Legislative Council Panel on Trade and Industry
Applied Research Fund
This paper outlines the operation of the Applied Research Fund ("ARF") since its management was contracted out to three private sector venture capital firms on 5 November 1998.
2. The ARF is administered by the Applied Research Council ("ARC"), a private company wholly owned by the Government and specifically formed to hold and manage the Fund. In November 1998, the ARC appointed three venture capital firms to be the Council's managers. They are Walden International Investment Group ("Walden"), HSBC Private Equity Management Ltd. ("HPEM") and AsiaTech Ventures Ltd. ("AsiaTech"). Under the new arrangement, the three firms are responsible for identifying and evaluating investment proposals, as well as providing management, marketing and networking input to the investee companies. The ARC assumes a supervisory role and ensures that the public mission of the ARF, i.e., to encourage technology ventures, is met.1
PRINCIPAL TERMS OF THE MANAGEMENT AGREEMENT
3. The ARC has entered into a management agreement with each of the three venture capital firms. The major contractual and administrative arrangements are summarized below.
UPDATE OF THE FUND'S OPERATION
- The amounts allocated to the three managers are $300 million each for Walden and HPEM, and $150 million for AsiaTech.
- The agreement period is nine years for Walden and HPEM and seven years for AsiaTech, with the primary investment period set at the first six years and four years respectively.
- To help ensure that the managers would try to identify investment opportunities for the funding available, there is a provision requiring the managers to invest at least 50% of their respective share of the ARF within the first four years of the allocation for Walden and HPEM and the first three years for AsiaTech. If the manager fails to achieve this investment level, the ARC has the option of withdrawing its undrawn commitment.
- There is a mechanism for the ARC to veto investment proposals that do not meet the public mission of the Fund, which is to foster technology ventures in the private sector. Specifically, the managers are required to invest in technology companies that have a substantial connection with Hong Kong.
- The assessment of applications and the monitoring of investee companies follows the practice of the venture capital industry.
- The three managers are required to submit quarterly written reports to the ARC on the financial position and performance of their ARF allocation and the investments, the operation and management of the investee companies and any other related matters. They are also required to attend progress review meetings with the ARC once every six months.
- There is no preference on particular technology areas, industries, or stages of investment.
- The fund managers are required to invest in at least five start-ups during the term of the agreement.2
- For risk management, investment in any one company (including follow-on investment) should not exceed 15% of the company's share of the ARF, unless with the prior consent of the ARC.
- The remuneration package follows the norm in the venture capital industry. It comprises a fixed management fee based on the ARF allocation, plus a profit-sharing element as an incentive for the managers.
4. Since the management of the ARF has been contracted out to the three managers, we have received encouraging response. Up to 30 April 1999, the three managers altogether received 424 enquiries and 166 written proposals.3 The ARF has supported six companies, involving over $95 million. Further details about the six investments are set out at the Annex.
5. Members are invited to note the content of this paper.
Trade and Industry Bureau
Companies Receiving Funding Support
from the Applied Research Fund Through the Venture Capital Firms
|Name of Company ||Fund Manager||Nature of Investments||Amount of Funding Support
|1. Property Market Intelligence Ltd.||AsiaTech||Provision of information services such as news, research and analysis on property markets and the construction industry in Asia through the Internet||$6.5m
|2. QuotePower Information Ltd.||AsiaTech||Securities transactions and information system through the Internet||$8m
|3. Wafer Systems Holdings Ltd. ||HPEM||Telecommunications network system||$46.5m
|4. InfoTalk Corporation Ltd.||Walden||Speech recognition technology||$15.5m
|5. Unitech Networks Ltd.||Walden|| Telecommunications network system||$11.63m
|6. I-Quest Corporation (HK) Ltd.||AsiaTech|| Provision of technology on Internet access service for hotels||$7.75m|
1.For further background about the contracting out exercise, please refer to LC Paper No. CB(1)814/98-99 considered by the Panel at its meeting on 1 February 1999.
2.Start-ups are enterprises that have been established for not more than three years with less than 50 employees.
3.Since applicant companies may approach the three managers at the same time, there may be duplication in the enquiries and applications.