Giving VC biz the Chinese touch

Executives of Shenzhen Kaizhong Precision Technology Co Ltd ring the opening bell at the Shenzhen Stock Exchange to mark the company's listing on the bourse on Nov 24, 2016. Kaizhong is one of the 112 companies initially backed by State-owned Shenzhen Capital Group that went on to list on various stock markets in China and abroad. [Photo provided to China Daily]

Shenzhen Capital Group Co Ltd, a State-owned venture capital firm, will strengthen international cooperation and investments to bring in new technology to emerging industries in China.

Through investments in innovative companies overseas, the firm hopes to take full advantage of its capital resources to speed up upgradation of China's technology and industrial structure, said Ni Zewang, chairman of SCGC.

He said the firm could also help connect the startups it has backed in China with overseas industry resources so that they could mature more rapidly.

Since its founding in 1999 till November-end, SCGC has invested 24.3 billion yuan ($3.52 billion) in 683 projects in areas like modern service, high-end manufacturing, IT, technology and many other emerging industries.

By the end of November, 112 companies listed on stock exchanges. Of them, 74 were A-share listings. Others listed on overseas bourses, including some in the United States, Australia and Singapore.

Ni said competition among VC firms is intensifying in China. Also, projects securing investments are becoming extremely expensive. On the other hand, some overseas investment opportunities have arisen of late.

China's VC firms such as Huashan Capital One Inc, which invests in firms in financial technology, and Legend Star, owned by Legend Holdings, have been investing abroad.

In fact, China's VC and PE firms had made 265 investments worth 31.7 billion yuan in the first 11 months of 2016, according to Zero2Ipo Research, a Beijing-based researcher of financial institutions.

Its data shows the number of investments and the money invested rose 105 percent and 189 percent on average year-on-year respectively from 2009 to 2015.

SCGC's investments overseas account for only 6 percent of its total. Its goal is to increase the figure to 15 percent by 2020.

To reach that goal, SCGC will hire professionals, cooperate with well-known investment institutes, and establish cross-border funding, Ni said.

He believes such funding could connect domestic and foreign financial markets, leading to precise allocation of resources.

SCGC's various funds had capital assets worth about 200 billion yuan under management by November. It also has 1.2 billion yuan worth of joint venture funds involving financial institutes in Singapore, South Korea, Japan and Israel.

It is raising another 5 billion yuan for a new joint fund with US institutes, eyeing startups in cutting-edge technology industries, such as 3-D metal printing.

In November, it signed a strategic cooperation agreement with a Russian venture capital firm, a government-initiated fund of funds, in a bid to invest in Chinese startups registered in Russia and Russian startups in China.

"The fund will focus on Russia's competitive industries, including advanced equipment manufacturing, energy, chemical industries and premium consumption," said Ni, adding these sectors could also drive China's economic growth.

Though State-owned, SCGC's operations have been in line with international conventions. For instance, its project managers and high-level executives who vote for a project, need to co-invest an amount of at least 1 percent.

"The co-invest rule is common in private venture firms, but an exception in State-owned ones," said Ni, who personally has invested lots of money himself.

SCGC swears by strict evaluation, careful project selection, time-tested management processes and having seasoned professionals on its team. It has ensured its investments generate relatively high rate of returns of around 40 percent, according to United Credit Ratings Co Ltd, a Beijing-based professional credit ratings agency.

Ni is confident of sustaining high returns on international investments despite the sluggish global economy. He believes innovative companies will drive economy growth, but admitted competition from international VC firms with abundant resources and expertise in specific fields is fierce.

Shen Lingkun, an analyst with Zero2IPO Research, said the biggest challenge for China's VC firms going abroad is technology risk. "Investment in the most advanced technology comes with stronger uncertainty."

So far, many VC firms in China have regarded international investments as opportunities, but few have improved their strategy, she said.

With SCGC going global, domestic VC firms can seek its guidance to explore overseas markets and build VC brands with global outlook, Shen said.