Thought some of you might find this interesting:

American capitalism

- http://www.economist.com/opinion/displaystory.cfm?story_id=E1_RPTJPVV

What's wrong with Wall Street
Nov 23rd 2006
From The Economist print edition

It is good that the world's leading market faces competition; bad that it has done so little to confront it

NOT since the 1980s, when the nation was in a spin about the coming of the Japanese, has there been such anxiety in America over foreign competition. The familiar concern that China is going to steal the country's remaining manufacturing jobs has been compounded by a newer fear: that Wall Street is losing its grip on the world's money. Bankers and politicians worry that business will drain away from America's capital markets to financial centres overseas, particularly London and Hong Kong. Several committees are sweating away on reports, the most important of which is to be published next week, on how to stop the rot. America's treasury secretary, Hank Paulson, made it clear in a speech on November 20th that he shares their concerns.

Although it is still the world's biggest market for capital, America's lead is shrinking fast in almost every area (see article). In some it has been overtaken. The most spectacular collapse has come in the market for initial public offerings (IPOs) of shares, where the New York exchanges, miles ahead a few years ago, now trail behind London and Hong Kong. American stockmarkets are actually shrinking as domestic firms go private or buy back their shares; and it isn't helping that foreign firms choose to list elsewhere.

This raises two questions. How has America's status as the world's sole financial superpower been eroded? And what, if anything, can it do to turn this around?
Onward, capitalist soldiers

The bad news for America is in part the result of good news elsewhere. Thanks to financial liberalisation (which America encouraged), New York faces a lot more competition than it used to. Developing countries are getting richer, and their companies and financial markets better governed. Firms that might once have rushed to American exchanges to privatise themselves are instead doing so at home, or at least nearby. London is seen as a natural home for companies from Russia. Chinese firms are turning more to Hong Kong, which is gaining a reputation for capital-raising as well as trading: witness the gargantuan offering by ICBC, a bank, last month. As Asian markets mature, more of the capital there will surely never leave the region: there is little point in Asian companies going to New York to raise cash from Asian savers. Other markets are growing up, making Wall Street less exceptional.

But America is also responsible for its financial markets' decline by tangling them up in red tape. Nowhere is this clearer than the Sarbanes-Oxley act, an overhaul of corporate governance passed in 2002 in the wake of the Enron scandal. It's not all bad: parts of the law have successfully increased accountability to shareholders, and have been copied by regulators elsewhere. What's more, there is evidence that such rules lead to higher stock valuations because they suggest a commitment by managers not to abuse shareholders. But Sarbanes-Oxley went too far. The notorious section 404 on internal controls greatly increased the reporting burden on companies. Smaller firms, in particular, suffer.

With regulators soon expected to announce rule changes that will lighten the burden, the battle against Sarbanes-Oxley's excesses looks well on the way to being won. This should mean efforts can be directed elsewhere.

More economists, please
Towards shareholders, to start with. On the one hand, they have too few rights in their dealings with company boards; they have less power than their British equivalents when it comes to electing directors, for instance. On the other, American shareholders (or rather the lawyers who purport to represent them) wield too much power in securities litigation. Lawsuits brought because of falling share prices make a mockery of both the principle of caveat emptor and the honourable New York tradition of never giving a sucker an even break. Sadly, this is tied up in the much broader tort-law problem that bedevils American capitalism.

Regulators could also do with an overhaul. Here there are two problems, both serious. First, the Securities and Exchange Commission (SEC) is good at the tough stuff, bringing plenty of “enforcement actions”. But in its zeal to keep pace with crusading state attorneys, who exploit high-profile campaigns to win votes, it has lost sight of its other supposed goal—ensuring that markets run smoothly and efficiently. One way to address this imbalance would be to replace some of the SEC's vast army of lawyers with economists. That would also lead to better cost-benefit analysis of new regulations—an area where the SEC trails behind Britain's Financial Services Authority.

Second, the regulatory structure is too atomised. Too many agencies monitor the markets. There are four separate banking regulators. State and federal regulators tread on each other's toes. The SEC's duties overlap with those of the Federal Reserve, the Commodity Futures Trading Commission (CFTC) and others. Since it no longer makes sense for the increasingly entwined cash and derivatives markets to be policed by separate regulators, a sensible first step towards streamlining would be to merge the CFTC and the SEC.

Will America sort out its problems before the rot goes too far? The review of Sarbanes-Oxley shows the world's largest economy is aware of its shortcomings, and responding to them. Both parties recognise that reform is needed; though there is a danger that rising anti-business feeling (see article) may persuade the lawyer-friendly Democrats otherwise.

