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1 1 Presentation By Vincent Chan Director & Executive Vice President JAFCO Investment (Hong Kong) Ltd. Rom 201B, Level, 2, Hong Kong Convention & Exhibition Centre 11:15am-12:30pm November 29, 2001 Venture Capital: Funding Alternative for New Enterprises

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Presentation By

Vincent ChanDirector & Executive Vice President

JAFCO Investment (Hong Kong) Ltd.

Rom 201B, Level, 2, Hong Kong Convention & Exhibition Centre11:15am-12:30pm November 29, 2001

Venture Capital: Funding Alternative for New Enterprises

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ContentContent

1. Definition2. Nature of Venture Capital3. Source of Funding4. Revenue Model5. Stages of Investment6. Geographical Preference7. Industry Preference8. Investment Process9. Past Development10. Competition11. VC looking for in return12. Classic Cases13. Points to Take Home14. General Information15. About JAFCO

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1. Definition: What is Venture 1. Definition: What is Venture CapitalCapital

U.S. – >30 years in existence

Fairly new term in Asia (until the last 2-3 years)

Earliest venture capital firm in Asia began in 1963 in Japan

Refers to investments in young, rapidly growing companies (particularly high-tech related) in the U.S.

Wider meaning in Asia ------- generally refers to equity investments in growing, unlisted companies. Private Equity Direct Investments

Serves as an intermediary between investors looking for high returns and entrepreneurs in need of capital

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2. Nature of Venture Capital2. Nature of Venture Capital

VS Debt Financing

VS Public Market

Objective: generation of long term capital gains

Horizon: 2-7 years

Liquidity: low

Risk: High

Instruments: shares, convertible bonds, options, warrants

Critical factor(s): Management team and market potential, rather than collateral

Impact on Profit, Balance Sheet

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3. Where does the money comes from? 3. Where does the money comes from?

Fund investors:

Insurance companies Pension funds University endowment funds Family trusts Government Treasury / Agencies Listed corporations / Private companies Wealthy high net worth individuals (>US$1

million)

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4. Revenue Model of Venture Capitalist4. Revenue Model of Venture Capitalist

Formation of the Fund : closed-end, structure: L.P./L.L.C.

The Appointment of the Investment Manager

Remuneration: ◈ Management Fees ◈ Carried Interests – hurdle rate

No e-commerce for us!

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5. Stages of Investment5. Stages of Investment

Stage One: Seed / Angel Round Stage Two: Start-up / Early stage Stage Three: Expansion / Development Stage Four: Mezzanine / Bridge Stage Five: Buyout / Buyin Stage Six: Turnaround / Restructuring Stage Seven: Others (pre-IPO, Privatization,

straight punt)

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6. Geographical Preference6. Geographical Preference

◈ China ◈ Thailand ◈ India◈ Hong Kong ◈ Malaysia ◈ Sri Lanka◈ Taiwan ◈ Singapore ◈ Australia/New Zealand◈ South Korea ◈ Indonesia ◈ Israel◈ Japan ◈ Philippines

Forbidden Land◈ Myanmar ◈ Brunei◈ Vietnam ◈ Pakistan◈ Laos ◈ North Korea◈ Cambodia

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7. Industry Preference / 7. Industry Preference / ClassificationsClassifications

◈ Telecom ◈ Construction/Mining

◈ Media ◈ Agriculture/Fisheries

◈ IT ◈ Infrastructure/ Transportation

◈ Leisure/Entertainment ◈ Financial Services

◈ Electronics ◈ BioTech/Life Sciences

◈ Travel/Hospitality ◈ Real Estates

◈ Manufacturing/ Consumer Products

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8. Investment Process8. Investment Process· Sourcing/Marketing Exits:

◈ IPOs ◈ Sale back ◈ Trade sale to Strategic investors

· Initial evaluation & terms ◈ Put Option

· Due diligence · Monitoring◈ viable business plan ◈ board seat◈ proprietary technology ◈ financial performance◈ enforceable legal structure◈ accounting/financial integrity

· Documentation/Completion/Funding ◈ legal structure ◈ valuation

· Final negotiation/term sheet ◈ Shareholders’ Agreement ◈ Subscription Agreement

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9. Asian Direct Investments9. Asian Direct Investments Development: Past Development: Past

Excessive valuations

Plenty of capital available

Weak deal flow but aggressive competition

Tightly - controlled enterprises → family business → allow only passive investments

Limited Government support for foreign investors → legal reforms → → corporate governance (transparency)

Risks associated with currency, political stability and credit

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9a. Asian Direct Investments9a. Asian Direct Investments Development:Past Development:Past (cond’t)(cond’t)

Statistics: capital under ManagementCountry 1997 1998 % change 1999 % change

Australia 2,721 3,062 12.5% 3,616 18.1%Hong Kong/china 10,670 15,442 44.7% 22,288 44.3%India 1,016 1,053 3.6% 1,826 73.4%Indonesia 426 328 -23.0% 333 1.5%Japan 7,722 12,513 62.0% 21,729 73.7%Korea 1,857 2,995 61.3% 4,986 66.5%Malaysia 406 460 13.3% 667 45.0%Myanmar 113 83 -26.5% 36 -56.6%New Zealand 110 186 69.1% 413 122.0%Pakistan 6 15 150.0% 57 280.0%Philippines 169 224 32.5% 292 30.4%Singapore 4,468 5,258 17.7% 7,791 48.2%Sri Lanka 71 68 -4.2% 68 0.0%Taiwan 1,913 3,598 85.4% 4,447 23.6%Thailand 177 242 36.7% 265 9.5%Vietnam 292 258 -11.6% 318 23.3%

