Hong Kong's private equity and venture capital landscape has made strides in driving startups and their scale-ups, paving the way for the city to foster its innovation and technology ecosystem.

The amount of venture capital investment surged to around HK$41.7 billion ($5.34 billion) last year from HK$1.24 billion in 2014, according to data from the city's 2022-23 Budget. The special administrative region's private equity market, with more than $190 billion of assets under management as of June, is the second-largest in Asia after the Chinese mainland.

Besides bank loans and initial public offerings, private equity and venture capital are crucial financing channels for companies' business development, particularly in their infancy.

"With Hong Kong as one of the world's financial centers, it means we have fundraising capabilities throughout the value chain of a startup," says Jayne Chan, head of StartmeupHK at InvestHK - the SAR government's agency tasked with promoting foreign direct investment and helping foreign enterprises to expand in the city.

Convenient access to abundant funding is one of the major business fundamentals that has helped Hong Kong forge a robust startup ecosystem, says Chan. According to official figures, the number of startups had gone up fourfold - from about 1,000 in 2014 to some 4,000 in 2021 - while 18 companies have become unicorns, including artificial intelligence company SenseTime, on-demand logistics and delivery firm Lalamove and digital lender WeLab.

Currently, Hong Kong is also Asia's largest and the world's second-largest fundraising hub for biotechnology.

"A strong investment landscape is an important part of building a robust innovation and ecosystem. Where there is money, opportunities and talent will follow," says Aldous Mak, chief financial officer at Hong Kong Science and Technology Parks Corp.

"In recent years, we have seen an increase in venture capital firms, and the number of family offices in Hong Kong is at an all-time high," Mak adds. "The investments we are seeing from private equity and venture capital funds symbolize confidence in startups that we have the capital to match their ambitions."

HKSTP Venture Fund is among numerous corporate venture capital funds in the SAR that combine private funding resources to nurture early-stage businesses.

From its inception in 2015 to March last year, the fund had invested HK$203.5 million in 19 technology companies. At present, it has more than HK$600 million in assets under management, in which every HK$1 invested by the corporation draws an external investment of HK$16 to support local startups at different stages of funding.

"A strong investment environment creates a virtuous cycle supporting startups and value creation within the innovation ecosystem which will, in turn, attract investors to land at Hong Kong Science Park," says Mak.

The increasingly diverse and rich funding landscape also dovetails with the city's goal of developing into a global innovation hub.

In the past five years, the SAR government has plowed more than HK$150 billion into the innovation and technology sector and set up a HK$5-billion Strategic Tech Fund to invest in technology enterprises. HKSTP and Cyberport are helping to identify technology enterprises that are of strategic value to Hong Kong, as well as investment opportunities conducive to enriching the ecosystem.

Wang Jun, CEO of Hong Kong-bred unicorn GeneHarbor, says the company was one of the beneficiaries of the Research Talent Hub under the Innovation and Technology Fund during the early stages of its growth, as well as the Elite Program sponsored by HKSTP.

The Research Talent Hub grants direct funding of up to HK$32,000 to each eligible professional, while the Elite Program offers fast-growing enterprises funding of up to HK$21.5 million to expand their businesses in international markets.

These direct funding programs for highly-skilled professionals and business expansion have enabled the biotechnology firm to use much of its capital on research and development, says Wang.

Cross-border boost

The red-hot expansion of Hong Kong's early-stage fund pool is showing no signs of easing. For one thing, the SAR's deeper integration into the development of the Guangdong-Hong Kong-Macao Greater Bay Area is a welcome boost.

In September, the SAR government and the Qianhai Authority of Shenzhen jointly promulgated 18 measures to support the linked development of Shenzhen and Hong Kong venture capital investments in Qianhai.

The measures complement Hong Kong's "three-step strategy" for developing the private equity fund market - introducing a limited partnership fund regime; offering tax concessions for carried interest distributed by eligible private equity funds; and establishing a mechanism to attract foreign funds to redomicile in Hong Kong.

As for fostering the free flow of capital between the two places and channeling funds from around the world to the Greater Bay Area, numerous measures will be taken, including expanding the investment scope and streamlining the application process of Qianhai's Qualified Foreign Limited Partnerships pilot program, which allows Hong Kong institutional investors to conduct private equity and venture capital investment in mainland cities of the Greater Bay Area.

The linked development of the private equity markets of Shenzhen and Hong Kong will also be promoted via a regulatory "sandbox" mechanism for cross-border financial innovation.

Secretary for Financial Services and the Treasury Christopher Hui Ching-yu calls the joint policy package a "breakthrough and an innovation in the mechanism", reflecting the two authorities' determination to support the development of private equity and venture capital funds.

"It is believed that with the wide-ranging measures in place, more private equity and venture capital funds will use Hong Kong as a base for investing on the mainland," Hui says.

Taking it a step further, as Mak says, there will be more early-stage investment in the Greater Bay Area to develop frontier technologies, spurred by the joint development of and mutual access to the private equity markets across the border. "It will ultimately contribute to the creation of an international innovation and technology hub in the Greater Bay Area," he says.

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