China takes a bow

This month sees the formation of the China Venture Capital Association (CVCA), an industry body which aims to promote the interest of venture capital firms investing in the Greater China region. Leading investment managers such as Warburg Pincus, Carlyle and Goldman Sachs have joined forces with the NVCA and Digital Fortune magazine to establish an ambassadorial body that hopes to foster relations between foreign investors and all levels of local and national government in China.

Until now, Chinese venture capital bodies have existed within a regional framework, although the number of associations has increased rapidly in recent years in line with the growing amount of interest in the region. The Hong Kong Venture Capital Association, established in 1987, has held formal meetings with local bodies including associations in Jiangsu, Shenzhen and Shanghai, as well as a number of science and technology committees in the region.

The inaugural body will comprise a board of directors of between seven and nine representatives, drawn from international houses including Pama Group, IDG and Intel Capital. It will comprise around 20-30 members, which between them control funds worth several hundred million dollars. Chang Sun, managing director of Warburg Pincus Asia, will be the founding member of the fledgling organization. The organization will be incorporated in Hong Kong with a representative office in Beijing and will provide investors with networking and knowledge-sharing opportunities and aims to promote high ethical and professional industry standards. It will also provide research data and professional development for members.

According to Warburg Pincus Asia's David Li, the rationale behind the association is simple. ?We are looking to establish a body that will best represent the interests of its members in a relatively new market. This will be achieved through lobbying the Chinese government in the hope of achieving more favourable policies for foreign investors.? China's admission to the World Trade Organisation increases the scope for investment in a region that had previously been prohibitive to foreign investment.

Private equity and venture capital firms have only been operating in China for the past decade and consequently there are still a number of teething problems. According to Li ?Private equity firms investing in China are faced with varying difficulties, not least the lack of viable exit strategies. Restrictions on ownership, and the fact that China is not a wellestablished capital market, are also a hindrance to achieving successful exits from investments.?

Venture capital firms invested around $500m out of a total of $40bn invested by foreign companies in China last year. Chang Sun, founding partner of the CVCA, expects this figure to decline this year as a result of the global decline of the technology sector. However Sun sees great potential for China. Warburg Pincus is planning to increase its investment in China from $100m in 2001 to around double that figure for the coming year. The firm's Chinese investments to date include AsiaInfo, a software systems integrator which was backed by the firm in 1997. AsiaInfo floated on the Nasdaq in March 2000 with a market capitalisation of $128m.

Li believes that investment opportunities are not restricted to IT related sectors. ?It is not just the technology sectors that offer opportunities. We are very positive about a broad range of industries in the region.? Sun reinforces this point, highlighting the potential of financial service providers – banks, insurance companies and security houses – as sectors of particular interest to the firm.

Despite the recent downturn, and the subsequent increase in competition for the best opportunities, which have seen price-to-earnings ratios fall dramatically in the past year, Sun is optimistic about the Chinese market, a point backed up by Li. ?We're very positive about the prospects for the CVCA. It will be important for the industry to have its say in the development of the market.? In a market as big as China, a little cooperation can go a long way.