When Hong Kong Investment Corporation (HKIC) launched, it was widely seen as an equivalent to Singapore’s Temasek Holdings – a de facto sovereign wealth fund with a strategic agenda.

Since then, HKIC claims to have backed over 100 companies, though only a handful have been disclosed. Last month, it announced partnerships with three external managers: one to invest in start-ups emerging from Hong Kong universities, another to support Chinese entrepreneurs with global ambitions, and a third aimed at start-ups pursuing commercialisation in the Middle East.

These activities represent small pieces of a larger puzzle. They do not capture the full transformative scope of HKIC’s USD 8bn in assets under management. Nor do they demonstrate how the organisation will strike a balance between its parallel objectives to drive local innovation and technology and to deliver acceptable financial returns.

For years, Hong Kong has aspired to build its own version of Silicon Valley that can support start-ups from seed funding through IPO. Government capital has been pumped into the early-stage part of this ecosystem, notably Cyberport and Hong Kong Science & Technology Parks Corporation (HKSTP).

HKIC appears to be operating across all investment stages, to the point of writing cheques for start-ups that have already surpassed USD 1bn in value. To investors active in the local market, the most pressing need it can address is the dearth of growth capital funding for start-ups – based at home or overseas – that need additional firepower as they work towards potential Hong Kong listings.

“In seed to Series A, there’s a lot of funding, whether it’s from the government, angel funds, or early-stage funds,” said Chibo Tang, a managing partner at Gobi Partners. But if we’re looking for someone who can lead a USD 10m or 20m round in a Series B, it becomes more difficult.”

Gobi, already a prolific early-stage investor in the Greater Bay Area (GBA), will work with HKIC on the “patient capital strategic fund” for university start-ups. The other external mandates were awarded to Lanchi Ventures, a Chinese GP that recently opened an office in Hong Kong to address global markets, and Gaw Capital, a real estate investor that expanded into VC via prop-tech.

A gap to fill

Hong Kong early-stage and growth-stage funding follows a familiar trajectory of circa-2021 peak followed by trough. Growth-stage activity, however, was always patchy – driven by outsize rounds for a handful of start-ups – and the drop-off has been precipitous, likely exacerbated by geopolitics. Only USD 40m was deployed across three deals last year, according to AVCJ Research.

“Western money doesn’t want to take the political risk if cap tables have a lot of Chinese investors or the founders are Chinese,” said Anthony Chan, CEO of family office investment platform Isola Capital.

“Series B rounds in Hong Kong are often USD 10m to USD 30m. When you look at the US and China, we’re talking USD 100m to USD 500m. Hong Kong is still developing a growth-stage market of scale.”

GoGoX is a case in point. The logistics services provider achieved unicorn status in 2017, following a merger with 58 Suyun, and completed an IPO five years after that, becoming one of few Hong Kong born-and-bred start-ups to list on the local exchange. A USD 250m round in 2018, featuring a string of Chinese financial and strategic investors, was followed by a USD 100m round in 2021.

Steven Lam, co-CEO of GoGoX, said the company bootstrapped its way through aggressive expansion plans in the formative years. CFO Vincent Chun added that fundraising was challenging at every stage. Getting the first USD 1m was especially difficult, he observed, because local VCs and angel investors – whose participation catalyses global players – were not supportive.

A Cyberport-managed fund did come into the USD 100m investment, but additional sources of government capital could have smoothed the path through pre-IPO rounds. “If we had these kinds of resources in Hong Kong, for example, if HKIC had backed us in our Series C, then we really would have had a lot of power to go much further,” said Chun.

Much like local VCs at the early-stage, endorsement from a local sovereign entity carries a lot of weight in investor confidence, potentially attracting further long-term capital from global investors, said Duncan Chiu, a member of Hong Kong’s Legislative Council (LegCo) representing the technology and innovation functional constituency. “We are just beginning the work,” he added.

The territory cannot rely on local start-ups alone to create a funnel of IPO-ready companies and catalyse the broader ecosystem. Foreign talent is required as well. HKIC is helping in this respect, making certain deals conditional on non-local companies making the Hong Kong Stock Exchange (HKEX) their first-choice listing destination. It claims to have 5-10 companies looking to go public.