Still, even if reform fails and America falls behind, there will be compensations. Diversification has provided big financial institutions with a hedge against national decline, and it continues apace. The New York Stock Exchange is buying Euronext, a big European exchange, and sounding out the Tokyo bourse. NASDAQ, meanwhile, has launched a hostile bid for the London Stock Exchange (see article). And New York's investment banks are minting money overseas, not least from all those IPOs that have gone elsewhere. To many American capitalists, geography has never seemed less important—though that should not stop them untangling Wall Street.

Happy friday folks! Thought some of you might find this article interesting: It's about US venture capitalists looking to IPO in China

From theInternationHerald Tribune

U.S. venture capitalists look to China to take companies public

By Matt Richtel Published: December 22, 2006

SAN FRANCISCO: For the last few years, a number of American venture capitalists have been visiting China to study how to break into the markets of that emerging giant. But one has spent time there studying exits — not from China, but from his start-ups back in the United States.

Ted Schlein, a partner at Kleiner Perkins Caufield & Byers, met in Shanghai last month with local investment bankers promoting an almost surreal concept: They want venture capital firms — the vanguard of capitalism — to take companies public on Chinese stock exchanges.

Schlein and other venture capitalists are cautiously thinking about it. Frustrated by the difficulty and expense of taking start-ups public in the U.S. market, these seed investors are considering overseas exchanges as an alternative place to turn handsome profits by selling their interests in start-ups.

Chinese exchanges, like those in Shanghai and Shenzhen, seem like more exotic choices for now. But investors said they were giving more serious consideration to the London Stock Exchange and its small-capitalization division, the Alternative Investment Market, as well as to exchanges in Japan, Hong Kong and India.

"It behooves all of us to start understanding each of the various exit options," Schlein said.

The ultimate questions about Chinese exchanges, he said, are whether "they will be a viable exit strategy for non-Chinese-based companies, and when?"

"I think it's a matter of when."

Already, there are a small but growing number of venture-capital-backed companies based overseas that have gone public in the nations where they have operations. Much rarer are examples of American-based start-ups that have sold shares on the foreign markets.

But a majority of venture capitalists said they thought the rarity if such listings was destined to change — and soon.

In a report published Monday, the National Venture Capital Association found that 57 percent of the 200 investors surveyed expected a growing propensity in the industry to take American companies public in overseas markets in 2007.

The chief reason for interest: U.S. markets have not exactly been friendly places of late for venture capitalists to resell their interests in start-ups. In 2005, 56 venture-backed companies went public in the United States, down from 93 in 2004 and a high of 273 in 1996. (About 37 venture-backed companies had gone public as of the end of September this year.)

Venture capitalists have made a whipping boy of the Sarbanes-Oxley Act, the 2002 corporate accountability law that they say has markedly raised the cost of domestic public offerings. Talk by venture capitalists of taking companies public overseas could include some hot air, part of the industry's effort to persuade American regulators of the seriousness of their frustration.

But the venture capitalists acknowledge, too, that the U.S. public markets' appetite for technology start-ups has not recovered from the collapse of the dot-com bubble.

There are serious challenges to taking U.S. companies public overseas.

Investors must learn new laws and regulations, and they face the risk that trading interest and volumes in those foreign markets might be so low that the experience would not yield a meaningful return.

There is also the worry that less regulatory oversight means some overseas exchanges could become tarred by scandals or collapse.

Of all the overseas exchanges, the Alternative Investment Market in London has drawn the most intense interest, said Mark Heesen, president of the venture capital association. But he said that it was not clear yet whether companies taken public there could yield enough value and daily trading volume to allow venture capitalists to sell their interest.

"You could go public there and not get very far," he said. "If it doesn't get the VC out of the company, it's just another step along the way. Is AIM basically going to be the pink sheets of Europe, or really be an exchange?"

Charles Cameron, managing director of Jefferies International, an investment bank arm of Jefferies that is advocating overseas exit strategies for some venture capitalists, said, "I'm hearing a lot of interest from venture capitalists but also some concern about what is the appropriate size and shape of a company for AIM."

Some U.S. investors, meanwhile, are having success taking foreign-backed companies public in overseas markets. One of the advocates and practitioners of this concept is Dixon Doll, founding general partner with DCM-Doll Capital Management.

Based in Menlo Park, California, DCM has succeeded in taking at least five Japanese companies public in Japan since 1996.

Doll has made an investment in a cellphone software company in Scotland that has a partnership with a major cellphone manufacturer in Japan and, should it ever go public, Doll said he would consider doing a dual listing on British and Japanese exchanges.

Read more here

Thought some of you might find this article about the growth of venture capital in India interesting.

