Hong Kong: the venture capital centre of Asia

Hong Kong has developed into the largest venture capital centre in Asia, managing 30% of the total capital pool in the region, the Financial Secretary, Mr Antony Leung said today (September 16).

Delivering the keynote speech at the Hong Kong Venture Capital Conference, Mr Leung said currently Hong Kong firms managed about US$50 billion in funds and the city was home to nearly 700 venture capital professionals, the second highest number in Asia after Japan.

He said Hong Kong was largely the centre serving the region rather than an actual investment target.

In 2000, 91% of the funds under management by venture capital firms came from outside Hong Kong, and the bulk of the funds were for companies in the region, principally China.

"As we move ahead and away from the shadow of the Asian Financial Crisis in 1997 and the bursting of the technology bubble in 2000, we are seeing that the various reforms by governments and businesses in the region are starting to bear fruit," Mr Leung said.

"Enterprises are putting more emphasis on innovation, research and development. New ventures are also rising to new business opportunities and are bringing new products and services to the market.

"Asia has a vibrant entrepreneurial culture and attractive investment fundamentals, including large pools of low cost labour, increasingly large pools of scientists and engineers, and a rising degree of investment in technology infrastructure."

Mr Leung said consumers were increasingly receptive to new products and services, and were becoming more demanding on quality and variety.

"This is precisely the favourable type of soil for start-up businesses, which I am sure will provide plenty of opportunities for venture capitalists and private equity investors," Mr Leung said.

The full text of Mr Leung's speech 'Hong Kong: The Venture Capital Centre of Asia' follows:

Distinguished guests, ladies and gentlemen,

It is my great pleasure to be the keynote speaker at the Hong Kong Venture Capital Conference here today. I am particularly delighted to have the opportunity to talk to you about the energetic and exciting industry of
venture capital and private equity, which is important to the birth and growth of new enterprises in the economy. And I am also eager to talk to you about the
advantages of Hong Kong for venture capitalists seeking opportunities locally and in the Mainland of China, and to hear any suggestions you may have to strengthen our competitive advantage.

As I have set out in my Budget Speech in March, the financial services industry plays a key role in the economy of Hong Kong. It is our policy to strengthen our
position as a premier international financial centre of Asia. The venture capital and private equity industry is an important sector of our capital markets, and promoting the development of this sector will be an indispensable part of our overall strategy.

Hong Kong is the largest venture capital centre in Asia, managing 30% of the total capital pool in the region. I was told just now when we were having lunch that right now about 50 billion US dollars of funds under management by Hong Kong venture capital firms are here. There are over 660 venture capital professionals in Hong Kong, which is the second highest number in Asia after
Japan.

Hong Kong's venture capital industry is highly export oriented. Hong Kong is largely the centre serving the region rather than an actual investment target. In 2000, 91% of the funds under management by venture capital firms came from outside Hong Kong, the majority of which from outside Asia. As for the recipients of the funds, 87% of these funds were serving companies outside of
Hong Kong, though the majority of the funds were for companies in the region, and in China particularly.

As we move ahead and away from the shadow of the Asian Financial Crisis in 1997 and the bursting of the technology bubble in 2000, we are seeing that the
various reforms by governments and businesses in the region are starting to bear fruit. Enterprises are putting more emphasis on innovation, research and
development. New ventures are also rising to new business opportunities and are bringing new products and services to the market.

Asia has a vibrant entrepreneurial culture and attractive investment fundamentals, including large pools of low cost labour, increasingly large pools of scientists and engineers, and a rising degree of investment in technology infrastructure. Consumers are increasingly receptive to new products and services, and are becoming more demanding on quality and variety. This is precisely the favourable type of soil for start-up businesses, which I am sure will provide plenty of opportunities for venture capitalists and private equity
investors.

Regional opportunities for venture capital

In most measures, the venture capital and private equity industries are still in their early stage of development in Asia. Despite the fact that more than 12.3 billion US dollars was invested in the Asia Pacific region in 2000, and the investment has been increasing at an average rate of 15-20% per annum, it still only accounted for 0.12% of the GDP. This was relatively small when compared to 0.4% in Europe and 1.2% in the United States. In other words, there exist immense growth opportunities in the road ahead.

The Conference today - "Riding the Dragon" - offers a useful forum to discuss regional opportunities for venture capital and private equity, particularly those in China. China is the major investment destination for Hong Kong's venture capitalists. In 2000, Hong Kong and China ranked as the eighth most popular venture capital market in the world, and the most attractive market in
the Asia-Pacific region.

