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Hong Kong limited partnership fund regulations attract flood of private equity

10 September 2021

Fang Ling Khor

Senior Executive Director, Head of Fund Services, Asia Pacific

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Fang Ling Khor

Senior Executive Director, Head of Fund Services, Asia Pacific

View bio
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Now is the time for private equity and venture capital funds to explore Hong Kong limited partnership opportunities, Fang Ling Khor, Intertrust Group’s Head of Fund Services, North Asia told the Hong Kong Venture Capital Association Summit

The recent Hong Kong Venture Capital Association (HKVCA) Summit – sponsored by Intertrust Group – brought together more than 540 delegates from across the region’s private equity and venture capital industries.

Fang Ling Khor, Intertrust Group’s Head of Fund Services in North Asia, told attendees to the event, on 17 August 2021, that now is the time to consider Hong Kong Limited Partnership Fund (LPF) regulations as one of the options when setting up a new fund.

Formally adopted at the end of August last year, the LPF regulations enhance Hong Kong’s position as an international centre for asset management. The regime is attractive to private equity and venture capital funds as well as similar entities channelling capital into companies. Tech start-ups in the Greater Bay Area are among the beneficiaries.

Hong Kong asset management industry thriving under LPF regulations

Khor said the Hong Kong asset management industry was responding well to the new laws, formally known as the Limited Partnership Fund Ordinance (Cap. 637).

The HKVCA Summit drew participants from across the region to discuss the latest developments in China’s private capital markets. Subjects covered included China’s economic recovery and regulatory obligations.

As outlined by Hong Kong’s Companies Registry, an LPF is a limited partnership to be used for managing investments for the benefit of its investors. Registry guidelines state: “A fund qualifying for registration under the LPF regime must be constituted by one general partner who has unlimited liability in respect of the debts and liabilities of the fund, and at least one limited partner with limited liability.”

The new regime provides an alternative for fund managers establishing onshore funds in Hong Kong. It is similar to arrangements in jurisdictions such as the Cayman Islands and Delaware.

Khor said: “The whole LPF design is making it so flexible and easy to adopt for any fund practitioners.”

Hong Kong Monetary Authority outlines 2020 AUM growth

Fang Ling Khor was joined on the panel by Anson Law, of the Market Outreach Division of the Hong Kong Monetary Authority (HKMA). He noted survey results from the Securities and Futures Commission showing that Hong Kong-based assets under management (AUM) grew 21% in 2020, despite the pandemic, to HK$34.9tr (US$4,505 billion). There are now 48,000 people working in the sector, he said.

Law said that 317 Hong Kong LPFs had been established since August 2020, which compared favourably with growth seen when similar LPF schemes opened in other jurisdictions.

“It’s a solid start,” he said. Part of the explanation for the enthusiastic take-up is cost. Law said participants had told him the costs of the Hong Kong LPF could be as little as one-twentieth of those required in other jurisdictions.

He described the Hong Kong regime as “fully commercial, fully operable” and the authorities as not intrusive. “We won’t ask for details about how much money you put in . . . what investment strategy in detailed terms you are doing.”

HKMA addresses private equity needs

Noting international efforts to standardise tax and auditing practice, Law said private equity professionals wanted a “future- proof” regime that would “survive international tax scrutiny, international regulatory tightening and the ever-changing requests of international investors”.

Law has broad experience in financial services policy formulation. He leads the HKMA team developing Hong Kong’s private equity and venture capital fund market.

Redomiciling arrangements imminent for Hong Kong LPFs

Law outlined an ambition eventually to see 3,000 LPFs operating in Hong Kong. He said new arrangements for redomiciling would be in place shortly. “Our working target is to get this passed [by the Legislative Council] and effective by 1 November this year.”

Lorna Chen, Asia Regional Managing Partner and Head of Greater China at Shearman & Sterling, the event moderator, also discussed the advantages of Hong Kong LPFs. “The big comfort we can give the industry is that you can take a limited partnership agreement from a Cayman fund structure and pretty much keep 85% of the content,” she said.

“Business-friendly” carried-interest law guidelines proposed in Hong Kong

The panel discussed new Hong Kong rules on the tax treatment of so-called “carried interest” – mechanisms that let investment managers share in the profitability of companies benefiting from their financial and operational support.

Sandy Fung, Partner, Alternative Investment, Tax, Hong Kong at KPMG China, described tax concessionary treatments of carried-interest law and application guidelines as “much more business-friendly than previous versions”.

“The feedback from the industry is very positive,” she said. “In particular, the entire process has given certainty to the tax treatment of carried interest which previously has been pretty contentious.”

She described the steps required for registration and certification, optional pre-screening and auditors’ reports. Delegates were reminded that filings concerning eligible carried interest received by or accrued to a qualifying person between 1 April 2020 and 31 March 2021 must be submitted to the HKMA in a Certification Application Form by 31 December 2021.

Market participants should review fund and carried-interest structures to establish eligibility for the tax concessions, she explained.

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