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Speech by PSFS at Hong Kong Venture Capital and Angel Investment Conference (English only)

     Following is the speech by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Miss Au King-chi, at the Hong Kong Venture Capital and Angel Investment Conference today (December 5):

Fanny, distinguished guests, ladies and gentlemen,

     First of all, congratulations to the Hong Kong Science and Technology Parks Corporation on the 10th anniversary of the APAC Innovation Summit.  Many of you have travelled a long way to participate in this forum. You are here as Hong Kong embraces our late winter, but let me extend to you all a very warm welcome.    

     About a year ago, when addressing the Global Venture Capital Congress, I spoke on Government's new policy initiatives to facilitate the growth of different strata of our asset management industry.  Today, I am delighted to update you on how we are doing in pursing these initiatives, especially with regard to private equity.

     Allow me to first set the scene by providing you with some encouraging figures. According to the Asian Venture Capital Journal, the total capital under management in private equity funds in Hong Kong reached US$99 billion at end 2013, recording a year-on-year increase of 16 per cent.  Market statistics reveal that, by accounting for 21 per cent of Asia's total capital under management in private equity at end September 2014, Hong Kong ranks second only after the Mainland in this area. It will come as no surprise to you to learn that many of the region's top venture capital firms have a presence here. Hong Kong is home to around 379 private equity firms. Over 333 of these firms have their regional headquarters here.

     Everything happens for a reason. The reason why Hong Kong has become a venture capital and private equity hub in Asia is that this city offers all a business could need to grow at each stage of development on their road to market leadership.

     The growth story of a business starts right here. It is very simple to set up a business in Hong Kong. In less than a week and for a low cost, a company can be up and running. More importantly, Hong Kong has an open and international market.  Our regulatory regime is aligned with major overseas markets.  We take pride in our rich pool of professional talent and robust market infrastructure.  Free flows of information and capital benefit business and reinforce our competitiveness.

     Looking for seed capital would be the first challenge that all start-ups have to face on day one. Traditionally, local investors tend to invest in more mature business, securities or properties, and may not have the risk appetite for projects still at their infant stage. To assist start-ups in raising capital, Government's Innovation and Technology Fund has launched a funding programme - the Small Entrepreneur Research Assistant Programme (SERAP) - to support their research and development work. SERAP provides up to $6 million pre-venture capital stage financing on a dollar-to-dollar matching basis. Not only could this provide the necessary finance to early-stage entrepreneurs, but also reduce the risk of angel investors, which could in turn encourage more angel investments.  As at end September 2014, SERAP has approved a total of 393 projects, involving a funding amount of HK$470 million. To make better use of this important funding source, the Innovation and Technology Commission will replace SERAP with a new Enterprise Support Scheme in early 2015 with improved features.  For example, Government's funding ceiling for each project will be raised from HK$6 million to HK$10 million.

     While Government funding may help to a certain extent, for more ambitious plans, early-stage entrepreneurs would need to bridge the funding gap by looking for angel investors. One major challenge for these entrepreneurs has been to locate their angels and to pitch to them their brilliant ideas. But, as Fanny has just said, things may have changed since the establishment of the Hong Kong Business Angel Network in 2010 by the Hong Kong Science and Technology Parks Corporation, together with the Hong Kong Venture Capital and Private Equity Association and some local universities. The Network matches start-ups with angels and venture capitalists.  It has attracted some $136 million of angel and venture capital investment in quality start-ups in the past four years. I am delighted to learn that there is also community effort in bridging entrepreneurs and angel investors. For example, the Startbase Hong Kong is an online database covering Hong Kong-based start-ups, which provides easy access to Hong Kong's growing number of start-ups from web and mobile devices.

     The Corporation also provides incubation services to assist technology start-ups in their vulnerable inception stages, enabling them to grow and flourish. There have been 152 successful cases that secured angel and venture capital investments amounting to over HK$930 million since April 2003. This is very encouraging.

     If lucky enough, a start-up could soon move to the next stage of drawing venture capital to grow its business. Very often, this will involve a private equity fund taking a minority stake in a company which the fund manager thinks is likely profitable. And this is where the business sphere meets the financial world.

     This then brings me to one of our latest initiatives to facilitate the private equity industry, that is, to extend the existing profits tax exemption for offshore funds to private equity funds. Taking into account industry feedback, we have prepared a legislative proposal to allow offshore bona fide private equity funds, in addition to those corporations which are licensed by the Securities and Futures Commission, to enjoy tax exemption in respect of profits gained through disposal of their portfolio companies incorporated outside Hong Kong. Under this proposal, as long as an offshore private equity fund meets the specified criteria, such as being an investment vehicle with multiple investors, and not simply a vehicle majority-owned by the fund manager, it will be exempt from profits tax. This will bring benefits to an overwhelming majority of the industry. To make this happen, we aim to introduce a Bill into our legislature in March next year.

