Following the money of Hong Kong's growing fintech cluster

December 24, 2021 09:41

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

The concept of an economic cluster is defined as a geographical concentration of interconnected businesses, suppliers, and associated institutions. This is often referenced 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 fast becoming a springboard for fintech innovation and scaling.

To understand this evolution, we must first acknowledge that Hong Kong is an economic cluster primed for fintech. First, the financial Services sector alone accounts for over 21% of Hong Kong’s GDP in 2020. For instance, 78 of the world’s 100 largest banks have a presence in Hong Kong and there are thousands more financial institutions – wealth and asset managers, securities firms, insurers, brokers, etc. This presents an enormous pool of potential buyers for B2B fintech companies, as they can help financial institutions accelerate their digital transformations.

According to a Q1 2021 PwC study based on AVCJ data, Hong Kong has the second deepest funding pool in Asia, just behind the Chinese mainland. Despite the onset of the pandemic, the city grew the funding pool by 8 per cent during 2020. In fact, fintech scale-ups such as Airwallex, FTX, and Amber Group are among those in the city that have raised over US $100 million in funding since the onset of the pandemic.

When you follow the money, Hong Kong offers something very few other fintech hubs can offer. The city is characterised by a highly diverse range of investors, from international venture capitalists and their mainland Chinese counterparts to family offices, private equity firms and corporate ventures. 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 many active investors in the city.

Top fintech scale-ups such as WeLab, One Degree, and Aqumon, as well as so-called “tech-fin” start-ups such as the likes of AI company, FANO Labs, can all trace their funding to these major investors. The Hong Kong SAR government’s own Innovation and Technology Venture Fund is also an active investor into fintech start-ups, which includes Qupital’s US$150 million Series B round earlier this year. Corporate ventures such as SC Ventures by Standard Chartered, and Citi Ventures are also active players that scout around the world for leading fintech solution providers.

Furthermore, with innovative startups across a broader technology spectrum targeting the Greater Bay Area continue to grow, so has the support for 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 by limited partners including financial institutions, family offices and conglomerates, among others. Beyond the money, these “smart money” investors can offer tremendous value by giving entrepreneurs access to their extensive business networks throughout Asia and beyond.

Access to finance is a prerequisite to facilitate scale. Compared to other offshore financial centres such as Singapore, Hong Kong’s private capital has been growing from strength to strength in the last five years, leapfrogging Singapore by a factor of four (US$ 97.7 billion versus US$ 26.8 billion). According to the Hong Kong Monetary Authority (HKMA), over 300 funds have been established in Hong Kong since the launch of the new Limited Partnership Fund (LPF) regime in August 2020. Family offices are growing rapidly in the city, attracted by strong deal flow and abundance of investment opportunities including those in technology. In response, InvestHK established 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 top in the world seven out of the last twelve years, with many technology companies from China listing on the bourse. The market capitalisation of the HKEX is over 9 times that of the Singapore Stock Exchange. During this year’s Hong Kong FinTech Week, the chief executive of the HKEX, Nicolas Aguzin, said that Mainland China’s capital market is on track to triple to US$100 trillion in the next decade. This would open up even more new opportunities for financial services and fintech companies in Hong Kong, as Mainland Chinese can invest in stocks and bonds through the “Connect” channels, while those in the Greater Bay Area can invest through the Wealth Management Connect scheme. Looking at the holistic funding picture, IPO is only the beginning of the longer-term growth story through Hong Kong. According to HKEX, the post-IPO and debt financing in Hong Kong was 6.6 times the funds raised through IPO in 2020.

The conditions are ripe for Hong Kong’s fintech companies to leverage on Hong Kong’s extraordinary capital base to scale to new heights. To take Michael Porter’s wine cluster analogy, Hong Kong’s evolving position, together with our increasing collaboration within the Greater Bay Area, is akin to combining the tech entrepreneur and venture capital base of the Silicon Valley, and the capital market powerhouse of New York. As we look to the year ahead, we can expect to see Hong Kong not only serve as a gateway in Asia but increasingly become a springboard for scaling fintech innovation – backed by a deep, highly diverse, and expansive investment infrastructure.

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Head of FinTech at InvestHK