Central and western China may present a tempting target for private equity and venture capital, but no investment is entirely without risk. Added to the usual difficulties of selecting targets, the potential for government meddling and the challenges of developing relationships at a local level, firms considering investments in Sichuan, Chongqing and other less-developed markets all contend with a major obstacle: Qualified labor resources – or the lack thereof.
“You’re not going to have the type of talent [in these areas] that you get in Beijing or Shanghai,” said Rocky Lee, head of the Asia practice of law firm Cadwalader, Wickersham & Taft in Beijing.
It is a statement echoed repeatedly in interviews with investors, fund managers, lawyers and other industry observers. The legal profession is an area of special concern as investors attempt to navigate an embryonic and occasionally confusing regulatory environment. Dawn Zhang, partner at GT Law in Shanghai, noted that Chongqing, which hopes to establish itself as a regional financial center, has made clear that it intends to redress the dearth of legal professionals.
The vision thing
But James Zhao, partner at Vivo Ventures, a health care-focused PE firm that recently set up a joint venture renminbi biotech VC fund in Chengdu, says the problems facing investors go beyond a lack of legal knowledge.
“When we talk about investment strategy with a local CEO or senior executive, compared with when we talk with people from Beijing or Shanghai, I see a gap in terms of their vision: How can they foresee the company growing?” he said.
Zhao said that his firm’s ability to educate entrepreneurs and improve their operations was a way to provide more value as a PE investor, but bridging the gap can still be difficult. While it is possible to transfer talent from elsewhere in the country, Zhao says that senior executives and chief scientists have balked at relocating to Chendgu.
“Beijing, Shanghai or Guangzhou – in those three cities it’s easy to attract people. But Chengdu right now, few people would consider doing long-term relocations,” he said.
For now, the most valuable asset PE and VC investors can bring to investments in less developed regions may be patience.
“I believe that it will improve significantly in the next 10 years, but talent is not something that you can grow overnight,” said Amir Gal-Or, managing partner of Infinity Group, a Tel Aviv-based PE firm. “It’s not an industrial issue. The gap will close with time. For now, you need to deal with the gap by training, importing talent, by sometimes limiting your expansion because of the talent [restrictions].”
There may already be signs of improvement: Chongqing’s economic development has made it less of a hardship posting, and Zhang at GT Law said some of her clients were beginning to send legal staff to the city. Others are simply happy to return home. “Some people who originated from Chongqing are now willing to move back,” she said.