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1 1
Presentation By
Vincent Chan
Director & Executive Vice President
JAFCO Investment (Hong Kong) Ltd.





Rom 201B, Level, 2, Hong Kong Convention & Exhibition Centre
11:15am-12:30pm November 29, 2001


Venture Capital:
Funding Alternative for New Enterprises

1 2
Content
1. Definition
2. Nature of Venture Capital
3. Source of Funding
4. Revenue Model
5. Stages of Investment
6. Geographical Preference
7. Industry Preference
8. Investment Process
9. Past Development
10. Competition
11. VC looking for in return
12. Classic Cases
13. Points to Take Home
14. General Information
15. About JAFCO

1 3
1. Definition: What is Venture Capital
 U.S. – >30 years in existence

 Fairly new term in Asia (until the last 2-3 years)

 Earliest venture capital firm in Asia began in 1963 in Japan

 Refers to investments in young, rapidly growing companies
(particularly high-tech related) in the U.S.

 Wider meaning in Asia ------- generally refers to equity
investments in growing, unlisted companies.
 Private Equity
 Direct Investments

 Serves as an intermediary between investors looking for high
returns and entrepreneurs in need of capital
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2. Nature of Venture Capital
 VS Debt Financing

 VS Public Market

 Objective: generation of long term capital gains

 Horizon: 2-7 years

 Liquidity: low

 Risk: High

 Instruments: shares, convertible bonds, options, warrants

 Critical factor(s): Management team and market potential,
rather than collateral

 Impact on Profit, Balance Sheet


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3. Where does the money comes from?

 Fund investors:

 Insurance companies
 Pension funds
 University endowment funds
 Family trusts
 Government Treasury / Agencies
 Listed corporations / Private companies
 Wealthy high net worth individuals (>US$1
million)


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4. Revenue Model of Venture Capitalist

 Formation of the Fund : closed-end, structure:
L.P./L.L.C.

 The Appointment of the Investment Manager

 Remuneration: ◈ Management Fees
◈ Carried Interests – hurdle rate

 No e-commerce for us!


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5. Stages of Investment

 Stage One: Seed / Angel Round
 Stage Two: Start-up / Early stage
 Stage Three: Expansion / Development
 Stage Four: Mezzanine / Bridge
 Stage Five: Buyout / Buyin
 Stage Six: Turnaround / Restructuring
 Stage Seven: Others (pre-IPO, Privatization,
straight punt)






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6. Geographical Preference

◈ China ◈ Thailand ◈ India
◈ Hong Kong ◈ Malaysia ◈ Sri Lanka
◈ Taiwan ◈ Singapore ◈ Australia/New Zealand
◈ South Korea ◈ Indonesia ◈ Israel
◈ Japan ◈ Philippines


Forbidden Land
◈ Myanmar ◈ Brunei
◈ Vietnam ◈ Pakistan
◈ Laos ◈ North Korea
◈ Cambodia




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7. Industry Preference / Classifications

◈ Telecom ◈ Construction/Mining

◈ Media ◈ Agriculture/Fisheries

◈ IT ◈ Infrastructure/ Transportation

◈ Leisure/Entertainment ◈ Financial Services

◈ Electronics ◈ BioTech/Life Sciences

◈ Travel/Hospitality ◈ Real Estates

◈ Manufacturing/ Consumer Products


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8. Investment Process
· Sourcing/Marketing  Exits:
◈ IPOs
◈ Sale back
◈ Trade sale to Strategic investors
· Initial evaluation & terms ◈ Put Option



· Due diligence · Monitoring
◈ viable business plan ◈ board seat
◈ proprietary technology ◈ financial performance
◈ enforceable legal structure
◈ accounting/financial integrity
· Documentation/Completion/Funding
◈ legal structure
◈ valuation


· Final negotiation/term sheet
◈ Shareholders’ Agreement
◈ Subscription Agreement
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9. Asian Direct Investments
Development: Past
 Excessive valuations

 Plenty of capital available

 Weak deal flow but aggressive competition

 Tightly - controlled enterprises → family business → allow only
passive investments

 Limited Government support for foreign investors → legal reforms →
→ corporate governance (transparency)

 Risks associated with currency, political stability and credit





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9a. Asian Direct Investments
Development:Past (cond’t)
Statistics: capital under Management
Country 1997 1998 % change 1999 % change
Australia 2,721 3,062 12.5% 3,616 18.1%
Hong Kong/china 10,670 15,442 44.7% 22,288 44.3%
India 1,016 1,053 3.6% 1,826 73.4%
Indonesia 426 328 -23.0% 333 1.5%
Japan 7,722 12,513 62.0% 21,729 73.7%
Korea 1,857 2,995 61.3% 4,986 66.5%
Malaysia 406 460 13.3% 667 45.0%
Myanmar 113 83 -26.5% 36 -56.6%
New Zealand 110 186 69.1% 413 122.0%
Pakistan 6 15 150.0% 57 280.0%
Philippines 169 224 32.5% 292 30.4%
Singapore 4,468 5,258 17.7% 7,791 48.2%
Sri Lanka 71 68 -4.2% 68 0.0%
Taiwan 1,913 3,598 85.4% 4,447 23.6%
Thailand 177 242 36.7% 265 9.5%
Vietnam 292 258 -11.6% 318 23.3%
Total 32,137 45,785 42.5% 69,132 51.0%
Source: AVCJ 2001 Directory
26,222
30,951
33,433 33,791
32,136
45,785
69,132
21,925
23,431
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1991 1992 1993 1994 1995 1996 1997 1998 1999
US$million
Asian Venture Capital Pool 1991-1999
1 13
9b. Fund Raising Scoreboard
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
US$M
Initial Close
to date
$2,006
17
Funds
$2,178
16
Funds
Final Close
to date
Total Funds Raised to Date
$4,184
33
Funds

