An in-depth look into the new Hong Kong LPF regime

Welcome to join our webinar today. Hope everyone is staying safe and healthy with the pandemic. Today, we are going to talk about the coming LPF in Hong Kong. Here we have Kenny from IQ-EQ, JingJing from King & Wood Mallesons, Vanessa from EY and also myself from ComplianceAsia. Kenny, shall we have a short introduction of ourselves and the company starting from you?

My name's Kenny Yeung, and I am the Business Development Director, based in Hong Kong with greater China coverage. IQ-EQ is one of the largest investor services provider firms. We have about 200 people based in Singapore and 40 people based in Hong Kong. We are currently serving 8 out of top 10 private equity clients, globally. Our headquarters is actually in Luxembourg. IQ-EQ actually was rebranded in 2018, previously you may have known us as Augentius and SGG Group. We have four core businesses, one is obviously alternative investments, we also have corporate services, tax and compliance services, as well as private wealth and family office services.

Thank you, Kenny. JingJing, could you have a short introduction of yourself and your company as well?

Thanks Alice, my name is JingJing and I am a partner in the fund team of King & Wood Mallesons. And King & Wood Malleson, based on the latest statistics that we got yesterday, we can say that we are the largest law firm in Hong Kong. So that’s it, thank you.

Vanessa, could you have a short introduction of yourself and EY and your business?

Thanks everyone. My name is Vanessa Chan. I'm the Hong Kong tax partner, focusing on financial services, mainly on wealth and asset management, so mainly focusing on funds. I don't need to explain too much about EY but EY is actually one of the two top Big 4 firms in terms of market share in the wealth and asset management industry. So very glad that we get to have the opportunity to talk to you guys today.

Thanks Vanessa. Thank you all. How about a short introduction from my company as well. So ComplianceAsia is the first compliance consultancy firm in Asia since 2003, with offices in Hong Kong, Singapore, Shanghai, and Tokyo. We assisted with more than 2000 financial institutions in Asia. Then the asset managers, PE funds, VC funds and also hedge funds. To start with, I'm going to give some background on our webinar today. Over the past few years, we have witnessed the development of PE funds across Asia, especially in Hong Kong and mainland China. Here I've got some data from AVCJ. Actually, there are around 565 PE companies in mainland China and Hong Kong at the end of last year. It represents around 40% in Asia. It is a quite huge number. Hong Kong currently is the second largest PE hub in Asia. I think that Hong Kong is well positioned to expand its PE market, especially with the new LPF. As far as we know, the more common form of PE funds is the Limited Partnership. However, the existing legislation for partnership law in Hong Kong is lagging behind many other jurisdictions. So actually, as an initiative to make Hong Kong a more attractive jurisdiction for PE funds, the government issued the LPF Bill earlier this year, and as the Bill will come into effect at the last day of this month. After sharing the data and the background, Kenny, could you give us some updates from your side, regarding recent trends of the newly set up funds in APEC?

Sure. Thank you, Alice, for the introduction. My topic today is on changing dynamics of the private funds industry in Asia. I want to give you guys an overview of what the future looks like for our industry and some trends we have observed in the private market. Can we see the slides of our presentation? Okay. The first slide you will see that is that we have seen geographical tendencies developing in our region. We believe Hong Kong remains the preferred gateway to the region. The city has a favourable tax regime, a robust regulatory and legal framework and solid financial infant structures that promotes high degrees of freedom, sorry, high degree of transparency and predictability. The city also allows free flow of capital without a currency exchange restriction. Its proximity to mainland China gives the city a shortcut to the largest pocket of wealth in Asia, and China is increasingly dependent on Hong Kong as the gateway for outbound investments and its appetite for offshore alternative assets. Over the next five years, we will further see our industry gravitating towards China as China’s asset management industry will be more outbound focused and as further liberalization of renminbi become inevitable, emergence of Shanghai, Hong Kong, Shenzhen Hong Kong stock connect are all good indicators of increasing coordination between the Hong Kong and mainland regulators. Also, the ongoing development of the Greater Bay Area and China's Belt Road initiative will provide plenty of investment opportunity for private equity managers and investors in the region. So, the evidence is overwhelmingly clear that our industry will continue to shift towards China. In addition to the China factor, we also see demographic and technology aspects driving demand for our industry. The rapid growing 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 existing in many Asian countries. Hong Kong, for example, its NPF is widely viewed as insufficient. So, we believe this trend also represents a substantial opportunity for the industry. In addition, 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.

