Hong Kong stands as Asia's largest venture capital/private equity centre in Asia. Since 1980s, the number of venture capital funds setting up operations in Hong Kong had grown significantly due its advantages of an uncomplicated tax structures, financial infrastructure and efficient communications. As at the end of 2001, funds under management amounted to US$24 billion*. There are now more than 150 firms involved in providing equity to private companies based in Hong Kong, with more than 500 professionals.

Hong Kong's role as a regional player is reflected by the fact that 90% of funds are disbursed to Asian companies outside of Hong Kong with recipients in China, Korea, Japan, Taiwan and other South East Asian countries

Prior to 1997, investments were focused on expansion stage companies. With the restructuring of the economies after the Asian financial crisis and the technology era, large buyout funds as well as smaller technology funds moved into the market. In terms of financing stage, about 18% funds disbursed was used for buyouts, 7% for restructuring, 49% in expansion/mezzanine stage, 21% in start ups and about 5% in seed stage companies.

90% of 'official' venture capital funds are from sources outside of Asia, largely from institutional investors. However there is a large pool of funds available for venture capital/private equity investments in Hong Kong and China, from Hong Kong based listed and non listed companies that is significant and not officially counted as venture capital or private equity.

After the hey days of the technology boom in 1999-2000, the industry has been suffering a downturn and consolidation. Fund raising had been modest during the past three years, however there has been several positive developments. Governments across Asia are instituting changes to strengthen the investment environment in the longer term with reforms in investment regulations and governance; these are stimulating investment, buyout and restructuring opportunities in Korea, Japan and China. At the same time, China has maintained its high rate of growth and rapid development as the world's manufacturing centre - in addition, it has also progressed in areas of information technology, microelectronics, media, environmental sciences, biotechnology and other life sciences as well in the agricultural processes. This offers wide ranging opportunities for Hong Kong venture capital/private equity firms which are well positioned to make sound investments given their proximity, knowledge, experience and understanding of the complex China market.

Major investors view Asia as a whole rather than individual markets. Many are demanding regional standards and performance information before commitment of sizable amount of funds in Asia. Hong Kong Venture Capital Association as the regional centre took a leadership role in the integration of the Asian region with the important establishment of the Asian Venture Capital Alliance formed in 2001. The Alliance will work together to build confidence of investors in the areas of governance and transparency

Despite the problems of deflation and the more recent and hopefully short term concern over SARS, the venture capital/private equity industry in Hong Kong remains "alive and well", enjoying the benefits of integration with China. It also enjoys an efficient and robust financial market of international standard and a free flow of capital which can process the huge demands of capital from China and Asia. It has a fair and independent legal system under which businesses can be managed. Equally important is the viable exit avenues in the form of trade sales or listings on the Hong Kong Stock Exchange or the second market, the GEMS board where 168 companies are listed since its establishment in 1999.

Hong Kong Venture Capital Association was established in 1987 to coordinate the industry in promoting venture capital/private equity business, networking and cooperation on regional and international front, and in raising the professional standards of the market. In Hong Kong, regular meetings and forums are held for practitioners and service providers to discuss industry issues. As China is of particular investment interest, the Association's activities include regular exchanges, delegations and summits and conferences with PRC businesses, Venture Capital Associations and government bodies. In Asia Hong Kong Venture Capital Association takes an important role in developing a distinct identity for Asian Venture Capital.

*Data from AVCJ