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Successfully exiting an investment is the goal and challenge of every venture capitalist. While these challenges have traditionally
been magnified when it comes to investments in China, the recovery of capital markets around the world combined with continued
legal developments in China have made the task easier.
Although every VC may have their own definition of a "successful exit", at the end of the day it involves a profitable return
to the VC from their investment. Achieving such a profitable return is not simple, particularly in China. A key condition
for a successful investment is proximity. Despite advances in communication technology, attempting to remotely monitor developments
in China is difficult. China remains a complex market that needs people on the ground familiar with how China works from a
business and legal perspective. This proximity provides an investor with more information in order to make better and more
realistic evaluations of potential exit strategies.
The exit strategy with the highest profile, and one that many consider the most appealing, is selling shares to the public
through an initial public offering. Our firm, Morrison & Foerster, has seen strong activity in the technology sector in China
recently. As the overall technology finance market develops, there are increased opportunities for IPOs as well as merger
and acquisition transactions. We have been involved in numerous transactions in the wireless value added services sector this
year, including several IPOs. In the technology sector, we are seeing many companies that suffered during the technology slump
of 2000-2002 now recovering. The market continues to show strength and we expect that there will be additional IPOs this year.
NASDAQ remains the preferred exchange for technology companies pursuing IPOs, due in part to Hong Kong main board listing
requirements and the fact that liquidity on the GEM is still limited. While discussion of the Shenzhen second board continues,
and it may provide an alternative listing venue for some PRC companies, it is not yet clear whether it will provide a useful
exit vehicle for foreign investors in Chinese companies.
Less visible than IPOs, M&A transactions are a more commonly used method by VC investors to exit China investments. The sale
of their equity in an investee company - whether a domestic vehicle or its offshore component - is straightforward and provides
increased certainty on a deal. Combined with an easing of regulatory barriers to market entry, companies with existing businesses
have become attractive acquisition targets for foreign companies looking to enter China.
Both forms of exit have been affected by China's ongoing regulatory developments, which intensified following China's accession
to WTO. While opportunities for foreign participation in various Chinese industries have increased dramatically, challenges
remain at the implementation level. Greater opportunity for foreign participation has provided increased exit opportunities.
Due to ongoing challenges created by the regulatory structure, though, PRC investments with the most useable exit options
continue to have an offshore component. This adds complexity to a deal, but provides investors a better ability to liquidate
the investment as and when required.
The VC and private equity market in China is showing increased maturity, but we must still realize that VC technology investing
in China has a track record of less than ten years. We are still in the early growth stages of this market. In this rapidly
developing environment, successful investors who can be flexible in meeting the complex challenges of China will benefit from
the opportunities presented.