Total 32,137 45,785 42.5% 69,132 51.0%

Source: AVCJ 2001 Directory

26,22230,951 33,433 33,791 32,136

45,785

69,132

21,925 23,431

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1991 1992 1993 1994 1995 1996 1997 1998 1999

US$million

Asian Venture Capital Pool 1991-1999

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9b. Fund Raising Scoreboard9b. Fund Raising Scoreboard

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

US$M

Initial Closeto date

$2,006

17 Funds

$2,178

16 Funds

Final Closeto date

Total Funds Raised to Date

$4,184

33 Funds

2001

$6,520

43 Funds

2000

Funds closed from January to September 2001

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9c. Fund Raising Scoreboard9c. Fund Raising Scoreboard

Conv'l Private

Equity 18%

Re-structuring

29%

Technology53%

Jan-Jun 2000Amount Surveyed: US$5.3 billion

Conv'l Private Equity23.6%

Re-structuring

18%

Technology58%

Jan-Jun 2001Amount Surveyed: US$6.8 billion

Distribution of Private Equity Funds(Jan-Jun 00 & 01)

Note: Survey excluded Australia & New Zealand's fund pool and Global Funds

Source : ASIA PRIVATE EQUITY REVIEW

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9d. Fund Raising Scoreboard9d. Fund Raising Scoreboard

Industry Breakdown by AmountAmount: US$1.7b (Jan-Jun2000)

Internet44.4%

IT6.5%

Others5.5%

Food0.7%

Banking & Finance

3.3%

Manufactur-Ing

31.4%

Reverse Takeover

8.2%

Biotech0.27%

Others5.45%

Consumer Goods4.22%

Internet2.02% IT

6.59%

Auto Industry7.11%

Semiconduct-or

31.93%

Banking & Finance23.16%

Telecommun-ication

19.26%

Industry Breakdown by AmountAmount: US$1.82b (Jan-Jun2001)

Regional Private Equity Firms’ Investment Profile

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10. Extreme Competition10. Extreme Competition

Too many players: Local & Foreign/Domestic & Regional

◈ HSBC Private Equity ◈ ABN-AMRO Asia ◈ JAFCO◈ PAMA ◈ ING/Barings ◈ Walden ◈ AIG ◈ Citicorp ◈ Transpac Capital◈ Morgan Stanley ◈ China Assets ◈ Tech Pacific◈ Merrill Lynch ◈ ChinaVest ◈ Intel Capital◈ Golden Sachs

Value-added services/advantages ◈ Financial and strategic planning ◈ Recruitment of key personnel ◈ Access to international markets and technology ◈ Introduction to strategic partners and acquisition targets ◈ Obtain a public listing

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10a. Extreme Competition 10a. Extreme Competition (cond’t)(cond’t)

Statistics: No. of Venture Capital firms

Country 1997 1998 % change 1999 % change

Australia 66 85 28.8% 124 45.9%Hong Kong/china 107 129 20.6% 190 47.3%

India 42 41 -2.4% 44 7.3%Indonesia 46 46 0.0% 44 -4.3%Japan 210 231 10.0% 221 -4.3%Korea 128 123 -3.9% 131 6.5%Malaysia 19 20 5.3% 28 40.0%Myanmar 3 2 -33.3% 1 -50.0%New Zealand 7 13 85.7% 16 23.1%Pakistan 3 3 0.0% 4 33.3%Philippines 8 10 25.0% 14 40.0%Singapore 59 64 8.5% 85 32.8%Sri Lanka 10 12 20.0% 12 0.0%Taiwan 74 124 67.6% 132 6.5%Thailand 7 8 14.3% 15 87.5%Vietnam 7 7 0.0% 7 0.0%Total 796 918 15.3% 1068 16.3%

Source: AVCJ 2001 Directory

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11. What are VC looking for in 11. What are VC looking for in return?return?

Big equity upside from appreciation in the value of the Company.

Return target – normally in the range of IRR 15%-25% in Asia.

Exit for VC to take place either before or at the same time with the entrepreneur.

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12. Classic Cases in Hong Kong12. Classic Cases in Hong Kong

Sing Tao Holdings – Lazard Asia Investment

Siu Fung Ceramics – Peregrine & Consortium

Cheung Wah Development – Softbank

Acme Landis Holdings (i100) – H & Q

“Can you think of any other case in Hong Kong?”

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13. Points to Take Home13. Points to Take Home

Venture Capital has become an alternative class of assets on its own

Extremely competitive marketplace

Useful conduit of capital between those who need and those who have

High risk – high returns (Universal Truth!!!)

Tough but fun career for those in it!

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14. General Information14. General Information Industry Associations

◈ Asian Venture Capital Journal/AVCJ Holdings http://www.asiaventure.com mail: [email protected]

◈ Hong Kong Venture Capital Association http://www.hkvca.com.hk

mail: [email protected]

Book Recommendation◈ Title: Fundamentals of Venture Capital◈ Author: Joseph W. Bartlett◈ Publisher: Madison Books◈ ISBN# : 1568331266

◈ ◈

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15. About JAFCO15. About JAFCO

JAFCO Co. Ltd. – largest venture capital manager in Japan Founding shareholders: Nomura, Sanwa Bank, Nippon Life Operation since 1973; listed on the Tokyo Stock Exchange Offices in the U.S. (Palo Alto, Boston), Europe (London) and

Asia (9 offices) Over US$3 billion under management with US$800 million

in Asia Pacific Asian’s Track record: over 250 companies of which 120

had exited (73 had obtained IPO) Nomura – our largest shareholder has over 60 offices in 26

countries 

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Thank YouThank You

JAFCO Investment (HK) LtdJAFCO Investment (HK) LtdTel.:Tel.: (852) 25361960(852) 25361960

Website: Website: wwwwww.jafcoasia.jafcoasia.com.com