Many private equity firms have plans for some type of strategic move to capitalize on the high octane growth underway in China, India and other emerging markets. Even middle-market firms are looking to establish offices in Asia to coordinate their outsourcing efforts.
A handful of private equity firms pursue emerging markets opportunities through a global or industry-specific fund. But many more firms establish distinct regional vehicles with distinct economics.
These funds need local talent, but many Western firms also find it crucial to have the firm's cultural DNA in the new office. For younger partners, such initiatives can be an opportunity to make an impact with a level of autonomy unheard of working from headquarters. But for firms committed to establishing an office in such far-flung geographies, the ability to send a more seasoned partner to coordinate an overseas effort can add a certain dose of certainty to a process fraught with so much uncertainty.
But senior dealmakers ?with vast track records of success behind them – constitute the most complex relocation projects. They tend to be older, with substantial family obligations and compensation packages tied to existing funds and the health of its underlying investments. There's no guarantee that emerging market deals will be of comparable size or performance to those in the US and UK. Furthermore, since these partners have already proven themselves, why jeopardize that reputation with a foray to some trendy emerging market? How do you compensate them for that risk?
Headhunters stress that relocation packages strive for equalization. The executive should make comparable wages to what they're making at their current location, along with adjustments to maintain the same standard of living, if not slightly better for the complications of leaving a life in progress. When major corporations transfer executives they tend to have the infrastructure to assist in those not-so-minor points of job placement for spouses and competitive schooling for children, if that's applicable.
Private equity shops are traditionally too lean to support that robust of a human resources program. Bringing aboard a relocation specialist may be worth the expense, as these professionals will tackle the administration of so many logistical details. The best vendor will be one with prior experience in the destination country and deep roots in the home country. They should be viewing the transition through the eyes of an executive's cultural bias with ample warning of what customs will clash with expectations.
The salary drawn down from the management fee is the most straightforward part of the package, with this compensation arriving in the currency of the locale, with changes made to respect differences in tax regimes.
However, true compensation ?equalization? is slightly more elusive to achieve for private equity deal partners. The carried interest for previous funds is already established, though not all capital may be committed from a given vehicle. What if the partner is leaving for the new initiative shortly after a new fund has been raised?
One lawyer suggested a frank dialogue of worst case scenarios. Should the fund outperform with investments the partner only had cursory dealings with, do they deserve the same percentage of the windfall as if they had stayed on in a more hands-on capacity? If the fund underperforms, are they willing to accept the fact that they were unable to have greater input to improve its results? Another source explained that while these issues should be raised, they are mainly a matter of clarifying expectations for when either scenario may occur, not changing the terms of the carried interest agreement. Shifting the share of the carried interest may be fraught with as much peril as maintaining it. The same worst case scenarios can adversely affect the partner if the carried interest is changed to pre-empt any problems.
In some cases, maintaining a partner's economics in the home-country fund becomes the best way to achieve that equalization. Coupled with the carried interest in the new, emerging market fund, the risk of smaller more unstable transactions could be weighed against the insurance of a stake in the firm's established markets. The carried interest acts for the GP, much like the GP acts for the firm: a stabilizing force from afar.
Ideally, the firm would have an in-house candidate that has enough experience to have earned the trust of his partners, while still traveling lightly enough that the adventure and autonomy of far flung lands is reason enough for the trip. That is, of course, if they get a hefty piece of the carry.