David Pierce: No-Fault Divorce Clause Is Essential When Investing In Asian Private Equity Funds

In this episode of China Money Network, guest David Pierce, CEO of Squadron Capital, a Fund of Funds manager with over $1 billion-under-management, talks about China's private equity industry in a slowing economy, lessons he learned from investments that have gone wrong, and why his firm doesn't want to become a QFLP (Qualified Foreign Limited Partner) yet. Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt. INTERVIEW EXCERPTS: Q: First give us a brief intro of Squadron Capital? A: We are a boutique fund of funds manager, focused on private equity funds principally in the Asia Pacific region. We also have a separate account program that includes the private equity portfolio of our sponsor, The Research Investment Group, which is the family investment office of Mr. Robert Miller, a co-founder of the Duty Free Shoppers. Q: What sets you apart from other Fund of Funds in the region? A: I think it's mostly our longevity in the market. My own experience of investing in private equity in Asia goes back to 1995. Most of the FoFs here, frankly, have arrived in the last few years. So we have a history with GPs (General Managers) in the region, so they are not fearful that we are carpetbaggers who are coming in for a bull market moment. So we are in for the long haul. Q: You have been in the industry for a long time, so where do you think the PE industry in China is right now, and where is it headed, particularly considering the slowing economy? A: Right now, there are a lot of uncertainties in the world, with China's economy slowing and troubles in Europe and the U.S. All these make investors and companies more cautious. China's private equity industry has also gone from the go-go period into a period of more reflection. Right now, people are thinking to themselves: Let's think about (our strategies) more carefully. Let's focus on how to create value for the long-term. Q: Give us some examples when you backed a private equity firm, but the result didn't turn out as expected. And, what lessons did you learn from them? A: Some of our investments have been disappointing in their ability to pursue the strategy they set out to pursue. It might not have anything to do with their own fault, but because of causes outside of their control. For example, one of our fund managers had one of their senior members tragically killed in an accident. One of the things that we learned is that these are relatively small operations. A fund generally relies on three or four people to make the fund successful. When you choose to invest in a smaller fund, the key people are very important. We have also been disappointed by the willingness of some members of the key team to stick it through. Again, it's a judgment we make. We've learned a lot about what motivates people. We are careful with our due diligence process to make sure the alignment of interests are there. We also focus on the chemistry of the team. In one case, two key people of the fund had personality clashes and became irreconcilable over time. In the end, one person left the fund. We as investors were anxious about their ability to succeed with a diminished team. So one thing I advise people when looking at smaller private equity funds is to try to deeply understand the team, the dynamics between the team members and the alignment of interests among the team members. A lot of the funds are quite new, so there isn't a rich history or track record to rely on. David Pierce is CEO of Squadron Capital, a fund of funds manager focused on the Asia Pacific region with over $1 billion under management. Previously, David was a partner at an international law firm in Shanghai and a managing director of a China-focused private equity firm. Pierce has rich experience in Asia, having first moved to the region in 1982, and has been based at various times in Beijing, Hong Kong, Shanghai, Singapore, Taipei and Tokyo.