In July, international law firm Shearman & Sterling caused a stir with the hiring of Carmen Chang from Silicon Valley law firm Wilson Sonsini. On the US west coast Chang is one of the best-known lawyers for - amongst other things - her work with private equity and venture capital deals. As a native born Chinese, she also has a unique take on how 'The Valley' is looking at Asia and China at the moment. Her client list of leading VCs, investors, and investee companies built up over a 10-year period, has made the move to Shearman & Sterling with her. FinanceAsia.com talks to her and to Lee Edwards, the firm's resident partner in Beijing about the Chinese private equity market as seen through they eyes of Silicon Valley.
Where is Asia on the radar screen of Silicon Valley private equity investors?
Chang: Asia is really hot at the moment. There is so much interest from the venture funds in Silicon Valley for investments into Asia. These funds are either jumping in with both feet or standing on the edge of the pool watching and waiting to jump in. I recently represented a company called United Platform Technologies Inc and we raised $58 million from Silicon Valley based funds and funds affiliated with technology companies. A year and a half ago, SMIC in Shanghai raised $1.1 billion in private equity with quite a few Silicon Valley venture funds coming in. Going forward you will see some of the most prominent names of old line Silicon Valley funds, investing in companies with China operations.
So there is still a lot of interest from investors in investing in companies with this west coast US/China business model?
Chang: So many of the companies I work for are started by someone who grew up in China and then went to the US for graduate school. They have a PHD from MIT or Stamford or Berkley and have worked for a US firm such as Hewlett Packard or Lucent. Having worked there for a few years they leave and form a company with R&D facilities in the US and China. The companies are funded by US venture funds with management that is US educated. There are so many successful companies like that in the last few years, they are a symbol of the nexus between China and the west cost of the US.
You say successful, but it is generally agreed that private equity investments in Asia have not been the success they have been elsewhere. How do you square that dichotomy?
Chang: A lot of the companies I have represented have been the unusual success stories. The kinds of companies that US venture funds are investing in are companies such as UT Starcom, Asiainfo or sina.com. These are companies that have been structured so that they can access the US capital markets or so that they can be sold to a US public company. These companies were built with venture capitalists playing a major role in the business plan and in their structuring and management. This means they have had good track records. The spectacular failures there have been in Asia - especially dotcoms - are just like those everywhere else in the world.
What are your views on the legal developments in the region? Has the environment become more conducive to private equity investors?
Chang: Silicon Valley VCs at this time want to invest in companies that are located offshore - usually either a US or Cayman Island company - with wholly owned subsidiaries in China. Even if they are Cayman Island companies with subsidiaries in China, they are structured to be as close to a Delaware company as Cayman law will allow. In addition to the articles being structured to look like a Delaware company, all the provisions and by laws are replicated in a shareholders agreement governed by New York law in which everyone agrees to subject themselves to the New York courts.
Having said that, everyone knows that 99% of the operations of these companies will be in China. Most people feel that with the right management who knows how to do business in China, the risks are getting less. IP protection has improved recently for instance.
Edwards: The general perception, if you extend it beyond structures, even with M&A and direct investments, is that the environment has improved. The regulations that have come out over the past two or three years aimed at foreign investment into SOEs or venture start ups or publicly traded companies, do have flaws, but the direction is the right one. We expect significant new M&A regulations to come down the pipe in the next 12-18 months and we think these will address some of the specific complaints people have had.
What sort of flaws are we talking about? Lack of provisions for preference shares for instance?
Edwards: Approvals for in bound and outbound investments have become more routine and easier to obtain. But there are still substantial regulatory obstacles to the free flow of funds in M&A activity. For instance even the M&A activity of Chinese companies through their Hong Kong subsidiaries is still subject to approvals from the Ministry of Commerce. The government needs to move away from this approval system and towards a filing for record system. This is the direction they will inevitably head towards. There are still problems with capital structures and they still haven’t authorized preference shares. Bottom line is that we think the direction is positive, but there are still some concerns in areas such as these and in the IP area.