While reading the fine print of an agreement between Xaloy Inc. and a local manufacturer, Baird Capital came across a clause indicating that the Chinese entity planned to set up a sister company with access to Xaloy's proprietary technology.

Baird, a unit of Robert W. Baird & Co., slipped a noncompetition clause into the agreement and the other party pulled out. According to Baird, the local company wanted to copy Xaloy's intellectual property and set up its own operation. Baird says it might not have picked up on the ploy if it hadn't had a team of investment professionals embedded in the country.

"You can't manage Asia from afar-the laws are evolving, the culture is evolving," said Andrew Brickman, a partner with the Milwaukee firm. "The most viciously competitive market in the world is Asia."

It's also one of the most complicated markets. But Asia is increasingly an essential ingredient of doing business for many midmarket companies. That combination is prompting more U.S. midmarket buyout firms to open offices in China and help shepherd their portfolio companies through the tricky process of sourcing goods and establishing manufacturing sites in the region.

While megafund managers such as Carlyle Group and Blackstone Group LP have had a presence in China for years, only recently have their midmarket colleagues followed suit. At least four have opened offices in China in the past year or so: American Securities Capital Partners LLC, Sun Capital Partners Inc., Anderson Group and Hammond Kennedy Whitney & Co. They join a small number of midmarket firms that have been there for longer, including Baird and Blue Point Capital.

There's no blueprint for setting up shop, with the new entrants varying in how they pay for their new branches and how many people they commit to the effort. Some firms, like Anderson Group, charge their portfolio companies fees to support the new offices. Others, like American Securities, rely on the general partners to absorb the costs.

These firms say that expanding overseas is no easy task, as reliable talent is hard to find and office space in cities such as Hong Kong and Shanghai is expensive. Becoming global also puts stress on a firm's culture, as lengthy overseas flights and 6 a.m. conference calls become a day-to-day reality.

But they add that midmarket investors have no choice but to pay attention to China as U.S. manufacturing shifts overseas.

Having an office in China "gives them a competitive advantage in actually winning deals in the U.S." said Jim Lawson, managing director and co-chairman of Lincoln International, an investment bank. "Private-equity firms are trying to distinguish themselves in some way. This Asian play is a way to distinguish yourself."

For Anderson Group, its China office represents a major change in strategy. For most of its 27 years in business, the firm took pains to avoid investing in companies vulnerable to competition from China, considering the region a threat. That changed in 2005, when it made a play for TexStyle LLC, a U.S.-based bedding and curtain maker with facilities in Shanghai. The investment opened the firm's eyes to the advantages of sourcing goods in the region, prompting it to establish the office.

"We shouldn't be looking at China as a strategic threat," said Corey Gaffney, a partner with the firm. "It really should be an opportunity."

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