This is an area which IQ-EQ firmly believes in and heavily invests in. Many of our offerings are technology driven. Our investor solutions services such as Cosmos and compliance solution services such as Max Comply are good examples of that. If you guys are interested to find out more about those services, please let me know. I'm happy to share more information with you after the webinar. Next slide please. With US 2.4 trillion AUM and 890 registered and licensed fund managers in the city, Singapore remains a developed Pan-Asia fund hub. Very much like Hong Kong, Singapore has a strong foundation supporting the funds industry. The city is strategically located at the crossroads of international trade and in the heart of the emerging Southeast Asia market, with proximity to India and Middle East capital investors and opportunities. In addition, the introduction of the VCC structure will also likely to strengthen Singapore’s competitiveness in the fund space. We have seen interest coming from China, India, Europe, and the US. Since inception already in January, 94 VCCs have already been set up. Next slide, please. We have also observed a shift in funds domicile preference in the region. We see no one jurisdiction can lay claim for being the right home for every alternative fund anymore. The selection will be more complicated and may include many new factors, such as regulatory path structure, and cost considerations. However, the main cause of all of this, is really because of the new challenge that Cayman Islands has faced in recent years, the AML officer requirement, economic substance requirement, and the recent new private fund regime all led to increasing costs and reducing flexibility for the Cayman structures. In addition, the arrival of the Singapore VCC and Hong Kong LPF will add competition to what was previously a Cayman fund dominated region. Some may see this shift as a challenge for the region, but firmly it’s an opportunity for Hong Kong and Singapore. Next slide. Now shifting our attention to the real challenges and uncertainties we will face in the coming years. We think managers and investors will continue to face scrutiny from regulators. Rigid compliance and AML procedures will become an industry norm, which will lead to a rise in compliance related costs, and overall cost increases for managers and investors. The industry will also be vulnerable to sudden shocks caused by the unforeseen political and policy shifts. We believe this to be the biggest potential mainland-related risk to the industry. However, amid the worst US-China relationship in the past 40 years, US policy changes could also pose risk to our industry. We continue to foresee Hong Kong and Singapore will take market share away from Cayman funds, but both cities will remain primarily importers and distributors of the fund product, not fund producers, as most funds will still be domiciled offshore. Cayman will remain relevant in the region, because of its legacy and tax benefits. Next slide, please.

We're now moving on to talk about some of the trends we have observed in the private funds market. According to the McKinsey Global Private Market Review in 2020, the private market funds space saw that fund raising in Asia slowed down in 2019, falling by almost 40 billion, a 25% year on year drop. All asset classes declined, PE funds fell by 27 billion. This is off the back of a record fund raising period in 2016 and 2017 for Asia managers. The drop represents a correction made to bring the fund raising back to the level in line with historical average in the region. We have seen managers opt to keep cash on hand over liquidity concerns and easing on fund raising and making new investments, therefore also making the environment a more challenging than before for the managers. Asia’s long bright spot in fundraising was private debt in 2019, which saw a rise by 23%. Private debt had gathered more attention for investors in recent years because investors are desperately searching for new sources of better returns in a low rate environment, and the fact that traditional lenders are struggling to keep up with the rising demand for credit also plays a role. Next slide, please. We have also seen trends impacting the funds’ ability to make distributions in the region. As mentioned earlier, more GPs opt to keep cash on hand. Another way of dealing with liquidity concern is by not making distributions to LPs, or some GPs have turned to distribution in kind to shift the risk and market volatility directly onto the investor. In light of that, investors in an LP need to consider reviewing more carefully the requirements set forth in the fund’s offering document to get better and more clear terms on capital call and distribution. For example, return call, but unused capital within a stated period of time and exercise the right to opt out on distribution in kind and etcetera. Next slide. We have also seen deal-making and lending activity slow down in the region. PE funds have registered a record high in uncalled capital, but due to the huge amount of the capital on the clock to be spent, and as the valuation retreats under the current climate, we think managers and GPs will have sufficient capital and abundant opportunity to be more aggressive in seeking value assets in the second half of 2020. On another note, China will have a faster recovery compared to other countries in the region. There's confidence in the market despite the outbreak. Investment into China will, following the pandemic, remain the same or even see a slight increase. Overall, we will see a faster recovering Asia as well, which could lead to a larger amount of investment being made in the region compared to other parts of the world.