2001
$6,520
43
Funds

2000
Funds closed from January to September 2001
1 14
9c. Fund Raising Scoreboard
Conv'l
Pri vate
Equi ty 18%
Re-
structuri ng
29%
Technology
53%
Jan-Jun 2000
Amount Surveyed: US$5.3 billion
Conv'l
Private
Equity
23.6%
Re-
structuri ng
18%
Technology
58%
Jan-Jun 2001
Amount Surveyed: US$6.8 billion
Distribution of Private Equity Funds
(Jan-Jun 00 & 01)
Note: Survey excluded Australia & New Zealand's fund pool and Global Funds
Source : ASIA PRIVATE EQUITY
REVIEW
1 15
9d. Fund Raising Scoreboard
Industry Breakdown by Amount
Amount: US$1.7b (Jan-Jun2000)
Internet
44.4%
IT
6.5%
Others
5.5%
Food
0.7%
Banking &
Finance
3.3%
Manufactur-
Ing
31.4%
Reverse
Takeover
8.2%
Biotech
0.27%
Others
5.45%
Consumer
Goods
4.22%
Internet
2.02% IT
6.59%
Auto
Industry
7.11%
Semiconduct-
or
31.93%
Banking &
Finance
23.16%
Telecommun-
ication
19.26%
Industry Breakdown by Amount
Amount: US$1.82b (Jan-Jun2001)
Regional Private Equity Firms’ Investment Profile
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10. Extreme Competition
 Too many players: Local & Foreign/Domestic & Regional

◈ HSBC Private Equity ◈ ABN-AMRO Asia ◈ JAFCO
◈ PAMA ◈ ING/Barings ◈ Walden
◈ AIG ◈ Citicorp ◈ Transpac Capital
◈ Morgan Stanley ◈ China Assets ◈ Tech Pacific
◈ Merrill Lynch ◈ ChinaVest ◈ Intel Capital
◈ Golden Sachs

 Value-added services/advantages
◈ Financial and strategic planning
◈ Recruitment of key personnel
◈ Access to international markets and technology
◈ Introduction to strategic partners and acquisition targets
◈ Obtain a public listing







1 17
10a. Extreme Competition (cond’t)

 Statistics: No. of Venture Capital firms


Country 1997 1998 % change 1999 % change
Australia 66 85 28.8% 124 45.9%
Hong Kong/china 107 129 20.6% 190 47.3%
India 42 41 -2.4% 44 7.3%
Indonesia 46 46 0.0% 44 -4.3%
Japan 210 231 10.0% 221 -4.3%
Korea 128 123 -3.9% 131 6.5%
Malaysia 19 20 5.3% 28 40.0%
Myanmar 3 2 -33.3% 1 -50.0%
New Zealand 7 13 85.7% 16 23.1%
Pakistan 3 3 0.0% 4 33.3%
Philippines 8 10 25.0% 14 40.0%
Singapore 59 64 8.5% 85 32.8%
Sri Lanka 10 12 20.0% 12 0.0%
Taiwan 74 124 67.6% 132 6.5%
Thailand 7 8 14.3% 15 87.5%
Vietnam 7 7 0.0% 7 0.0%
Total 796 918 15.3% 1068 16.3%
Source: AVCJ 2001 Directory
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11. What are VC looking for in return?
 Big equity upside from appreciation in the
value of the Company.

 Return target – normally in the range of IRR
15%-25% in Asia.

 Exit for VC to take place either before or at
the same time with the entrepreneur.



1 19
12. Classic Cases in Hong Kong
 Sing Tao Holdings – Lazard Asia Investment

 Siu Fung Ceramics – Peregrine & Consortium

 Cheung Wah Development – Softbank

 Acme Landis Holdings (i100) – H & Q

“Can you think of any other case in Hong Kong?”


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13. Points to Take Home
 Venture Capital has become an alternative class
of assets on its own

 Extremely competitive marketplace

 Useful conduit of capital between those who
need and those who have

 High risk – high returns (Universal Truth!!!)

 Tough but fun career for those in it!


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14. General Information
 Industry Associations
◈ Asian Venture Capital Journal/AVCJ Holdings
http://www.asiaventure.com
mail: [email protected]

◈ Hong Kong Venture Capital Association
http://www.hkvca.com.hk
mail: [email protected]

 Book Recommendation
◈ Title: Fundamentals of Venture Capital
◈ Author: Joseph W. Bartlett
◈ Publisher: Madison Books
◈ ISBN# : 1568331266





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15. About JAFCO
 JAFCO Co. Ltd. – largest venture capital manager in
Japan
 Founding shareholders: Nomura, Sanwa Bank, Nippon
Life
 Operation since 1973; listed on the Tokyo Stock
Exchange
 Offices in the U.S. (Palo Alto, Boston), Europe (London)
and Asia (9 offices)
 Over US$3 billion under management with US$800
million in Asia Pacific
 Asian’s Track record: over 250 companies of which
120 had exited (73 had obtained IPO)
 Nomura – our largest shareholder has over 60 offices
in 26 countries
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Thank You


JAFCO Investment (HK) Ltd
Tel.: (852) 25361960
Website: www.jafcoasia.com

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