A senior government official announced Friday that Shanghai is looking at scrapping its 20 percent capital gains tax on hedge funds and using other incentives to lure more venture capital and private equity to the city.
Fang Xinghai, director-general of the Shanghai Municipal Government’s Financial Services Office, said it would be “wrong” to slow the pace of private equity, venture capital and hedge fund investment at this critical time of financial uncertainty, according to a report by Reuters.
Back in August, Shanghai officials also said they would allow foreign investors to register as local investment firms, in order to compete more effectively with other Chinese financial centers such as Beijing and Tianjin. Currently, foreign investment funds such as Carlyle Group and Bain Capital who do business in China must invest in Chinese firms through overseas units, due to China’s stringent capital controls and regulations.
Guy Kawaski is one of the best-known authorities on entrepreneurship and technology start-ups. The former chief evangelist for Apple is the author of seven books, founding partner of Garage Technology Ventures and other web start-ups, and a popular speaker.
New York Times blogger Marci Alboher recently interviewed Kawasaki for her blog, Shifting Careers. She asked about Kawasaki’s “Reality Check” which includes an aptitude test for the people who are best qualified for careers in venture capital. Is it an M.B.A. degree or background in investment management, accounting or consulting?
Kawasaki noted that these backgrounds often do not provide “on the firing line” experience. Instead, you are more of an outside expert who parachutes in, interviews a few people, and then creates a PowerPoint presentation on what people should do. Analysis is easy, implementation is hard, Kawasaki says.
Everyone has an entrepreneurial gene, says Kawasaki. But the “richest vein” for successful start-ups comes from people who create a tool they want to use themselves. He cites Google, Yahoo and Apple as examples.
His advice for entrepreneurs looking for funding or growth opportunities in the current financial mess? Plug your ears with wax and go forward with your idea. “If they are waiting for wonderful credit and capital markets, they probably aren’t entrepreneurs. They’re much more likely to be consultants and bankers looking to quickly flip a company.”
Jack Perkowski, author of Managing the Dragon, and one of the leading experts on doing business in China, offered a snapshot of what’s ahead for private equity investing around the world on his website recently. Perkowski has just returned from the SuperReturn Middle East 2008 Conference in Dubai, an elite gathering of 500 private equity professionals whose focus is on Middle East and North African investment. Speakers included Henry Kravis, David Rubenstein and Steve Schwarzman, founders of KKR, Carlyle and Blackstone, respectively.
There was overwhelming consensus that it would take three years or longer for financial markets to recover to their 2007 highs, Perkowski said. More than a third of attendees felt it would take even longer, and that the U.S. and Europe, in particular, were in for protracted recessions.
Perkowski also said that the traditional private equity model is broken. The days of using financial engineering (i.e. high leverage, “covenant light” debt and arbitraging higher exit multiples) to generate higher returns are gone. Instead, the focus will be on buying good companies at substantial discounts and growing the company as a way to generate acceptable returns.
Nearly two thirds of conference attendees felt that the best returns over the next five years will come from the Asian region and India. The impending global recession may be a blessing in disguise to China and India, in that it will merely cool down their overheated economies to a more manageable level of growth. Perkowski also commented that the center of gravity of the global economy had already started shifting outside of the developed markets into rapidly-growing countries such as China and India, and resource-rich countries such as Russia, Brazil, Indonesia and Australia. The current economic crisis will only hasten this trend.
Private equity’s traditional aversion to taking a minority investment in firms may change, too. Buy and hold strategies, such as Warren Buffet’s recent strategic investments in General Electric and Goldman Sachs, may become more prevalent. Obtaining majority interests in China, for example, tends to be difficult. Deals are smaller and generally unleveraged. Thus growth capital deals may be the trend of the future.
