Following money from growing Hong Kong fintech cluster EJINSIGHT

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Economist Michael Porter once said that California is successful for its wine, not because of its weather conditions, but because it has an economic cluster of wineries, wineries, suppliers and wine institutions interconnected in the state. There are banks in California with such a deep understanding of the local economy that they grant business loans based on grape quality, vintage, etc.

The concept of an economic cluster is defined as a geographic concentration of interconnected companies, suppliers and associated institutions. This is often mentioned in how Silicon Valley flourished as investors rallied around Stanford, Xerox PARC, Sandhill Road, etc. Today, many parallels can be drawn with how Hong Kong is transforming its role in global finance. Once known as a financial gateway in and out of Asia, the city is quickly becoming a springboard for fintech innovation and scale-up.

To understand this development, we must first recognize that Hong Kong is an economic hub initiated for fintech. First, the financial services sector alone accounts for over 21% of Hong Kong’s GDP in 2020. For example, 78 of the world’s 100 largest banks are present in Hong Kong and there are thousands of other financial institutions. – wealth and asset managers, securities companies, insurers, brokers, etc. This represents a huge pool of potential buyers for B2B fintech companies, as they can help financial institutions accelerate their digital transformations.

Hong Kong has the second-largest funding pool in Asia, just behind mainland China, according to a Q1 2021 PwC study based on AVCJ data. Despite the onset of the pandemic, the city increased the funding pool by 8% in 2020. In fact, fintech scale-ups such as Airwallex, FTX, and Amber Group are among those in the city that have raised more than US $ 100 million in funding since the start of the pandemic.

When you follow the money, Hong Kong offers something that very few other fintech hubs can. The city is characterized by a very diverse range of investors, from international venture capital firms and their mainland Chinese counterparts to family offices, private equity firms and enterprises. Leaders such as Alibaba Entrepreneurs Fund, Bitrock Capital, Gobi Partners, Horizons Ventures, Lingfeng Capital, Mindworks Capital, Mitsui & Co, QBN Capital, Sequoia China, Tencent, Vectr Ventures, are among the city’s many active investors.

Large fintech companies such as WeLab, One Degree, and Aqumon, as well as so-called ‘tech-fin’ start-ups such as AI company FANO Labs, can all trace their funding back to these large investors. The Hong Kong SAR government’s innovation and technology fund is also an active investor in fintech startups, which includes Qupital’s US $ 150 million Series B round earlier this year. Companies such as Standard Chartered’s SC Ventures and Citi Ventures are also active players looking for leading fintech solution providers around the world.

In addition, with innovative startups across a wider technological spectrum targeting the Grande Baie region, continues to grow, as does the support of these companies. One example is the Alibaba Hong Kong Entrepreneurs Fund (AEF), which recently launched a HK $ 2 billion AEF Greater Bay Area fund in July 2021, with the support of sponsors including financial institutions, family offices and conglomerates. Beyond money, these “smart money” investors can deliver tremendous value by giving entrepreneurs access to their extensive business networks across Asia and beyond.

Access to finance is a prerequisite to facilitate scale-up. Compared to other offshore financial centers such as Singapore, Hong Kong’s private capital has grown steadily over the past five years, exceeding Singapore by a factor of four ($ 97.7 billion versus $ 26.8 billion). of dollars). According to the Hong Kong Monetary Authority (HKMA), more than 300 funds have been established in Hong Kong since the launch of the new Limited Partnership Fund (LPF) scheme in August 2020. Family offices are growing rapidly in the city , attracted by solid chords. flow and abundance of investment opportunities, including those in technology. In response, InvestHK created a dedicated family office team in 2021 to further accelerate this growing trend.

On the capital markets front, the Hong Kong Stock Exchange (HKEX) has been ranked number one in the world in seven of the past twelve years, with many Chinese technology companies listed on the stock exchange. The market capitalization of HKEX is more than 9 times that of the Singapore Stock Exchange. During this year’s Hong Kong FinTech Week, HKEX chief executive Nicolas Aguzin said mainland China’s capital market is set to triple to $ 100,000 billion over the next decade. . This would open even more new opportunities for financial services and fintech companies in Hong Kong, as mainland Chinese can invest in stocks and bonds through “Connect” channels, while those in the Greater Bay can invest through the Wealth Management Connect program. Looking at the bigger picture of financing, the IPO is just the beginning of the story of long-term growth across Hong Kong. According to HKEX, post-IPO and debt financing in Hong Kong was 6.6 times the funds raised through the IPO in 2020.

The conditions are right for Hong Kong fintech companies to leverage Hong Kong’s extraordinary capital base to reach new heights. To use Michael Porter’s wine cluster analogy, Hong Kong’s evolving position, as well as our growing collaboration within the Great Bay region, is akin to the combination of the tech entrepreneur and the grassroots. of Silicon Valley venture capital and the might of the New York capital market. As we look to the year ahead, we can expect to see Hong Kong not only serve as a gateway to Asia, but increasingly become a springboard for the development of fintech innovation – supported by a deep, highly diversified and expansive investment infrastructure.

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