HKVCA (Hong Kong Venture Capital and Private Equity Association)

 

Mission of HKVCA

HKVCA (or Hong Kong Venture Capital and Private Equity Association) represents over 400 corporate members which include 240 private equity firms (such as the top 10 largest private equity firms and small VC investors). All these firms together are managing a total assets of US$ 2 trillion, and are engaged in venture capital and private equity investments in the Asia-Pacific region at all levels (from venture, growth, buyout, secondary, to pension, funds of fund, family offices, etc.)

HKVCA (https://www.hkvca.com.hk) has the mission to promote the venture capital and the private equity industry in Asia, and encourage all the corporate members to create value, innovate, and develop the economy.

HKVCA provides a forum to its members to network and share experiences, while promoting industry professional ethics, international best practices and standards.

The Hong Kong Venture Capital and Private Equity Association reflects the views of its members to the government departments.

About HKVCA

HKVCA (or Hong Kong Venture Capital and Private Equity Association) was founded on November 12, 1987. It was formed based on the recommendation in the Working Party of the Hong Kong Association of Banks' study of venture capital. The main objective at the time was to promote and protect the interests of the venture capital industry in Hong Kong.

HKVCA has been incorporated as a HK company limited by guarantee.

The very first venture capital funds were formed in Hong Kong in the early 1980s. The money was raised from local and foreign investors. Hong Kong always has had low tax, relatively uncomplicated tax structures and financial infrastructure, and efficient communications. All these factors have encouraged many venture capitalists to set up their operations in Hong Kong (i.e. HKSAR). Hong Kong has often been the center for regional investment, even when much venture capital investment is/was China related.

Venture Capital and/or Private Equity – Why?

Conceptually, venture capital (VC) can provide long term equity funding to young, fast growing companies (i.e. startups). VC funds can be known as "direct investment" or "private equity investment". The three main types of private equity transactions are startup venture capital, development capital and buyouts.

When a startup needs to raise funds for further development of the business, the financial support can take the form of loans and/or equity capital. A company not listed on a stock exchange can receive funds from banks or by issuing shares to private investors. Venture capital companies inject funds into the company in exchange for a proportion of its equity.

Usually a young company without any strong track record can find it difficult to get any funding for its business expansion. At this stage of the startup business, many banks are reluctant to lend them any loan/credit unless the startup can provide collateral.

But with venture capitalists, they would inject fresh capital into the startups instead of commercial loans. This does not require the startup to provide any collateral or pay back any interest.

Professional/experienced venture capital firms may be able to serve as useful sounding boards for startups in many strategic and management areas. The VC firms can provide senior level counsel on key issues and infrastructure support to help young companies / startups.

Consider the different stages in funding/investment.

Stage 1 - Seed: This is the stage when a business idea is conceived and the initial concept of the business is formed. The entrepreneur would fund the project with his/her own resources/assets.

Stage 2 - Startup/Development: The product/service is being developed at this stage. Free trial on using the product/service are released to selected new users. Most likely at this stage, there is still not enough or not at all any users who would pay to use the product/service. Commitment on funding is high, but the rate of failure is also high.

Stage 3 - Expansion: The startup has come a long way and now is established. Users have been paying to use the products/services which were developed by the startup. Now the startup/company is ready to expand its business with additional funds. Bank loans now are more available at this stage but still require collateral. The best funding option is to get equity investment (or expansion or development capital). This will ensure the uninterrupted, quick growth to new markets.

Stage 4 - Mezzanine: This is the stage after the company has already built a good track record over the past few years of continuous successful growth. A company restructure is required to strength the balance sheet for the preparation of the listing on the stock exchange. An additional venture capital firm may be needed for attracting more potential investors. At this stage, the rate of failure is relatively low in terms of venture capital investment.

Stage 5 - Buyouts: When a buyout happens, its objective is to acquire the control over a business either through the purchase of shares or the assets and trading liabilities. A buyout usually only works when the business has sustainable cash flows. Buyouts may be done in different ways including Management Buyout (MBO), Leveraged Buyout (LBO), Management Buy-in (MBI), or a mix of all three. After a buyout is complete, the VC will own the majority of the share capital and full strategic control of the company. But the management staffs will be responsible for the day-in-day-out operations.

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