Fund managers are part of the native fauna of Hong Kong, so nobody batted an eye when a large group of people complete with expensive suits and flashy blackberries gathered in September at a downtown hotel to discuss where to put their – and their clients'- money.
Such gatherings in the region's financial heart are not likely to become rare anytime soon. Hong Kong is a natural jumping off point for the growing number of funds looking to invest in China and the rest of Asia Pacific.
"These days there is so much money," said Roman Shaw, a Shanghai-based venture capital fund manager who recently closed fundraising on a technology-focused venture capital fund in China. "Guys who didn't want to talk about China are now looking for deals."
Shaw represents a new breed of home-grown venture-capital fund managers that are setting up operations to tap the China market. Usually foreign educated, these fund managers can claim short track records of their own.
DT Capital Partners, Shaw's company, represents his second fund. It aims to raise more than US$100 million to invest in China.
It is difficult to peg the amount of investment money looking for a home in China because many companies in this famously informal economy rely on private angels, family connections or local big shots to grow (See: What's in name?).
Follow the money
Still, Ernst & Young says venture capital funds directed US$1.18 billion to 154 deals in China in the first nine months of 2006, putting the industry well on track this year to surpass the US$1.2 billion directed to 151 deals during the whole of 2005.
The amount of private equity funds floating around China has also jumped, from US$1.1 billion in 2004 to US$1.6 billion in 2005, according to Thomson Financial research. Professional services firm KPMG calculated that private equity firms raised a record US$20.6 billion to invest in Asia in 2005.
This pile of private money is on track to grow even further in 2006 and beyond.As the pile grows, talk of a bubble is becoming more common, if not among fund managers then certainly among those who invest with them. They worry that there is too much money flowing into the region and that, sooner or later, a bust will come.
"One of the constant things that you see from people who are looking to put money with us or with other private equity firms is concern about deal flow," said one private equity fund manager from Beijing, who asked not to be identified.
On the surface, it is not an irrational fear. After all, around US$8 billion in aggregate funds have been accumulated over the last three years for private equity in China according to some estimates.
But there may still be plenty of room for that money to find a home and grow. As Johannes Schoeter, general manager of Hong Kong-based Victoria Capital, said: "US$8 billion in a [US$2.2 trillion] economy is not a lot of money."
This simple figure is good news for investors that have grown fat on easy returns, and even better news for those who wish to follow in the footsteps of the early movers.
While it is true that rates of return have slowed as the market has matured, it is also true that the money to be made in China (and across the rest of Asia) is significant enough to continue to attract the attention of the largest money holders from around the world.
Back in mid-September, during the SuperReturn Asia 2006 conference in Hong Kong, a handful of fund managers took in a seminar by veteran market-watcher Vincent Chan of Jafco Asia.
Chan, who knows as much as anybody about Asia funds and China's venture capital market, outlined how private equity funds in the early- to mid-1990s could raise money simply by name-checking China, with returns above 30% more expected than merely hoped for.
Those were the days before purely domestic venture-capital funds and a crowded investment community. Those were the days during before Suntech redefined the Chinese success story, proving to domestic firms looking for growth capital that they had the clout to hold out for a better deal.
In the years since, companies have learnt that they have value to offer in exchange for capital.
At the same time, investors have realized that they may have to shell out more money and live with smaller returns than those available during the high-water-mark days of China investments.
Average returns have declined somewhat. Some funds have made investments with expectations of 15-17% returns and large Asian funds now target returns of 25%, according to a KPMG survey.
This has not deterred investors from starting new funds in the region. On the contrary, the maturing of the market may be yet another incentive for more companies to set up shop here.
"Who wouldn't say no to 20%-plus returns?" asked Gavin Geminder, a partner at KPMG in China and Hong Kong SAR.
The KPMG study notes that the number of funds operating in Asia Pacific jumped from 151 in 2003 to 173 in 2005. At the same time, the amount of money available across the region has jumped to over US$20 billion.
Competition has gone a long way towards eliminating the low hanging fruit from the tree but there are still plenty of opportunities for the smart investor.
Neil Shen is among those who have made the most of the China market. Shen built his reputation and fortune as the founder of online travel agency Ctrip.com and budget hotel chain Home Inn. In November, he watched as Home Inn raised US$109 million on a NASDAQ listing, before an investor frenzy pushed its share price 59% in first day trading.
Shen is also the founding manager of Sequoia Capital's China operation, where his reputation as one of China's most successful entrepreneurs and investors helps bring in the investors.
"The overall economy has been doing very well and that can certainly provide a lot of opportunity for young small- and medium-sized corporates to grow," he said.
"If you are a top venture capitalist you should be able to generate a handsome return for the fund."
In China's increasingly competitive investment market, the key may be to find fields that have so far been neglected and win the early mover advantage by backing the emerging leaders.
The vast majority of venture capital investment has traditionally gone to high tech start-ups. But now the service industry and technology transfer ventures are rapidly developing and entire sectors of the economy are up for grabs.
China also offers the opportunity to differentiate geographically from the competition to break open new regions.
According to the Beijing-based manager, the uncharted waters lie in a "diagonal band from Beijing to the southwest, avoiding the coastal provinces".
Kenneth Read, managing director of business development for Thomson Financial Asia, agrees.
"Toward the coast, you will have an environment that much more closely resembles the environment your Western style venture capitalist or private equity investor will be familiar with.
"But they are going to need to start venturing inward a little bit to start uncovering more opportunities."
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