If you had to pick a capital of China’s local-currency private equity and initial public offering booms, it would likely be Shenzhen.
Shenzhen, a port city in China’s South near Hong Kong, is fast becoming a frequent stopping point for venture investors. Shanghai and Beijing are frequent stopping points for investors, but Shenzhen could become a part of that standard itinerary, given the investing ecosystem that has built up around the city and the strong returns earned by general partners based there.
Shenzhen, a port city in China’s South near Hong Kong, was one of the first to be designated as a special economic zone when the country began liberalizing its economy. A manufacturing boom followed, creating wealth that has made the city attractive for younger money managers and seasoned veterans looking to break into private equity and venture capital investing.
On their doorstep those investors have the Shenzhen Stock Exchange, the site of both the country’s SME exchange for small and medium-sized enterprises, and the ChiNext, a technology- and growth-focused exchange modeled after the Nasdaq.
“Shenzhen has been an entrepreneurial hub in China for 30 years and has been the fastest growing city in the world for about 30 years,” said Erik Lassila, a partner with private equity firm Share Capital Partners. “Shenzhen is a petri dish for founding new companies.”
The city has become home to many of the country’s top domestic investors including Shenzhen Capital Group, a government-affiliated investment firm, along with other relative old-timers of China’s private equity industry such as Shenzhen Fortune Venture Capital and Shenzhen Co-Win Venture Capital Investments, which both launched in 2000.
The environment is vibrant enough to support smaller upstarts as well, like Share Capital, launched in 2007 with capital from a network of wealthy home-grown entrepreneurs.
“Fifteen individuals are the sole investors in the [Share] RMB funds, and each individual is a successful entrepreneur in consumer products and services, businesses services, clean energy or information technology,” said Lassila, who used to work as a venture investor with Mayfield Fund, and with Charter Ventures as a general partner in the late 1990s.
If deep pockets are one draw, then returns are certainly another. Both Shenzhen Fortune and Shenzhen Capital rank among the highest-performing funds in China, with many of their exits coming from the exchanges in Shenzhen.
“First, China’s GEM [Growth Enterprise Market] and China’s SME market are in Shenzhen?and there are so many small and medium enterprises in the Guangdong area,” said Margaret Shao, managing partner for Shenzhen Fortune.
Her firm began in 2000 with a 75 million yuan fund. Of the five investments it made, four of them had initial public offerings in China, Shao said, returning 27 times the capital invested in the fund. Since then the firm has had another 20 exits through trade sales and public offerings, out of the 120 companies it has backed.
At Shenzhen Capital, 40% of the companies the firm has backed since 2006 have gone public, been acquired, or are planning to list on one of the country’s domestic exchanges, according to the firm’s special assistant to the chairman, Chris Burch.
“There’s a lot of nuance and intimate knowledge that you need,” Burch said of domestic investing in China. “Government relationships enable people to like you. You have to have the trust of these decision-making authorities within government. You have to be friends with these people.”