HKIC declined to be interviewed for this story. However, investments are said to feature various other requirements, including that portfolio companies to establish offices, attract talent, establish R&D departments or corporate venture capital departments in Hong Kong. All are in line with the mandate to nurture the innovation and technology ecosystem.

Investment infrastructure

HKIC’s perceived lack of transparency has come into focus – in April, a Hong Kong lawmaker pressed Christopher Hui, secretary for financial services and the treasury, on this issue. In a vague response to a list of seven questions, Hui revealed that HKIC has 53 staff and 56% portfolio exposure to hard and core technology, followed by 16% in biotech, and 11% in new energy and green technology.

Investments across these three sectors come from four pools of capital. The Hong Kong Growth Portfolio, which backs companies with a Hong Kong nexus, is the largest with a corpus of HKD 32bn (USD 4.1bn). A Co-Investment Fund, intended to attract business and talent to the territory, is not far behind on HKD 30bn.

Then there is the GBA-oriented Greater Bay Area Investment Fund and the Strategic Tech Fund, which focuses on developing “new quality productive forces” – a term coined by Chinese President Xi Jinping last year in reference to moving beyond traditional economic growth models to embrace technological innovation. Each of these funds has a corpus of HKD 5bn.

To put HKIC’s scale in context, Hong Kong established the Innovation and Technology Venture Fund (ITVF) in 2017 and allocated HKD 2bn. About HKD 450m had been deployed – in early-stage investments of USD 200,000 to USD 18m – across 45 start-ups as of end-April. It claims to have helped facilitate approximately HKD 3.7bn of private investment.

ITVF is structured as a co-investment programme that works alongside select venture capital firms. While there is no clear-cut sectoral focus like HKIC, most its partners are active in technology and healthcare. They include Isola Capital, MindWorks Capital, Radiant Tech Ventures, Beyond Ventures, and Qiming Venture Partners.

According to a spokesperson for the Innovation and Technology Commission, which oversees ITVF, co-investment partners are primarily responsible for identifying investment opportunities and conducting financial and legal due diligence. “In addition, the co-investment partners play a role in assisting the investee companies to grow and expand their business,” the spokesperson added.

Last year, ITVF announced plans for a fund-of-funds that will build a portfolio by committing HKD 1.5bn to third-party funds on a matching basis. Separately, the government said it would create a HKD 10bn fund-of-funds with a similar new industry emphasis – artificial intelligence (AI) and robotics, semiconductors and smart devices, advanced materials, and new energy.

Local universities are adding fund-of-funds to their investment programmes as well. Hong Kong University of Science and Technology (HKUST), for example, launched the Redbird Innovation Fund (RIF). Shin Cheul Kim, associate vice president for R&D at HKUST and CEO of RIF, said that HKD 500m would be committed to three or four GPs in a maiden tranche of investments.

The university also has the HKD 100m HKUST Entrepreneurship Fund for direct investments in start-ups emerging from its own faculty and student base.

Watch and learn

A recurring theme in these government initiatives is a growing dependence on private markets and partnerships with GPs that have skin in the game. However, concerns remain around how the capital, which is taxpayer money, is being used.

“I don’t think we should use the people’s money to invest in Hong Kong ‘anchored’ companies,” said Fritz Demopoulos, founder of Queen’s Road Capital.

“We look at some of the other sovereign funds – Temasek, PIF – and most of their excellent returns came from outside their home markets. In fact, there are some known disasters because they were looking for local champions and forgot to do the due diligence. So, one thing we can learn is let’s not be smitten with some local entrepreneur story.”

The most recent Asia-based disaster is eFishery, an Indonesian aquaculture start-up that received USD 300m in private funding before large-scale falsification of sales was exposed at the end of last year. Temasek participated directly in Series C and D rounds for the company.

While Temasek is regarded as a sophisticated investor, these situations draw attention to the potential conflicts between strategic and financial mandates. It adds credence to the notion, endorsed by LegCo’s Chiu, that government should be follower rather than leader.

“History tells us that giving money to professional and experienced fund operators will give you a better result. My advice is that if the government wants to generate better returns and invest into the correct companies, it needs to leverage investor wisdom,” he said.