     Now let me return to the growth story, which would come to a great finale - the exit point to take profit, which could be a company sale, a buyout, or going public. An even greater finale could happen in Hong Kong - there is no capital gains tax on the sale of shares of private companies. Also, dividend income is not subject to withholding tax.

     If the exit plan is to go public, the Hong Kong stock market, with its liquidity, attractive valuations and easy access to international investors, is always a popular route. Last year, our stock exchange ranked the second in raising equity funds through IPOs. We are the Mainland China's international equity funding centre, given our deep liquidity and international investor base.  Mainland enterprises constituted about 57 per cent of Hong Kong's total market capitalisation last year.  We will also continue to facilitate overseas companies listing here.  

     If IPO does not fit your appetite, you may wish to get a taste in our very vibrant bond market.  We know that it's quite common for venture capitalists and private equity firms to look to low-cost debts available in the market, to help finance new acquisitions, or to increase leverage on new deals.  To this end, we spare no effort in strengthening the diversity and the depth of our bond market which will help accommodate this kind of fund raising, and satisfy the search of attractive asset classes.  

     For the Hong Kong dollar debt market, total new issuances in the first half of the year amounted to almost HK$1.2 trillion.  Investor appetite for offshore Renminbi debt securities, known as "dim sum bonds", has remained strong, as the total issuances in the same six-month period amounted to RMB280 billion, a jump of almost 40 per cent year-on-year.  While we have a mature USD debt issuance platform, we are seeing an increasing trend for institutions seeking USD funds to tap the offshore RMB bond market for efficient swap-based issuances.  

     To establish a benchmark yield curve for corporate issuers, the Government has launched a Government Bond Programme since 2009 to conduct regular debt issuances with a present size of outstanding bonds of over HK$100 billion. We are also exploring the issuance of Government bonds of a longer tenor to satisfy investor demand, and to build the yield curve for the relevant market segments.  We encourage both public and private sector entities to leverage the financial intermediation of the bond market.  In this regard, we welcome the Hong Kong Science and Technology Parks Corporation's recent HK$1.7 billion notes issuance to finance its phase three development, as it has well demonstrated the effectiveness and viability of the fund raising function of the Hong Kong platform.

     The measures I mentioned just now are part of the overall strategy to further develop our asset management business.

     Indeed, with the fast economic growth and wealth creation in Asia, as well as continued financial market liberalisation in the Mainland, we have the advantage to attract more funds of various types to base in Hong Kong. To this end, we have been implementing various policy initiatives to remove existing restrictions in the legal structure, broaden the product base and provide a more facilitating tax environment for our asset management industry.

     To diversify our fund management platform, we are taking steps to introduce an open-ended fund company (OFC) structure to expand Hong Kong's legal structure for investment fund vehicles.  The OFC proposal will allow funds to be set up in an open-ended structure like a company, but with the flexibility not enjoyed by conventional companies to create and cancel shares for investors to trade the funds.  We hope to attract more funds to domicile in Hong Kong, which will help build up Hong Kong's fund manufacturing capabilities to complement the existing fund distribution network and develop Hong Kong into a full fund service centre.  

     On tax initiatives, aside from the extension of profits tax exemption to offshore private equity funds, we will also be introducing a Bill into our legislature later this month to waive the stamp duty for the trading of all exchange traded funds (ETFs) to help promote the development, management and trading of ETFs in Hong Kong.

     A strong stimulus to Hong Kong's asset management business is the development of our offshore RMB business. Our city has a natural competitive edge of connectivity with the Mainland. In fact, the continued financial market liberalisation in the Mainland presents ample opportunities to Hong Kong as a hub of both venture financing and asset management.

     Hong Kong is now the world's largest offshore RMB investment product market. We have been leveraging this competitive edge to strengthen Hong Kong's role as an international financial gateway to the Mainland. Hong Kong is a fertile testing ground for our country to internationalise RMB. Of relevance to private equity, the deep pool of offshore RMB liquidity accumulated in Hong Kong, now amounting to over RMB1.1 trillion, has found channels of circulation by means of equity investment. In the years ahead, we will continue to play a leading role in promoting offshore RMB business.

     Some may see the Mainland factor more as a challenge to Hong Kong's private equity industry. We see mutual benefits instead. We have professional managers to run business and this city is well fortified with well-established contract law and laws to protect intellectual property rights, providing protection for start-ups. Hong Kong is simply an ideal launching pad for quality start-ups and venture capital investors seeking opportunities in the Mainland, the region and beyond.

     Ladies and gentlemen, I have highlighted some of our recent initiatives for the development of our financial services sector.  Indeed there is no room for complacency.  We would like to hear more from you as to how the Government may do a better job in meeting your need either as an angel or a start-up. Given the Mainland's rapid economic growth and the increasing affluence of its people, we expect that more overseas investors will seek to tap into the opportunities in the Mainland through Hong Kong.  

     On that note, I would like to wish you all a successful Conference and, for those coming from overseas, a most enjoyable stay in Hong Kong.

     Thank you very much.

Ends/Friday, December 5, 2014
Issued at HKT 10:25


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