A bullish stock market combined with overseas listing
constraints and investment difficulties are enough to convince
foreign venture capital firms in China that it's time to start
setting up renminbi funds.
"We are now helping three foreign venture capital firms to
establish renminbi funds," says Li Ying, a partner at HellerEhrman
LLP. The US law firm set up a Beijing office in 2004 and has helped
clients such as CID Greater China Venture Capital Fund II and TDF
Capital China II in their fund formation.
Foreign venture firms, so far the dominant players in China's
venture capital arena, used to raise funds mainly from overseas
investors using dollar-denominated funds to invest in Chinese
companies. But while they allowed firms to tap the global capital
market, the funds also ran into investment difficulties in China
because of the inconvertible renminbi and regulatory hurdles.
In the first half of 2007, venture investors spent more than
$2.36 billion on stakes in local companies. But only 7.7 percent of
the investments were made by renminbi funds, most of which were
from local venture capital firms.
In recent years, a handful of overseas venture firms such as
Sequoia Capital and SAIF partners have set up trial renminbi funds
with local partners.
Sequoia Capital China, which has about $1 billion under
management, is preparing to establish a renminbi fund with Shenzhen
Capital Group Co Ltd, according to the Asia Venture Capital
Journal.
In 2005, SAIF Partners, a China-savvy venture capital firm,
established its first renminbi fund with Tianjin Venture Capital Co
Ltd, a government-backed local venture firm.
Foreign venture firms must find a local partner to establish a
renminbi fund under the current rules. And local and central
governments, eager to explore new ways to finance domestic
start-ups, are expected to play an important role in those renminbi
funds. Some analysts say government investment institutions could
become the "funders of funds".
"We are in talks with a number of foreign players for setting up
renminbi funds," says Hu Bin, a senior official at the Investment
Banking Department under the China Development Bank. According to
Hu, the lender has invested more than 3 billion yuan in homegrown
venture capital firms in recent years.
Local governments have already set up several bodies to invest
in venture capital firms. For example, Shanghai's Pudong New Area
has earmarked 1 billion yuan to invest in venture capital
firms.
Beijing's Zhongguancun Science and Technology Park also
established a similar fund of 165 million yuan.
"A renminbi fund could be the choice for venture firms trying to
use China's stock market as an exit channel," says Guo Dehong,
managing director of Orchid Asia Group Management Ltd. "The high
price- earnings (PE) ratio in local bourses is very attractive
now."
The mainland's stock market, after a decade of sluggish
performance, has more than doubled over the past two years, pushing
the PE ratio of local shares up more than 30 times, much higher
than stock exchanges in Hong Kong and the United States.
The bullish market, accompanied by the government's move to
float non-tradable shares, has helped some local venture capital
companies to reap good returns from their investments in local
firms.
Shenzhen Fortune Venture Capital Co Ltd, a local investor, has
raked in a return 40 times its investment in Coship Electronics Co
Ltd, a Shenzhen-based producer of digital TV receivers and set-top
boxes.
Fortune Venture Capital paid 930,000 yuan in 2001 to buy 10
percent of Coship, which held a share offering on Shenzhen's small-
and medium-sized enterprise board last year.
"There are still some concerns about establishing renminbi
funds, such as the three-year lock-in period, double-taxation and
uncertainties in the listing process," says Chen Hao, managing
director of Legend Capital.
Local companies must remain profitable for three straight years
before they can hold a share sale, compared with no requirement on
profitability history on the NASDAQ, analysts say.
And venture investors must wait three years after a portfolio
company holds its initial public offering on a mainland stock
exchange before they can sell their stake in the firm.
"Double taxation is another concern about setting up renminbi
funds," says Huang Ping, a partner at Softbank China Venture
Capital. "The new Partnership Enterprise Law still leaves
uncertainties over the double taxation issue."
China's Company Law introduced in 2005 and the new Partnership
Law conform to international standards.
The country revised its Partnership Enterprise Law last year and
now allows alternative financing and investment structures such as
onshore limited partnerships.
The revision is expected to boost the number of renminbi funds
in China with the introduction of a limited and general partner
concept, a common practice in overseas venture capital markets.
But whether limited partners will be taxed on their investment
returns is unclear, say industry insiders.
"There will be more trial renminbi funds set up," says Gavin Ni,
CEO of Zero2IPO Group, a Beijing-based consultancy focusing on
venture capital in China. "But it will take a while for overseas
investors to become familiar with the procedures - from fundraising
to the listing process."
(China Daily September 6, 2007)