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Source - http://www.economist.com/people/displaystory.cfm?story_id=8447659

Face value

Delhi dreams
Dec 19th 2006
From The Economist print edition

Sanjeev Aggarwal believes that venture capital is about to boom in India

“THE propensity for risk-taking in India has gone up a lot,” says Sanjeev Aggarwal. Back in 2000, when he left his safe job at Digital Equipment Corporation (DEC), an American multinational, to launch a start-up, most Indian businesspeople were highly risk-averse, as were their families. “My wife was very worried about me leaving the security of a salary at DEC,” he recalls. Now a growing number of Indians are keen to risk becoming entrepreneurs, which is why Mr Aggarwal recently helped found a venture-capital firm, Helion Venture Partners, to help them succeed—and to enable him to get a piece of the action.

This increased appetite for risk has several causes. As India's economy has boomed (especially, but not only, in the technology industry) Indian executives have started to make a lot of money. They now have big enough nest-eggs to reassure themselves and their wives that they will be in good financial shape even if their entrepreneurial enterprises fail, as many are certain to do. This has given them the confidence to take more chances.

And, unlike when Mr Aggarwal took the plunge, they can also draw strength from a fast-growing list of successful Indian start-ups that now extends far beyond Infosys, the pioneering business-process-outsourcing (BPO) giant. Other notable successes include i-flex, a hugely successful developer of banking software, and Daksh, the BPO firm that Mr Aggarwal started with a call-centre in Gurgoan, on the edge of Delhi. In 2004 Mr Aggarwal made what he hopes will prove to be merely his first fortune when Daksh was bought by IBM as part of the computer giant's ambitious expansion in India. Daksh has gone from strength to strength: its workforce has increased from 6,000 to 20,000 employees since IBM bought it.

The prospect of adding to this list of start-ups is increasingly appealing to Indian executives looking for a bit more excitement—particularly those working for home-grown firms that have done well or for foreign multinationals that have expanded into India. “They are finding it ain't fun any more,” suggests Mr Aggarwal. Helion is, for example, about to announce an investment in a firm started by a team that is breaking away from one of the biggest outsourcing firms in India.

There are obvious parallels with the early days of Silicon Valley's venture-capital industry, which financed many start-ups created by former employees of local giants such as Hewlett-Packard and Intel. Indeed, many of those entrepreneurs were expatriate Indians who, now wealthy, see the chance to replicate Silicon Valley at home—much as returning Israeli entrepreneurs helped to create in their homeland the world's second-largest venture-capital industry.

That is the hope of investors in Helion's first fund, of $140m. They include some of the big American university endowments that did fabulously well by funding some of the pioneering Silicon Valley venture firms. Among the expats transferring their expertise back home is another of Helion's co-founders, Ashish Gupta. He was a co-founder of Junglee, a comparison-shopping website bought for $230m by Amazon.com in 1998, and later an angel investor in Daksh, having got to know Mr Aggarwal via their extended family network. Helion's other two co-founders, Kanwaljit Singh and Rahul Chandra, also bring useful expertise from abroad, mostly acquired by working for big foreign firms such as Intel, the Carlyle Group and Walden International, one of the first foreign venture-capital firms to try its hand in India.

All this makes Helion India's first noteworthy American-style venture-capital firm. Its $140m gives it reasonable clout. Mr Aggarwal estimates that the total venture capital allocated to India is around $750m-$1 billion, with about $250m of that invested each year in companies. But that does not tell the whole story, as much of the investment in fast-growing industries in India is done by the giant family conglomerates (such as the Reliance Group and the Tata Group) that have dominated the economy for decades and continue to be well placed to exploit the most promising opportunities. They use lots of their own capital, although increasingly they are willing to supplement this with money from the foreign private-equity and venture firms that are now desperate to be in the Indian market.

The voice of experience
Helion will face competition both from the old family firms and from big American venture capitalists, including Matrix Partners, Bessemer, Sierra Ventures and Silicon Valley's Sequoia Capital. But Mr Aggarwal plans to appeal to a new generation of Indian entrepreneurs who are not from old money. He thinks Helion's founders' practical experience of building successful businesses will be a selling point. Helion plans to provide start-ups with the hands-on advice that used to be the norm in Silicon Valley before the venture-capital firms got too big to provide it.

Helion's first investment, in August, was in JiGrahak Mobility Solutions, a firm that helps people shop by mobile phone. Its second investment, signed last week, is in makemytrip.com, an online travel firm. Mr Aggarwal expects Helion to concentrate on the intersection between mobile telephony, the internet and India's booming consumer markets. Another focus will be on extending India's outsourcing industry, either by automating labour-intensive processes or by developing high-margin specialist niches. Helion is looking at several such firms that do legal processing (preparing patent filings, for example) or equity research. These typically have revenues of around $20m, 300 staff and profit margins five times those of ordinary BPO firms. With venture backing, they could become firms with $100m in annual revenue and $20m in profits, reckons Mr Aggarwal—which, he adds, with a price-earnings multiple of 20-30, translates to “a half-billion-dollar market cap from a listing on the NASDAQ”. It will be risky, but Mr Aggarwal is ready to roll the dice.