Next slide. We have seen funds portfolio companies increasingly attempt to draw down any existing credit facilities in full to mitigate the risk of lenders refusing to lend. Extension of existing facility or new bridge financing will need to be carefully negotiated. For example, negotiating sufficient headroom in the financial covenants to take into account of expected impact of prolonging economic hardships on the portfolio companies. We have also seen more investors and LPs defaulting on their capital call obligations due to reduced overall liquidity or perhaps due to internal disorganization as part of transaction transition from remote working environments. Investors are encouraged to take a more proactive approach to discuss with their managers to better understand what is happening, not just at the funds level, but also at the portfolio companies level to be better prepared. Moving on to the final slide. Identifying opportunities amid the COVID-19 pandemic. We think healthcare, technology and pharmaceutical R&D are the three sectors most likely to attract increased interest from private equity funds. The outbreak has hit travel, entertainment, traditional retail, energy sector very hard with a considerable number of market players struggling with cashflow problems. We will see more distressed deals in the making, more so distressed debt will be a preferred instrument for growth and expansion in a sluggish global economy. We will also see more private equity funds actively seeking deals to acquire public companies at a bargain price. With that I conclude my part of the presentation. Now I pass it to JingJing for his presentation.

Jiang JingJing as far as we know you are in teamwork closely with FSTB. So I know you will give us an in-depth sharing of the briefing regarding the LPF.

Okay. Thanks Alice. And thanks Kenny for sharing your views on the dynamics and trends of fundraising in this market. So, next slide please. So, as you can see this is the history of the LPF. So, as you can see, it takes more than a hundred years for Hong Kong to make this law happen. So, since I was talking to Hong Kong Monetary Authority eight years ago about, coming, amending, either amending this existing limited partnership law or come up with a new law because every other major jurisdiction, they have their limited partnership regime, tailored for funds - PE funds. But, the Hong Kong limited partnership, even though we have a limited partnership, but, it's not suitable for funds. And after eight years - so nearly every year we talked to them - and after eight years, finally they came out, they sent out the consultation paper in July last year. And we submitted a very comprehensive submission to FSTB and had a few meetings with them and doing the legislation, actually we reviewed a few drafts before the legislation was published in March this year, so we are very excited to see it coming and, in July it was finally passed. And, we are glad to see that law take effect at the end of this month as scheduled. So, today I'm going to talk about an overview of LPFO and a comparison with the Cayman structure. So next slide please.

Next slide. Yes, so, the key requirements of the LPF, first of all, it will meet the definition of “fund”. I will talk about the definition in the next slide. And, as the same as in other jurisdictions, you need to have one GP and at least one LP and you need to have a partnership agreement. Although, people familiar with the registration process in Cayman Islands, know that you need an initial LPA, to form a partnership in Cayman, but in Hong Kong, the company registry does not require a submission of the LPA, but even without that requirement, from a legal perspective, you still need to have the partnership agreement, before you register your partnership. And you need to register with the Registrar of Companies of Hong Kong, and you need to have the registered office in Hong Kong, next slide. So the definition of a “fund”. It is very similar to the definition in the SFO. So basically, it means, the fund needs an operating person to manage the assets put together by the participating person. So basically, it means, operating person means, a GP or manager and a participating person means, a limited partner who will not have day-to-day management control. And the law also has a few examples, of some schemes not falling to the scope of the fund. So, like the arrangement where all the participants are the employee or former employee of the same group, and all those arrangements of a registered credit union, which is very uncommon anyway. So, those would not be defined as a fund. So if you are running a private equity fund, a VC fund, a real estate fund, then usually you will fall into this definition of fund and therefore, you can use the LPF vehicle for your fund. Next, next slide.

