Private Equity Hubris – A Way to Mitigate in China

Private Equity Hubris – A Way to Mitigate in China

Private equity hubris is causing a lot of losses  In a huge and well documented article on Private Equity in Wikipedia, the very last topic with just one sentence says the following:

Cognitive bias

Private equity decision-making has been shown to suffer from cognitive biases such as illusion of control and overconfidence.

Lets look at how to counteract that instead of burying and ignoring that.

Private Equity companies I work with are North American and invest in North America.  Because China is the second biggest economy, their North American investments often have a China business of some type. Often the China portion of their acquisition is a Wholly Owned Foreign Enterprise. They feel this is North American owned and let their guard down.

First Lets Talk About Illusion of Control

Many people think because they audited the books that they have control of their China holding.

I have written a popular blog call Beware the Dog and Pony Show. Chinese people are experts at making a good impression. You come and all works well, and you leave, and it is not working well. Go see that blog for more on this.

Another issue is something I call parallel meetings. You have a meeting with your China top management and decide to resolve things in a certain way and then you see things not working this way. It is quite possible that a meeting happened after you left that proved to be the real meeting that got acted on. This even happened to an on site American GM I knew. He was busy protecting a top Chinese leader while not realizing that guy was running the parallel meeting system that vexed him. It totally vexed the overseas investors. They thought having an American GM would solve the problem. It took a deeper look and a leader with very high leadership ability to solve the problem in that case.

Now Lets Look at Overconfidence:

Somehow getting financial auditors and lawyers to sign off gives unwarranted overconfidence. One China acquisition I knew saw some difficult changes needed after acquisition. They thought they could place a hand picked GM, and all would be well. They ended up sending in emergency consultants to live there for months on end to dig them out, and the GM left and had to be replaced as well.

Acquisitions of even pure Chinese companies does not have to be one expensive and time consuming surprise after another. Hubris is never warranted. You can read more about that in another blog of mine here. Careful preparation and HR Audit are all needed to operationally succeed.

Private Equity Hubris Summarizes the Problem

I think we need to check our pride at the door and especially when the acquisition has a Chinese component.

See also Ideal China Recruitment: Perfect Hires and Perfect Companies?

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Posted in: Private Equity Acquisition Recruitment

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