When ITVF first started deploying capital, concerns were expressed because civil servants, as opposed to investment professionals, were responsible for investment vetting and due diligence. This led to delays in deal closings, frustrating co-investment partners and start-ups. It is perhaps no coincidence that ITVF is now prioritising the fund-of-funds route.

“That was a learning cycle. Internal government vetting and due diligence processes are long,” one investor observed.

The learning curve remains steep, and investors believe Hong Kong would do well to study the experiences of neighbouring jurisdictions – such as Singapore and China – that are more advanced in this process. “Different jurisdictions who started earlier, they have basically been paying tuition. When you invest, you are going to make mistakes,” said Isola’s Chan.

HKIC has moved in the opposite direction. It started out making LP commitments, first to established private equity names like EQT and Hillhouse Investment and then adding more VC and growth equity players, and now appears to favour direct and co-investments.

It is unclear to what extent this shift is intended to bring HKIC closer to its goals, but balancing mandates can be difficult. HKUST’s Kim made this observation of RIF, which requires GPs to invest a majority of the funds into the university’s ecosystem. There is an expectation for financial returns, but sometimes this sits on the back burner to ensure certain start-ups get the funding they need.

When government capital is involved, there is arguably no such flexibility. Financial returns must come first, and there is flexibility in the definition of “companies with a Hong Kong nexus.”

“We are not as stringent as the mainland’s sovereign funds. We have not been restricting funds and managers to actually invest a big portion or all their money in Hong Kong,” said LegCo’s Chiu.

David Wu, an investment director at Cyberport, added that wider investment remits are also important in attracting and incentivising partner GPs, both local and foreign managers.

Chicken and egg

For HKUST’s Kim, overseas entrepreneurs are essential to realising the government’s ambition of transforming Hong Kong into technology hub. Early evidence of this includes Emaldo, a developer of in-home power systems founded in Denmark. The company moved its headquarters to Hong Kong last year on receiving investment from HKIC.

This brings into focus the question of whether there is sufficient quality in Hong Kong’s founder ecosystem. The challenge is not unique to Hong Kong – accelerating commercialisation of technology in individual cities means looking for intellectual property outside university ecosystems – and it is arguably more of an obstacle than availability of growth capital.

“If there are great companies, there is no lack of investors, whether that be from Europe, the US, or the rest of Asia. They all would want to invest. The notion that there is a lack of money is just not true,” said Ian Goh, founding partner at 01VC, which invests in China and the wider Asian region.

There is a circularity to this debate: start-ups are reluctant to come to Hong Kong if the promise of a full-stack ecosystem, from seed through pre-IPO funding, cannot be realised; growth-stage investors won’t look at the market without a supply of high-quality targets.

Should HKIC fill this gap? LegCo’s Chiu believes government investors should restrict themselves to Series A and B rounds. By the time companies reach the growth stage, Series C and beyond, there should be sufficient commercial traction that private investors are willing to participate.

“If they are not getting private investors and have to look for government money, I doubt whether these companies can really succeed,” he said.

In backing start-ups at all stages, HKIC is effectively underlining the breadth of its role and the scale of its challenge. Drawing growth-stage companies to Hong Kong, for example, not only feeds HKEX’s pipeline but also contributes to a base of local talent that may spin out and create the next generation of early-stage start-ups. That is how to build bona fides as a technology hub.

“There is a misperception that VC likes risk. GPs have LPs and they have to pay money back, so they cannot take too much risk,” said HKUST’s Kim. “But somebody has to take a risk to accelerate innovation. The public sector – the government, universities, research institutes – can do it.”

It remains to be seen whether HKIC can perform this role effectively, and Gobi’s Tang noted that industry participants would be naïve in demanding immediate impact. This particular brand of capital with strategic strings attached may take years to find its feet. However, it may turn out that the organisation is pushing itself forward at a geopolitically opportune moment.

The longstanding connection between China and Silicon Valley seems fractured: VC firms are looking to reset historically US-centric LP bases, and start-ups may decide that the US, including its public markets, no longer represents friendly terrain. Hong Kong is well-placed to offer an alternative to stakeholders that might be capital-starved and seeking a new strategic direction.

“This might be the best time in a decade for Hong Kong,” said Elissa Liu, a partner at Lanchi. “China tech is taking a leading role globally, and Hong Kong can benefit from a generational wave of technology and innovation, establishing itself as a hub for a new era.”