Vincent Chan, a Hong Kong-based venture capitalist specializing in mainland companies, has no qualms in describing his business as “opportunistic” or worse. “Our job is like that of a loan shark,” hesays.<\/p>\n
Self deprecation aside, venture capital, as a form of direct foreign investment, is widely seen as an important source of funding to China’s hundreds of thousands of privately-owned small- to medium- sized enterprises. Though showing the most vitality, this sector of the mainland economy has largely been ignored by domestic banks, which have traditionally been focusing on lending to the State- owned sector.<\/p>\n
To finance their rapid business expansion, many private-owned enterprises have turned to irregular sources of funding, including underground money lenders and pawn shops, which charge interest at rates that are many times higher than banks. In comparison, venture capitalists seem more like “angels” than loan sharks. In some other Asian countries, including South Korea, venture capital is often endearingly referred to as “Angel funds”.<\/p>\n
Chan says he has been involved in direct investment in mainland companies for many years with different financial institutions. As director and executive vice president of Jafco Investment (Hong Kong), he is managing a venture capital fund totalling US$260 million.<\/p>\n
His company is a subsidiary of Jafco, one of the largest Japanese venture capital companies, with a global investment portfolio. Since it was established in 1973, the group has invested in a total of 2,600 Japanese companies, of which 689 had obtained a listing on the Tokyo stock exchange. Of the 200 US companies in which it invested, 44 were eventually listed. The group set up its Asian (outside Japan) investment arm 13 years ago and has invested in 300 regional companies of which 77 had obtained a listing in different Asian stock markets.<\/p>\n
In the first 10 years, Jafco (Hong Kong)’s strategy can be described as mainly “opportunistic”, says Chan. During that time, it invested a total of US$120 million in 40 companies that engaged in relatively more traditional businesses, such as manufacturing or retail, and had already shown a healthy return, Chan says.<\/p>\n
“We were able to buy into these companies mainly because they needed the capital to expand their businesses,” he says.<\/p>\n
“We avoided technology companies in those days to minimize risks,” Chan recalls.<\/p>\n
But in the past three years, Jafco (Hong Kong) has drastically changed its strategy to one that focuses on technology companies. Since then, the company has invested in 10 mainland technology enterprises, injecting a total of US$40 million. With about US$100 million at hand, the company is actively looking for opportunities.<\/p>\n
Chan says that the change in strategy was brought about by the view that the technology sector on the mainland has matured to a point where many companies have built up the expertise and resources to develop, manufacture and market technology products that can compete with foreign brands in the domestic market. Take mobile phones for example. In the past, the three foreign manufacturers, Motorola, Nokia and Ericsson had a stranglehold on the market. Now, they are losing market share to several domestic brands from TCL, Legend, Bird and Haier.<\/p>\n
But Chan says that even for technology companies, the average return on venture capital investments in Asia is much more modest than that in the US. “In Asia, it is hard to make anything more than 20 times,” he says. “Anything between 10 to 20 times in five to six years is considered good,” he adds. In contrast, 100 times return on a venture capital investment in the US is not uncommon, he says.<\/p>\n
The dearth of high-margin businesses in the region can be attributed to the unwillingness of Asian companies to invest in research to develop products that are innovative enough to be patented as intellectual properties, Chan says. Asian technology companies, including those on the mainland, are capable of producing products that are technologically equivalent to those of the advanced industrialized countries at lower costs. But so far, no Asian company is known to have developed a patented product that can rake in big profits year after year.<\/p>\n
A company in the low margin end of the business in the US would never have been considered by venture capitalists. But the risk of investing in such companies is lower than investing in one that is engaged in research and development of leading-edge products, Chan says.<\/p>\n
The emphasis in Asia, including the mainland, is to focus on technology companies that are applying technologies developed in the US or Europe to produce products at its Asian manufacturing base. There are no shortage of such companies on the mainland, especially in the Pearl River Delta area which has become the manufacturing powerhouse of the world.<\/p>\n
The penalty of failure is, of course, the same everywhere. “If you bought into a dud, whether it’s an Asian company or a US company, the write-off is total,” he says.<\/p>\n
The chances of making a successful venture capital investment are usually low. Chan says that making money on three deals out of 10 is considered very good. That low rate of success combined with a relatively smaller average return has made venture capital investment in China a high-risk game.<\/p>\n
Another major problem is inadequate exit channels for mainland investments. The most common and efficient way to cash in on a direct capital investment is to sell the shares of the company in the stock market. But Chan says that the mainland stock market is too immature to properly reflect the true value of an enterprise.<\/p>\n
The Hong Kong stock market, especially the Growth Enterprise Market, is a viable alternative. But a spate of scandals involving mainland enterprises have greatly undermined investors’ confidence in “red chips”. Even the better ones are now traded at prices that are way below their net asset values.<\/p>\n
But those negative factors do not seem to have fazed Chan. “We simply cannot apply the US benchmark for venture capital investment in China,” Chan says.<\/p>\n
There is no established benchmark for venture capital investment in China yet, he says. “We are still on a learning curve,” he adds. But “if you’re not in the game when the market gains maturity, you’ll be too late.”<\/p>\n","protected":false},"excerpt":{"rendered":"
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