October 22, 2010
If Dick Kramlich’s move in Hangzhou’s pays off, it might have just gotten a lot easier for foreign venture capital firms to capitalize on the value of wholly owned foreign firms in China and give many foreign investors an improved exit strategy to their Chinese investments. Until now, foreign investors have been unable to maintain ownership without forming precarious partnerships with local firms and thus most choose to a WOFE structure in China. However, in addition to increased regulatory scrutiny, wholly-owned foreign entities are not able to list inside China and thus take advantage of the relatively high PE multiples common (95+ P/E ratio) on the mainland.
Kramlich’s firm, New Enterprise Associates, is investing in promising microfinance service UPG which is a wholly owned foreign enterprise. As a WOFE it is currently unable to list on China’s equity markets. However, he will transform the WOFE back to a Chinese firm through a stock swap thus allowing him to invest directly and, eventually, exit through a local IPO on the Shanghai Stock Exchange for example. If NEA successfully exits in this manner, expect many to follow as there are numerous firms with promising technologies starved of capital on the Chinese mainland.
From what we have heard so far, it seems this has the blessings of local officials who are intent on bringing Silicon Valley venture capital style investing to China. Perhaps this is the opening salvo in Mr. Kramlich’s attempts to create worthy exit strategies to satisfy his partners and investors who entrusted him with the largest pool of capital created since the financial crisis and tops out at $2.49 billion USD.