Private Equity in Hong Kong

Private Equity in Hong Kong Presented by: Gordon Clancy Asia Pacific Head Citigroup Venture Capital International Citigroup Venture Capital International 1 Outline • Role of Hong Kong • Paradigm shift in standards • Hong Kong as hub to invest in China • Conclusions Citigroup Venture Capital International 2 Hong Kong is a management centre of regional private equity Source of private equity in HK: US$24bn in 2000 Other Asian Countries 20% Disbursement of private equity in HK: US$9bn in 2000 HK Companies 13% Non-Asian Companies 3% HK 9% Non-Asian Countries 71% Other Asian Companies 84% Hong Kong - conduit of private equity to Asia Source: AVCJ Citigroup Venture Capital International 3 Managers of private equity in Hong Kong are facing a crisis of confidence • Poor investment performance • Many major firms (proprietary & funds) are leaving or closing • First time ever no new money being raised by Hong Kong managers (mid-year Asia Private Equity Review - July 2002) Citigroup Venture Capital International 4 Primary cause of this crisis in confidence is the poor investment performance due to... • Minority investing • Weak terms & conditions • Reliance on local stock markets for exit • Weak participation in investee companies • Poor investment selection capability Citigroup Venture Capital International 5 The private equity industry in Hong Kong needs to focus on improving its investment standards to create demonstrable performance • Later stage investing with promoters who share similar goals as the private equity investors • Stronger terms & conditions - better exit controls & options - more management controls • Larger stakes • More participation with investee companies 6 Citigroup Venture Capital International We see the Hong Kong private equity industry overcoming this confidence crisis to remain the leading regional centre due to • Abundance supply of professionals/experience base • Legal, accounting & regulatory framework • Low tax regime & freely convertible of currency • Strategic location & good infrastructure • Large community of private equity firms In particular, Hong Kong has a unique advantage for investing into China 7 Citigroup Venture Capital International Private equity funds’ key concerns for investing in China Importance rating (5 - very important, 0 - not important) Integrity of management 4.6 Quality of corporate governance 4.5 Quality / transparency of information 4.5 Tax, regulatory, and legal concerns 4.4 Management control 4.1 Currency issues 3.7 Immaturity of domestic capital markets 3.4 Governments commitment to change 3.3 Impact of WTO 2.9 Source: PWC Citigroup Venture Capital International 8 Hong Kong’s competitiveness as an offshore private equity investment centre into China • Professional management • Corporate governance • Tax efficiency • Regulatory & legal framework • Professional advisors • Access to co-investors • Funding • Language & cultural understanding • Exit • Costs • Technology know how Citigroup Venture Capital International            9 The Hong Kong advantage has been demonstrated in FDI statistics (FDI in China 1992-1998) 140,000 120,000 100,000 80,000 US$MM 60,000 40,000 20,000 Singapore Taiwan HK E.U. S Korea Japan U.S. Source: Internal Trade, Almanac of China’s Foreign Economic Relations & Trade, and China Statistical Year book Others 0 Citigroup Venture Capital International 10 Conclusions • A major reform is necessary & developing • Hong Kong is & will remain as the centre for private equity in Asia • Hong Kong will be one of the major roads to China • Timing is good Citigroup Venture Capital International 11