Contrary to general beliefs, China does have a strong base of science and technology by world standard. There are a huge number of prospective technology projects in the Mainland cities, such as Beijing, Shenzhen and Shanghai, waiting to be identified and developed. Moreover, China is opening its doors to private equity funding by instituting reforms to allow foreign investors to set up joint ventures, wholly owned private equity ventures, or partnerships with Chinese companies. The doors will no doubt open up further with China's accession to the World Trade Organisation.

Let us look at our neighbours - Shenzhen and the rest of the Pearl River Delta. Besides being one of the world's greatest manufacturing centers, a large population of academics and researchers are conducting research and development on information technology, multimedia, microelectronics, environmental technology, Chinese medicines, biotechnology and other life sciences, as
well as advanced manufacturing processes of traditional industries. This alone offers plenty of opportunities.

Hong Kong's venture capitalists

Venture capitalists in Hong Kong are well positioned to take on these opportunities. They are experienced in managing venture funds and have access to global networks. They have the necessary knowledge of effective strategies to help Mainland companies build up names in both domestic and international markets. They also possess the needed capabilities in managing local and regional research and manufacturing facilities. After all, Hong Kong has long been, and will continue to be, natural partners for foreign businesses exploring
the Mainland market, and for Mainland enterprises venturing to the outside world.

The Hong Kong Government is mindful of these opportunities, and is keen to facilitate the growth and development of the industry. From the macro perspective, Hong Kong offers an enabling environment for the industry to flourish. This includes free flow of capital and information, an independent judiciary based on the rule of law, clean and efficient government, a simple and low corporate tax regime, as well as a state-of-the-art transportation and telecommunications infrastructure. Together with the presence of a large and varied pool of qualified professionals in the legal, accounting, finance and consultancy fields, venture capitalists can benefit from the "clustering effect" available here in Hong Kong.

Specifically, venture capitalists and private equity investors can use Hong Kong as a base to manage their investments in China and the region. We have efficient, robust and liquid financial markets of international standards. You can manage your businesses here in Hong Kong. You can process the large demand for capital from entrepreneurs locally, in the Mainland of China, and elsewhere in the region. And you can also source sufficient supply of capital from all over the world to meets these demands.

Financial infrastructure

More importantly, venture capitalists will be able to find viable exit routes for their investments here in Hong Kong. Profits can be realised by sale of the share of equity, either as a trade sale or through initial public offering (IPO). In relation to the latter, our stock market, which has a market capitalisation of nearly 470 billion US dollars as at end August, provides
a well-established exit route of high liquidity for venture capitalists.

Particularly, a second market, namely the Growth Enterprise Market, was established in November 1999 to provide an alternative fund raising channel for emerging growth companies under a well-established market and regulatory infrastructure. As at the end of August 2002, 152 companies were listed on the GEM with a total market capitalisation of about 8 billion US dollars. GEM provides both an exit route and a venue for further fund raising for investment made by venture capitalists. This in turn facilitates more and earlier investments to be made by the venture capitalists in support of the growth of the industry.

Raising corporate governance

Poor corporate governance will hinder any investment opportunities. Lack of faith in the management's ability to make the project work is often cited as a major reason for venture capital walking away from a deal. If the management's integrity is in doubt, the venture capitalist is likely to consider whether the lack of integrity is actually symptomatic of greater problems in the deal.

To this end, the government and our regulators have embarked on implementing corporate governance recommendations, including those made by the Standing Committee on Company Law Reform. These measures will raise Hong Kong's corporate governance standards, which are already among the best in Asia. We will continue to push ahead with reforms, despite the hiccups during the consultation of the delisting mechanism for penny stocks.

Large investors are now looking at Asia as a region, rather than a composite of separate markets. In this regard, the requirements for regional standards and
performance information and the development of umbrella institutions to bring together the national institutions are emerging. I notice that this is being addressed by the Hong Kong Venture Capital Association and other national associations, with the development of the Asia Pacific Venture Capital Alliance. The goal, as I understand, is to establish a distinct identify for Asian venture capital and private equity as a vital and rewarding asset class for institutional investment, with Hong Kong as a recognised venture capital and private equity hub.

Ladies and Gentlemen, to sum up, Hong Kong's position as a key commercial and financial hub for businesses in China and the region brings unique advantages. Our strategic position offers significant opportunities, and venture capitalists in Hong Kong are ideally positioned to take on these opportunities. I would like to assure you that the Government commits to promote and strengthen our position as a premier international financial centre of Asia, including that for venture
capital and private equity. To this end, I am sure we will have the support and advice of the industry and the business sector at large.

Thank you.

End/Monday, September 16, 2002