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Chris Chapel

First half of 'tough year' sees record tally as Hong Kong consolidates its key role

If there is one overriding message from the venture capitalists and service providers taking part in this year's venture-capital partnership conference, it is that the industry in Asia is poised for strong growth.

The venture-capital industry has  survived the Asian financial crisis, the dotcom bust and, more recently, the depressing impact of the Iraq war and Sars to become even stronger.

Today  the industry is still very much part of the corporate finance landscape.

The chairman of the Hong Kong Venture Capital Association, Kevin Yip Ka-kay, said the business environment over the past year had been  'generally tough'.

'We venture capitalists have had to work extra hard in working with our investee companies, but I am happy to report our tally of investment activities in Asia being managed out of Hong Kong,' he said.

'Investments approached US$4 billion in the first half of the year, up significantly from about $2 billion for the same period last year.'

The $4 billion comprises venture capital and private equity investments in Asia originating in Hong Kong.

Mr Yip said it was important for  Hong Kong's venture-capital industry to widen its focus beyond the city's borders. The bulk of the $4 billion figure  comprised regional investment out of Hong Kong destined for  restructuring deals in bigger nations such as South Korea.

The surge in investment in the first half was met by a corresponding wave of new funds made available to venture capitalists.

About $900 million in new money flowed into the Hong Kong-based industry in the first half of the year.  Mr Yip did not have a comparative figure for last year  but said this year's figure represented a significant  increase.

'If you look at the amount of investment in the first half, about 60 per cent to 70 per cent relates to the area of buyouts,' Mr Yip said.

To venture capitalists, a buyout is a leveraged deal where a team of investors, typically including existing management and an institution, acquire a business unit from a larger company in the hope of turning it around or increasing its profits.

This type of activity has increased dramatically  since the Asian financial crisis.

'If you look back at the history of venture capital in Hong Kong and Asia,  it mostly related to technology and development capital for small and medium-size companies until the late 1990s,' Mr Yip said.

'But after the Asian financial crisis, a number of  firms from the United States and Europe began to evaluate buyout opportunities in Asia. Those typically involve much larger amounts of capital.'

He said that while the number of individual deals had not risen significantly year on year, the amounts involved in each deal were significant.

'This obviously relates not just to Hong Kong but to places such as South Korea, where the size of the economy is quite big and some of the dollar amounts of the deals are quite big.'

Jamie Paton, director, North Asia, for venture capital company 3i Asia Pacific, said the industry had learned many valuable lessons  during the dotcom collapse.

A concentration on the fundamentals of the prospective deal had returned to the fore, after being too often ignored during the dotcom boom, he said.

'At the end of the day, you have  to come back to the fundamentals of what is the business of a management team. All of us venture capitalists are looking to back quality people running businesses that have  the ability to grow and create value. I think  some dotcom deals were done where those criteria were not met.'

The local venture-capital industry was in better shape than ever, he said.

'If you look at the funds  in Hong Kong today, the quality is evident. Many  are global investors and they are here because of the opportunities ahead of them.''

One popular area of venture-capital activity is the mainland, where the appetite for foreign funding and resources remains intense. A  big plus for Hong Kong is the relatively undeveloped nature of the mainland capital markets. This  gave Hong Kong an obvious role as a conduit of funds and  as a provider of services to mainland businesses seeking to grow externally, Mr Yip said.

'The pipeline of deal activity is very strong. One of the delights we all have is probably each day we meet someone who is passionate about what they do. These are chief executives who are absolutely driven by their companies and their ambition.'

Mr Yip said there was no doubt  Hong Kong would continue to be the  key centre for venture capital in Asia.

'According to our count,  more than 200 companies in Hong Kong are involved in the venture-capital business, employing about 1,000 people. But if you take into account the companies and employment we create through our investments, we believe it is a very high level of activity. It clearly capitalises on what Hong Kong is good at and what Hong Kong has to offer - well-regulated markets and a strong, functioning capital market.'

The 120 member companies of the Hong Kong Venture Capital Association together manage more than US$20 billion in Hong Kong, directing it around the region.



Extra efforts earn US$4b in investments