Government encouraging and venture capital funds growing up

Shijiazhuang Development and Investment Co., Ltd. and ARC China held a signing ceremony on April 13, 2010 to form the Shijiazhuang-ARC Investment Fund I (the “Fund”), which will be established through a joint investment fund totaling RMB 300 million (US $44 million). This fund will be joining the successful Shijiazhuang Venture Capital Investment Guidance Fund already established in the area.

ARC China has previously reached public-private joint equity fund agreements in Dalian, Liaoning Province; Chengdu, Sichuan Province; Danyang, Jiangsu Province; and Jiangyin, Jiangsu Province. The total fund size of agreements signed to date, including the Shijiazhuang based fund, amounts to RMB 2.15 billion (US $315 million). In fact, throughout the nation, it is springing up a wave to establish Public-Private Joint Investment Guidance Funds.

Emerging investment boom

The new wave of establishing Public-Private Joint Investment Guidance Fund has its policy setting. Recently the state Council approved the plan which referred to the exploration and development of the equity investment funds and setting up policy to guide government venture capital fund. Now, many local governments such as Lianyungang, Beijing, Deyang, Yingkou and Foshan, etc. have established guidance funds.

At the end of last year, there are 20 new venture capital funds came into being. They were established by NDRC and the Ministry of Finance together with Beijing, Shanghai, Chongqing, Hunan, Anhui, Jilin and Shenzhen, and the capital scale is expected to exceed 9 billion RMB. The central government has completed equity injection totaling 1 billion RMB, local governments invest 1.2 billion RMB and social capital nearly reaches 7 billion RMB. This is the first domestic market-oriented operation government guidance fund. What makes different is that the government will no longer act as Fund’s decision-making party and main operator, but just as one of the Limited partners (LP), and entrusts professional investment teams (GP) to perform funds management. It is said that as long as the operation of these 20 pilot funds comes to mature, the government would like to establish a large number of public-private joint funds. It is expected that the total amount of the funds will reach 200 within 2-3 years in the future with raised capital over hundred billions RMB.

At present, there are a large number of funds having been set up in the nationwide. As for Guidance fund of Lianyungang, Jiangsu province, its total scale reaches 5 billion RMB and the first phase of the registered capital is 1 billion RMB, of which Lianyungang financial department and state-owned investment & financing platform enterprises together invested 150 million RMB, and the remaining investment capital are raised outside Lianyungang by the Central Division (CSM) Investment (Fund) Domain management company.

Interests’ jigsaw puzzle

Local governments have their own high-profile investment calculations.

Shijiazhuang Development Investment Co., Ltd. Executive Chairman of Mr. Gao Huimin said: Mr. Gao said that the Fund would create a win-win situation for both parties. ARC China and its partners will harvest attractive returns from their local investments while local enterprises will greatly benefit from the ARC China’s global resources and management and corporate governance expertise.

Mr. Li Jinlu, Vice Mayor of Shijiazhuang Municipality, expressed a cordial welcome to the ARC China team and commented that the joint fund would be helpful in upgrading the city’s financial infrastructure and would allow the city to become an increasingly prominent location for its industries of focus.

“They pay more attention to the management idea behind the taxes and funds” Managing Director Mr. Chang of ARC China said. “With little money leveraging a lot of money” ,the foundation of guidance venture capital funds is significant for improving the government’s control of social resources and investment efficiency, further changing the mode of development, and making better use of financial resources in an amplified, radian and guiding “multiplier effect”.

Insiders pointed out that: private equity funds are rushing here to cooperate with government to promote suitable local enterprises going public as soon as possible and then exit through the local government after these enterprises have listed.

Seizing recourses channel

The investment strategy of President Mr. Wu Kezhong of Advantage Capital Co., Ltd. has changed as well, in the past they only invested top 1% enterprises. Now they have expanded to search for the top 5% enterprises, provided that these enterprises’ growth rate exceeds 30% or 40%. Previously, they looked for national leading enterprises, but now they looks for regional leading enterprises. These distributions can radiate the local regional resources precisely.

At present, Advantage Capital Co., Ltd. has transfer their focus to developing Tier II and III Cities and has signed agreements in Wuhan, Deyang, Chongqing and Chengdu, in the past they tried to look for value, but now they looks for projects channel.

“Expand our channels and strengthen our channels.” Mr. Wu Kezhong said. “I emphasize the channel. The government introduced more funds, and the funds increase the reliability and stability of the channels.” In the point of Mr. Wu, in the future what competition lies is not money and professional competence competition, but the channel competition. The current hot investing cities like Beijing, Shenzhen and Shanghai have been very hot, but other areas need to deep plowing.