Exploring the growth of local fund structures in Asia Pacific.
Despite a difficult few years, markets in Asia Pacific continue to offer strong investment opportunities for local and international investors. As the region grows in importance for private equity groups, the vehicles and fund structures they use to invest continue to gain attraction for optimizing transactions and general partner (GP) and limited partner (LP) outcomes, including local domiciled structures such as variable capital companies (VCCs).
While Cayman Islands structures such as exempted limited partnerships (ELPs) remain very popular among alternative investment firms and will likely remain commonly used vehicles for the foreseeable future, it’s clear that more local, Asia-Pacific-based vehicles like VCCs are gaining ground. This is due to the benefits they can offer in areas such as regulatory familiarity, tax efficiency, investor confidence, and ultimately—fundraising flexibility. Indeed, structures allowing easy capital mobility, and efficient management and transparency in particular, are increasingly preferred by fund managers and investors alike.
Which vehicles are gaining ground?
Singapore’s VCCs and Hong Kong’s limited partnership funds (LPFs) are two structures that have become competitive options for cross-border firms depending on the region of investments.
VCCs, incorporated by Singapore’s Accounting and Corporate Regulatory Authority (ACRA) and supervised by the Monetary Authority of Singapore (MAS), have become very appealing due to their versatility and application for various strategies such as private equity, hedge funds, and venture capital. VCCs help ensure a robust yet compliant regulatory environment, and are highly flexible, allowing for the creation of sub-funds with separate assets and liabilities. VCCs also offer access to various tax exemptions and incentives. Importantly, incentives have been extended to December 31, 2029, extending to LPs in Singapore, with changes taking effect January 1, 2025.
Hong Kong LPFs are specifically tailored for private equity and venture capital funds, with fund managers benefitting from Hong Kong’s strategic position as a gateway to China, which is crucial for investors targeting Chinese markets. Significantly, LPFs provide a familiar legal framework, similar to other common law jurisdictions, and in terms of tax benefits, there are profit tax exemptions for qualifying funds.
Cayman Island structures are still very strong
Cayman Islands’ ELPs remain a highly competitive option for private capital managers and will continue to be used by a wide range of stakeholders, particularly larger investment managers with existing funds. Familiar to and trusted by institutional investors globally, they offer a quick and efficient set-up process for funds, which is crucial for timely investment decisions. ELPs are well known for tax neutrality and structure flexibility, facilitating efficient relationships between GPs and LPs.
And while recent regulatory changes in the Cayman Islands may increase regulatory scrutiny—such as new laws around economic substance requirements, enhanced anti-money laundering, and compliance measures to align with global standards—they should also enhance the jurisdiction’s credibility. This may potentially make Cayman Islands vehicles even more attractive for institutional investors who prioritize regulatory compliance and stability.
What should fund managers consider when picking a fund structure?
There are a number of considerations for GPs and other key stakeholders when deciding which fund structures will be best.
When thinking about how best to optimize Asia-Pacific fund structures, managers should weigh factors such as flexibility and liquidity against specific strategic objectives and investor bases to determine the most suitable structure. Likewise, ease of administration, cost of compliance, and flexibility in capital deployment and repatriation are critical operational considerations. Different asset classes may require specific structures to optimize tax and regulatory treatments, for example, real estate funds might use structures that allow for efficient property acquisition and management.
Jurisdictions targeted for investment may also dictate the fund structure. For instance, funds focusing on Asian markets might benefit from structures in Singapore or Hong Kong due to local tax incentives and regulatory frameworks. Likewise, ESG requirements may require the adoption of structures that facilitate sustainable and responsible investing practices.
Looking ahead into the APAC private equity market
The Asia-Pacific private equity market has endured a difficult few years. According to one study[1], deal values fell to $147 billion in 2023, 35% below the previous five-year average. Values were at the lowest annual level since 2014, while the number of deals dropped under 1,300, 30% lower than the previous five-year average.
Notwithstanding the uncertainty, Asia Pacific remains a dynamic, fast-developing region composed of multiple countries offering a wide variety of investment opportunities. Looking ahead, fund structures that allow easy capital mobility and efficient management will likely be increasingly preferred by fund managers and investors alike, including the UHNWIs and large single-family offices becoming much more prevalent and active in the Asia-Pacific region.
The benefits of a specialist outsourcing partner
Working with a specialist outsourcing partner such as CSC that understands global and local compliance and regulatory landscapes, and can help establish structures in multiple jurisdictions, is key for fund managers focused on the Asia-Pacific market. The growing complexity of fund structures, understanding options in different jurisdictions, keeping on top of operational burdens and expenses, among other elements, all need to be managed effectively to optimize outcomes.
CSC has a physical presence across the Asia-Pacific market, operates one of the most powerful technology platforms in the world, and is notably well placed to help our clients simplify this complexity and enhance their own offerings. A testament to our service and product offering, CSC recently won “Best Hedge Funds Platform” at the HFM Asia Service Awards[2] and has been a trusted provider to large private capital investment management clients.
To find out more, please visit CSC’s Funds homepage.
[1]bain.com/insights/asia-pacific-private-equity-report-2024
[2]cscglobal.com/service/press/csc-wins-hfm-asia-services-award-for-best-hedge-fund-platform/
