How to Start VC Funds in Hong Kong
Start the journey
Speak with one of our experts to explore a tailored solution for your business
Interested in learning how to set up a venture capital fund? Why not set it up here in Hong Kong! With the country being home to a fast-growing asset and wealth management industry due to its supportive government, Hong Kong is a great place to either set up a venture capital fund or invest in one.
In 2022 during the 21st Hong Kong Venture Capital and Private Equity Association China Private Equity Summit, Hong Kong’s Secretary for Financial Services and the Treasury Mr Christopher Hui shared that the city had over US$190 billion of assets under management, ranking second in Asia behind mainland China — with Hong Kong’s venture capital fund industry being part of its focus for development.
So, how to set up a venture capital fund? You have to do the following:
Build A Strong Foundation
Whether it’s constructing infrastructure or establishing a business, having a strong foundation will assist you in how to set up, run and expand your business. Having a clear purpose, mission and vision will be the glue to keeping your diverse core team together. An authentic purpose and clear vision of how your venture capital fund will run in the future will also serve to make you stand out in the eyes of investors or entrepreneurs.
Still, no matter how attractive you may be, it is only when you have a sturdy track record and credibility would you be able to convince GPs and LPs to invest in your fund. A clear-cut investment thesis will be a tool that can assist you in acquiring the funding you need.
So now that you have a strong foundation of your brand, what’s next? Setting up a venture capital fund is only the start. You would also want them to start investing in your venture capital fund and compel them to want to work with you in the foreseeable future. If you are as good in articulating your purpose, mission and vision then you should also be as capable in pitching the following:
Specialisation or sectoral strengths (e.g. FinTech, EdTech, HealthTech)
A well-defined investment thesis to the right audience
Venture capital funds not only provide funding but can also provide the needed expertise a startup might need to have in order to expand. Having the right edge, network and reputation can be just as important as gaining funding.
A considerable knowledge of the industry a startup is specialising in, and a hefty network in that industry to support them are attractive assets for gaining LPs or investors. Just as startups need to have the right edge in a competitive market like Hong Kong, a venture capital fund must also be smart enough to deliver their pitch to the right audience.
Just as there will always be the right people to do a job well done, there will always be investors who are more willing to fund your venture when you both have the same interests.
Cost-conscious venture capital funds
Just as VC funding expects a return on investment (ROI), investors investing in your venture capital funds will also expect a satisfactory share. Having a clear cut capital allocation scheme and a well-defined program to portfolio construction can help promote your proposed fee structure. We have learned from the Singaporean firms that Lanturn has worked with, the simplest approach is to apply the “2 and 20” rule. In this rule, 20% is carrying interest and 2% is a management fee.
As most LPs are very cost-conscious, it would help that upon negotiation you are able to show them data to support your proposal. It would be best to properly communicate your expectations in terms of fund performance and the assumption behind the fund model. Use industry benchmarks for similar venture capital funds or other fund types and compare your expectations against them.
You can use the data gained from the industry benchmarks to provide comprehensive justification for your proposed fee structures. It might help to provide special terms to early anchor LPs provided they are able to match an advantageous condition for your fund.
This concept isn’t unlike how high paying customers are able to acquire VIP privileges. Be mindful of maintaining team commitment and GP-LP alignment as this would greatly assist you in running your venture capital fund in the long run.
Lanturn and fund services
Lanturn is a user experience-focused corporate and fund services provider. We have a rich client base in the asset management and VC Funds industry. With Lanturn’s years of experience in providing corporate and fund services to both micro and corporate venture capital funds, we grew to be exposed to the actual life cycles and structures of various venture capital funds.
We know for a fact that venture capital funds also have their own challenges in operation and set up. Two of the most common challenges are acquiring funds or capital within a certain time frame as well as sourcing deals.
In Hong Kong, most VC firms take on the Limited Partnership fund structure with a General Partner (GP) and various Limited Partners (LP), although there are also a number of venture capital funds structured as open-ended fund companies (OFCs).
Are you interested in setting up in Singapore? Here is a link to the article on Singapore’s new Variable Capital Company (VCC) bill.
Remember the part about specialisation? We at Lanturn can assist you with Lanturn’s expertise in fund formation and administration in Hong Kong, so you can concentrate on building up your portfolio to secure your LPs. Lanturn’s fund experts will be more than happy to assist you.
Here are more resources for aspiring fund managers in Hong Kong:
Are you especially interested in joining the competitive Hong Kong fund market? Then Lanturn’s very recent short guide to Hong Kong’s tax system might help you decide.
Want some other helpful tips for startups? You will find Lanturn’s Startup Fundraising 101 helpful.