The Hong Kong government is keen to take a big bite of the global asset management pie, and with its new law on limited partnership funds it is showing serious intent to lure alternative funds away from their homes in offshore jurisdictions and Singapore, and anchor them in the city. Mithun Varkey reports
The Hong Kong government has taken a firm step towards preserving and reaffirming its position as a global financial hub with the passing of the Hong Kong Limited Partnership Fund Ordinance (LPFO).
The ordinance, effective from 31 August 2020, is an important step in attracting close-ended funds to domicile in the city and away from offshore jurisdictions, which has been the default model for most fund managers.
The new law allows fund managers to set up limited partnership funds (LPFs) in Hong Kong. The LPF regime follows the open-ended fund companies (OFC) regime, which came into effect on 30 July 2018, providing the option for Hong Kong-domiciled, open-ended investment funds to be structured in a corporate form, rather than as unit trusts, which has been the conventional structure followed for more than a century.
The LPFO regime is a registration scheme that allows a variety of alternative asset classes such as private equity funds, venture capital funds, real estate funds, infrastructure funds, funds of funds, family offices and even hedge funds to be domiciled in Hong Kong.
“LPFO is part of a series of building blocks put in place by the government in the last couple of years to anchor funds in Hong Kong,” says Anson Law, a senior manager in the market development division of the Hong Kong Monetary Authority (HKMA), who has been spearheading the legislation.
“We realized that a lot of funds in Asia are domiciled offshore, especially in the Cayman Islands, and most of them are using the Cayman model because they don’t have an option, and we thought it makes sense to get a [piece of the] pie of this business for Hong Kong,” he says.
“Hong Kong has capital under management of about US$160 billion, and 565 private equity and venture capital fund managers as of the end of last year. If the offshore model is not going to work in a few years, then either these fund managers will be forced to move to other jurisdictions, and we will lose this offshore fund business completely. So the idea is to attract new business as well as retain the existing business.
“The first thing we did was to expand fund-level tax exemption provided to offshore funds to onshore funds as well under the unified profits tax exemption rule put in place in 2019, extending the tax exemption to all funds regardless of where they are managed from. And now, with LPF, we provide a channel for a general partner (GP) to set up a vehicle in Hong Kong similar to the Cayman Exempted Limited Partnership (ELP) vehicle, which is essentially a pooling vehicle.”
Lorna Chen, the Asia regional managing partner for Shearman & Sterling, says the Cayman structure has been the default, and the problem was that there hadn’t been an alternative structure for the industry to use. “Many China-based managers and funds with China-focused strategies have been expressing strong interest in using Hong Kong, mainly because they are increasingly evaluating alternate options because governments worldwide, including in Europe and China, are starting to be concerned about the tax haven status of offshore jurisdictions,” says Chen.