Capital gains

Venture capital, private equity from overseas playing an increasingly important role in Chinese economy

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Chris Zhang seems somewhat out of place to be a potential new player in China's burgeoning venture capital market. His office in an innocuous business park in the east end of London, which houses an Internet food business he also runs, appears worlds apart from the gleaming skyscrapers normally associated with high finance.

The 31-year-old serial entrepreneur, who has lived in the UK for 10 years, is, however, managing director of ACE VC Ltd, which has raised 50 million pounds (57 million euros) to invest in China start-up businesses. His will be one of a number of European-based businesses now providing finance to Chinese companies.

Around 1,000 private equity and venture capital firms raised $39 billion last year and invested around $16 billion in China, making the country the largest market in Asia for this type of finance, according to Zero2IPO, which researches the sector in China.

Chris Zhang, managing director of ACE VC Ltd, says his company has raised 50 pounds million to invest in China start-up businesses. [Nick J B Moore / for China Daily]

"There is a need for this type of finance in China because everyone wants to be an entrepreneur. People want to be rich and they don't believe they can achieve this by working for somebody else," he says.

Although it is yet to be officially announced, ACE's first investment is set to be in a tea house business, which Zhang believes has the potential to expand internationally, even emulating US global chain Starbucks in the coffee market.

"It is not a traditional tea house but one with a great service offer and we think it could be a success not just in China but all over the world," he says.

Zhang says the excitement in the China venture capital and private equity market is similar to that in Silicon Valley in the late 1990s when investment flowed into the dotcom sector.

"What is happening in China now is similar to what happened in the Google times. Magic is happening all the time. The environment is full of money and there are not enough good projects out there," he says.

The venture capital and private equity market in China is very much in the early stage of development and dates back only to the late 1990s when major foreign players such as UK giant 3i and US companies Sequoia and KPCB began entering the market.

A recent feature of the market has been the emergence of Chinese companies. According to the Beijing Private Equity Association, up to 80 new local companies are entering the market each year.

One of these is Liuhe Private Equity, which is based in Shanghai and employs 30. It was co-founded by Steven Wang, its chief executive officer, in 2005.

"I would say the private equity market is still very much in the early stages. There is, however, an oversupply of money available for private equity investments," he says.

Wang is typical of many who work for Chinese venture capital and private equity companies in that he has both international skills and experience - in his case, an MBA from Harvard and time at the Boston Consulting Group.

He says the market is being spoiled by amateurs entering the market, typically entrepreneurs who have sold their businesses and have grouped together with people in a similar position to form investment companies.

"You might have someone who ran a small factory in Guangzhou or a coal mine and who has made 50 million yuan who does this," he says.