process of PE firms, and so greatly improve the odds of succeeding in raising PE capital.” 

The report identifies five key areas of risk that private equity investors attempt to quantify, manage and where possible, mitigate: They are:

1. 1.      Market Risk
2. 2.      Execution Risk
3. 3.      Technology Risk
4. 4.      Political Risk 
5. 5.      Due Diligence Risk

As far as we know, this is the first such detailed report prepared in Chinese, specifically for Chinese entrepreneurs. It was written with input from the entire CFC team, and represents a collation of our experiences in dealing both with the founders and owners of Chinese SME and the PE firms that invest in them. 

Few, if any, Chinese entrepreneurs have experience raising private equity capital, or for that matter, answering pointed questions about their business. So, the whole PE process will often seem to them to be odd and protracted. The report aims to increase entrepreneurs’ level of understanding ahead of any PE fund-raising process. The report puts it this way: 

“ The goal of PE firms is to lower risk when they invest, not completely eliminate it. Risk is a necessary part of any profit-making activity. The basic principle of all PE investing is finding the best “risk-adjusted return” – which means, the best ratio of risk to potential future profit.”

Some strategies for entrepreneurs to lower an investor’s risk are also discussed. It’s practically impossible to fully eliminate these risks. But, an entrepreneur will have an important ally in managing them, if successful in raising PE capital. 

PE investment in China is a process in which an entrepreneur give up sole proprietorship over the risks in his business. It’s a new concept for most of them. But, the results are almost always positive. A problem shared is a problem halved. 

We hope the report contributes to the continued growth and success of the PE industry in China.

It can also be enjoyed, for entirely other reasons, by anyone who shares my love of Song Dynasty porcelains. Some beautiful examples of Jun, Guan, Ge, Yaozhou, Cizhou and Longquan ceramics are used as illustrations. 

Some examples:

My Chinese language skills remain sub-standard. At best. But, that doesn’t prevent me from taking enormous pleasure in my wall-to-wall waking-hours’ immersion in Chinese. Often, it’s just the sound and cadences of Chinese local accents, which occur in extraordinary numbers and varieties. Even calling them “accents” doesn’t capture the bewildering array, since to an English speaker, the comparison that comes to mind is likely the difference between an English and American accent. In China, regional accents can be so extreme they are mutually incomprehensible. I often feel like the most common phrase I hear in Chinese is “What?”, accompanied by a puzzled expression that shows the listener didn’t catch a word of the Mandarin just spoken at him. 

In other words, I often feel like I’m in the majority in China that’s in the dark about the meaning of someone else’s spoken phrases. But, of course, that’s not quite the case. Chinese do just fine here. I stumble, fall flat, get back up and trip again. Again and again. That about sums up the path of my linguistic development. 

There are moments of transcendence as well. For example,  in Shenzhen recently, I listened in on pitches by six Chinese companies seeking private equity or venture funding. They were from different industries, but I heard repeatedly the phrase “shangye moshi” in the presentations. The first ten times or so, I just let it pass through my brain unmolested, assuming it was just another word that was outside my active vocabulary. Then it hit me. I knew both words: “shangye” means business, “moshi” means model, or method. Put them together, you get 商业模式, or “business model”, an increasingly common business jargon term in English that I now know was translated literally into Chinese. 

I never liked the term “business model” in English, and so rarely use it. Companies have a way of making money, it seems to me, not a “business model”. Models are static, not dynamic, ever-mutating structures, which is what most good companies must be in order to keep making money. 

But, my aversion to the term disappears in Chinese. I’ve taken it to using it quite often now. Why? For one thing, at my age, it’s rare that any new word will stick around long enough in my memory for me to use more than once. I’m on an email list that sends me seven Chinese words every day. I read today’s words about 15 minutes ago, and I’ve already forgotten half of them. By tomorrow, the rest will probably be gone also. So, the fact I’ve retained “shangye moshi” is already cause for minor celebration.

The other reason is that it does seem to fill a slight conceptual void in Chinese. Languages, including Chinese,  often import foreign phrases for this reason. Two other well-known Chinese examples of this are “lang man” and “you mo”, meaning “romantic” and “humor”, both of which entered as corrupted versions of the English original. Others have speculated about what this says about China, that it had no native words for “romantic” and “humor”, but I’ll leave that to theoreticians. 

With “shangye moshi”, the missing native concept in Chinese was likely a simple way of saying a company has a recurring source of profit. If so, of course, it’s a welcome addition to the Chinese language, and one hopes, to Chinese management strategy as well.