PE funds face array of appealing structuring options in Asia


Over the past few years, we have witnessed the development of private equity (PE) funds across Asia, especially in Hong Kong, Singapore and mainland China. Data from AVCJ underscores that there were around 565 PE companies in mainland China and Hong Kong at the end of last year. This figure represents around 40% of all-Asia figures, making Hong Kong the second largest PE hub in the continent. In the current context, Hong Kong is well positioned to expand its PE market, especially with its new Limited Partnership Fund (LPF) regime.

Earlier this year, Singapore, another leading fund management jurisdiction in Asia, introduced the Variable Capital Company (VCC) structure, considerably enhancing its appeal in the eyes of fund managers and investors alike. Indeed, since the inception of the VCC regime in January, we have seen interest coming from Greater China, India, Mauritius, Europe and the US.

Hong Kong remains among preferred gateways to Asia, with LPF enhancing appeal…

Hong Kong remains one of the preferred gateway to the region based on its favourable tax regime, robust regulatory and legal framework, and solid financial structures that promote a high degree of freedom, transparency and predictability. The city also allows free flow of capital without any currency restriction.

Moreover, its proximity to mainland China gives the city a broad access to the largest pocket of wealth in Asia, and China is increasingly dependent on Hong Kong as the gateway for outbound investments and international alternative assets.

Building upon these factors, the government issued the LPF Bill earlier this year as a determined initiative to make Hong Kong a more attractive jurisdiction for PE funds, with the most common form of PE funds globally being the limited partnership structure. Allowing Hong Kong to play catch-up with other jurisdictions offering a comparable structure, and following extensive government consultation with Hong Kong’s asset management industry, the Bill came into effect at the end of August.

The LPF regime is being introduced to attract private investment funds (including but not limited to PE and venture capital funds) to set up and register in Hong Kong so as to facilitate the channelling of capital into corporates, including start-ups, in the booming innovation and technology field in the Greater Bay Area. 

Demographics and technology will drive further demand for Hong Kong

With the LPF regime now in place, we see demographic aspects driving continued demand for the alternative assets industry in Hong Kong. The rapidly growing but ageing population and prolonged retirement period in Asia could drive more Asians to seek alternative investment options with higher returns to support the insufficient pension arrangements currently in place in many Asian countries; in Hong Kong, for example, the public widely views the MPF as insufficient.

Increasing connectivity via technology could be another important growth driver. The use of technology in virtually all aspects of life and commerce will lead to demand for more real time, electronic information, interactive digital experience for the managers and financial service providers. Indeed, this is an area of focus for IQ-EQ and we heavily invest in leveraging technology for the benefit of our clients such that many of our offerings are technology driven. Our unique Investor Solutions offering, powered by IQ-EQ Cosmos, and proprietary AML compliance platform MaxComply, are good examples of our focus on facilitating investor decision-making based on clear data.

Singapore as an Asian hub for PE with recent VCC regime

With US$2.4 trillion in assets under management (AUM) and 890 registered and licensed fund managers in the city, Singapore is a notable pan-Asia fund hub, strategically located at the crossroads of international trade and in the heart of the emerging Southeast Asia market, with proximity to both Indian and Middle Eastern capital investors and opportunities.

Thus, akin to Hong Kong, Singapore is already blessed with strong foundations supporting the growth of the fund management industry and the introduction of its VCC structure in January is already strengthening Singapore’s competitiveness in this space. Indeed, over 100 VCCs have been set up already since the regime became operational.

Healthy competition with other leading fund jurisdictions

Bolstering the increasing interest in Hong Kong and Singapore as fund domiciles is the concurrent increase in regulation in other established funds jurisdictions; for example, the Cayman Islands with its mandate for an AML officer, enhanced economic substance requirements and new Private Funds Law.

Even so, it is expected that Hong Kong and Singapore will remain primarily importers and distributors of the fund product as opposed to fund producers, with most funds remaining domiciled in accordance with tax and other legacy benefits. Certainly, however, the arrivals of the Singapore VCC and Hong Kong LPF will serve to enhance the level and depth of competition between investment hubs.

Fund managers face complex domiciliation decisions

It is clear that the fund domiciliation decision is becoming more complicated for fund managers, with many new factors to consider such as regulatory path structure and cost implications, and this is leading to greater opportunities for Hong Kong and Singapore.

With attractive new structuring regimes now in place in both Hong Kong and Singapore, and China expected to bounce back faster from COVID-19 disruption than other Asian countries owing to a deep core of confidence in the market – on top of confidence in a faster recovery for Asia as a whole – the region is poised for fund managers and investors to take advantage of the immense potential it has to offer PE funds.