With the introduction of exciting new fund structures and industry laws, 2020 was a game-changing year for Asian funds. Jocelyn Oh, our Singapore Commercial Director, Fund & Capital Market Services, picks out some of the most pioneering developments across Hong Kong, Singapore and China.
Hong Kong launched its Limited Partnership Fund (LPF) offering on 31 August 2020 to much fanfare. Structured in the form of a limited partnership, investment managers now have an additional fund jurisdiction to set up their investment vehicle. We expect the new regime to see more private equity and venture capital funds considering this onshore option.
As of January 2020, more than 70 LPFs have been set up in Hong Kong, covering a multitude of investment strategies such as private equity, venture capital, distress and hedge funds. Non-mainstream sectors such as telecommunications, aviation, renewables and impact investments formed part of the list of funds that were launched over the past few months.
Further announcements made on 4 January 2021 confirmed the much-awaited carried interest tax concession for LPFs. This is a notable booster for private equity funds, which will see the concessionary tax rate being formalised at 0% for eligible profits. This essentially allows exemption from local profits tax on the carry interest portion of the fund. Conditions will be in place for the qualified funds to be certified by the Hong Kong Monetary Authority (HKMA) and to have significant fund operations locally.
We expect an increase in the number of LPFs, especially private equity funds, being launched in Hong Kong in the coming year as China and other regional economies bounce back in the wake of Covid-19.
Well into its first year the Variable Capital Companies (VCC) framework, which was launched on 15 January 2020, has garnered good responses despite its fundraising plans being delayed by the pandemic. A total of 184 VCC funds had been created as of 24 December 2020, fuelled by a second wave of interest from overseas and local institutional investors. Strategies formed under the umbrella structure constitute popular investment themes such as Asia focused, real estate, special opportunities, credit, macro and alpha funds – as well as emerging alternatives such as ESG, blockchain, distress, and social impact investments.
The VCC structure attempts to offer the best of both worlds – the benefits of a limited partnership alongside the benefits of a corporate structure. Absorbing the feature of a passthrough structure found in limited partnerships and the legal identity of a corporate structure to allow the leverage of tax treaty. Flexibility in creating new sub-funds for different strategies allows fund managers to operate efficiently within a single structure.
Tax incentives (no withholding nor capital gains tax, on-going tax exemptions on revenues), as well as the offering of government grants to offset fund formation costs, have certainly garnered much interest from the international asset management space.
An increase in multi-strategy, special opportunities, and debt focused VCC funds are expected to be launched in the coming year with the traction for venture capital funds continuing to see exponential growth.
China’s Foreign Investment Law (FIL), enforced on 1 January 2020, provides a unified legal framework on the access, promotion, protection, administration, and other key aspects of foreign investments in China. Key changes under the new FIL address the outcome of China’s trade negotiations with the US – including intellectual property (IP) rights – and lifts restrictions on foreign shareholder ownership for investments in certain sectors.
For foreign fund management firms that are regulated by the China Securities Regulatory Commission (CSRC), there is much to celebrate as ownership restrictions were removed on 1 April 2020 for foreign firms to set up 100% foreign owned shops in China. Institutional managers such as BlackRock and Neuberger Berman led the way in filing applications to set up public fund management entities, which would allow them to access China’s retail investor market. Meanwhile, developments and enhancement to other fund regimes such as the Qualified Foreign Limited Partnership (QFLP) have led to an uptick of foreign private capital funds setting up and investing into China.
Applications for Wholly Owned Wholly Foreign-Owned Enterprise Foreign Management Companies (WOFE FMC) are now streamlined and often fast-tracked as China opens its domestic markets to the world. While the number of WOFE FMCs is certainly expected to increase, we anticipate further regulatory updates and refinements to the onshore administration and reporting requirements. Hiring of experienced professionals or partnering experts on the ground is strongly advisable to navigate regulatory complexity.
If you’re interested in learning more about any of the developments above, or looking to expand into these markets, get in touch with our experts today.