The key features of the limited partnership fund, if you are running any limited partnership in offshore or any other common law jurisdictions, then you will be familiar with them. And, when the Hong Kong [xxxxx] and FSTB, before they drafted this law, they also reviewed all the legislation of other major jurisdictions and therefore, it will look like very familiar for you. So, first of all, as a limited partnership, it does not have a separate legal personality. And in most of the jurisdictions nowadays, the limited partnership does not have a separate legal personality, although in some of the jurisdictions they give the GP to choose whether they will have, or have not legal personality, but it's still not common. And the second feature is there is no minimum capital requirement.

So for the GP and LP, there is no legal requirement that you need to put at least a minimum amount of capital contribution. For the GP, there is no capital contribution requirement at all, so actually the GP does not need to commit anything to act as a GP and the LP, of course, you need to put in something cash or property, and there is no restriction or investment restriction as well. So a lot of, in some of the seminars we organized before, there are people asking whether we can use LPF to invest in public stocks, or other bonds, fixed income products. And the answer is, yes, there's no such restriction. The third feature, and this is also one of the most important features of the limited partnership, is that it gives full freedom for the parties to contract and therefore, unlike a company, there are a lot of restrictions on how you structure your share capital, how you redeem the share, reduce the share for the limited partnership, it's totally free for GP and LP to enter into a contract to regulate any government or the relationship between the LP and GP. The next feature is, you probably, if you know, there was the FSC rolled out the OFC two years ago, which was not a success, and that OFC needed to go through all the SFC, for registration and vetting, although it's not approval, but it will involve SFC heavily if you want to set up an OFC. But for LPF, it's totally private. So, it's out of the regulation of SFC, and unless you are targeting public investors or retail investors, you don't need authorization for SFC. So, you will, you can go straight to the company registry, set it up, without any prior approval for any regulators and the regulator will not even look at your documents. The next feature is - which I will elaborate later - that the LP, the LPFO, will have a very long list of Safe Harbour, meaning that the LP they can participate in a lot of activities and the management of the fund, without losing their limited liability. Next slide. We are going to look at the key operators of the LPF. So as just mentioned, the LPF, they need at least one GP and one LP, and they have the manager, and, the GP, according to the LPFO, it needs to be a Hong Kong private company, or a registered non-Hong Kong company, or limited partnership, whether in Hong Kong or outside Hong Kong or any individual above 18 years old.

So one thing that I probably need to clarify here is the non-Hong Kong company, because a lot of people come to me and say, okay, it seems that the GP can be a company anywhere. Yes, that's true. But the non-Hong Kong company here has a definition in a company only located in Hong Kong. It means if you are a foreign company, then the foreign company needs to register in Hong Kong as a non-Hong Kong company under part 16 of the Companies Ordinance. So, it means if you want to use a Cayman company or mainland China company to be the GP, you have to register it as a non-Hong Kong company in Hong Kong. So, the process is similar to the process of a registered new company. And you still need to get the business registration from the inland revenue and pay tax in Hong Kong, and if the GP itself is a limited partnership or without legal personality, then the GP must appoint an authorized representative. And the authorized representative means a Hong Kong resident over 18 years old, a Hong Kong company, or registered non-Hong Kong company. So basically, you have to make sure that the GP should have an operation in Hong Kong. And the manager, the LPF law requires the GP to appoint a manager. But the manager can be the GP itself, or any company in Hong Kong, or a non- Hong Kong company. So, the manager, as you can see, it cannot be an offshore vehicle. It has to be a Hong Kong company or registered non-Hong Kong company, or Hong Kong resident individual. The LP can be any person, individual, or a corporate or unincorporated body. And the GP must appoint an independent auditor. This is the same as Cayman. So, you have to appoint a local auditor and you have to appoint a responsible person. The responsible person, their job is to carry out the AML and KYC, and not anyone can be the responsible person. Only four types of person can be the responsible person. So, the authorized person is either an authorized institution, which is a bank or a licensed corporation. So, any FSC license holder, entity, I mean, not individual. And all accounting professionals or legal professionals. So only those four types of people can be that responsible person, and a custodian is not mandatory. So, it does not require an LPF to appoint an independent custodian. Next.

