New HK venture fund needs "high-quality investors"

The Hong Kong government’s new HK$2 billion ($257 million) innovation and tech fund must properly incentivise investors to attract “high-quality” capital, said Denis Tse, executive director of the Hong Kong Venture Capital and Private Equity Association (HKVCA).

The association has welcomed the scheme, which was launched this week to encourage investment from institutional venture capital funds into Hong Kong technology start-ups. It will use a matching process, whereby the government will put in capital alongside that of private investors.

“The government will need to attract the right level of interest from asset managers,” Tse told AsianInvestor. “They will need to be economically motivated in the right direction – not just to make money, but to invest in what the government wants them to invest in.

“I want to see high-quality investors, those who have experience in this area,” added Tse, who has run his own investment firm, Asia-IO Advisors, since April 2015. Before that he was Asia head of private investments for  six years at Lockheed Martin investment Management, which runs the pension assets of US-based Lockheed Martin Corporation.

Whether an asset manager can raise its own capital for the Hong Kong scheme is key, said Tse. “It won’t help anyone if the fund doesn’t attract a sufficient amount to match that being pledged by the government. That sets quite a high bar for the quality of the managers, at least with respect to their fund-raising capabilities.”

Another issue for asset managers is how they will reconcile this programme with their existing funds. They will have to manage this side initiative and accommodate it into an existing investor programme, said Tse, taking into account issues such as investor conflict and human resources.

Very little information is available on how the scheme will operate as yet, noted Tse, but references can be drawn from some other models.There is a fund-matching initiative in Israel’s VC industry, where the ratio is 70% government funding to 30% private money, and which has a similar philosophy to the Hong Kong programme, he said.

Another scheme is the Singapore government’s disbursement programmes for various stages of investments from early VC through to small-and-medium-sized-enterprise stage. There are also various fund-matching models in North America at state level focused on different sectors.

It is also not yet clear whether the money will be disbursed in several stages or in another way, said Tse, but he sees it as a very encouraging move, especially given the surprisingly large size of the fund. “This can be a strong catalyst for local entrepreneurs if the money can be disbursed; HK$2 billion can go a long way in the venture space.”

If it is to succeed, not only will investors have to be incentivised in the right way, but entrepreneurs will need to be ambitious and committed. “There has to be a commensurate mental adjustment among local entrepreneurs,” said Tse. “They can’t just be focusing on developing Apple apps.”

He said the Hong Kong government had been very active in engaging the investment industry through groups such as the HKVCA and the Venture Investors Alliance of Hong Kong, of which he is a member.