Just now I talk about the Safe Harbour activities. So, the LP, one of the most important issues that LP cares about is about their limited liability. So, the reason they invest in the LP structure is because they want limited liability protection. But nowadays, especially in this market, we see a lot of LPs that want to be involved in the activities of the fund. And they want to have some say in the organization, governance or even management of the fund. Therefore, this LPFO, they have a very long list, like a four page long list, of the Safe Harbour, where it says, if you, the LP, participate in those activities, you are still an LP, you will not be deemed as a GP. And a good example here is that if the LP approves certain action by the GP, such as the extension of the fund term or change of the LPA certain clauses, in the LPA or investment scope, those would not be what will be one of the Safe Harbour activities. The LP they can even appoint members on the board of the portfolio company or investment committee member. They can appoint their directors in the GP. They can appoint, they can act as an employee of the fund. So those activities are also Safe Harbour activities. So actually, it means that the LP can be deeply involved in a fund and in certain measures of the fund and the GP without being deemed as a GP and therefore taking unlimited liability. The next slide is about the registration. So, the registration process is very simple. So, you just need one form, complete one form and submit to the Company Registry. And then you will just complete the registration. And the form that - in the form, you need to specify, this information of the key operators like the GP, the name and the specifics of the GP, the manager, responsible person, and you will declare that you are using the LPF as a fund.

So, if you go to the Company Registry’s website, they already have rolled out a full page of all the forms and the Q&As. There will be around - there are around sixty Q&A's. So you will find most of the answers to the questions that you may have there. And the submission, they require the submission to be made from a Hong Kong law firm or a solicitor, on behalf of the GP. So, the GP, or the manager cannot submit the application directly to the Company Registry. They have to submit it through a law firm or solicitor. Of course, if you have an in-house solicitor, then you can submit it by yourself - by your own solicitor. And the fee is only HK $3,000. And, now it's still not not clear how long it will take, but based on our experience, with the registration of a limited company in Hong Kong, we believe it will be similar. So, it will, normally we believe, take less than a week to register an LPF. I think it will be clear in the next two weeks because in two weeks’ time you will be able to register an LPF. Next, we will talk about the comparison between the Cayman structure and the Hong Kong LPF. So, as you probably know, in the past two years, the laws and regulations in the Cayman Islands have been constantly changing, and along with that, it comes, as Kenny just mentioned, it comes with the increasing costs and the compliance burden and less flexibility. So, a few of those laws that probably keep everyone busy and have been a headache in the past two years is the Economic Substance law and the Amendment of Security Investment Business law. That, I think may make almost all the fund managers or most of the fund managers reorganize their fund structures in Cayman and this year in February, the Private Funds law requires all the closed ended funds to register. So, it's like now the Cayman CIMA, they regulate, the closed ended funds, in a similar way as they regulate the mutual funds, hedge funds. In July, they even expect to expand the definition of private funds. So, a single project fund, or even a fund with no fee no carry feature will be caught by the definition fund. And therefore, you need to register your fund, however small it is, that you need to register your fund with CIMA, and the deadline was last Friday. So, if you have an existing fund and it is not registered, probably, you need to speak to your Cayman counsel and see, because the potential consequences, there is a fine of KYD $100, 000 which is around USD $120,000 and it is not a small amount. Next slide.

So, as I said, when the Hong Kong FSTB and monetary authority, when they are preparing for this law, they studied all the legislations in other jurisdictions. And as you will see later, when I finish this talk, you will see that everything that Cayman Islands offers, Hong Kong has got , and whatever Cayman Islands does not have, Hong Kong has as well. So, the GP, is the same. So, in Hong Kong and the Cayman Island…(can we go to the first, the, the previous one, the previous one – slide?) Yes. The registration authority in both jurisdictions. (I don't, what, what happened to this slide? Can we go to the previous one? Not this one. Yes, it's fine) So the registration authority it's very simple. In Hong Kong, it is the Registrar of Companies and in the Cayman Islands, it is the Registrar of Limited Partnerships and there is no separate legal personality in both jurisdictions. Regulatory approval is not required in either jurisdiction, but I have to say that in Cayman Islands, although there is no prior approval required, based on the Private Funds law, you need to register your fund. And actually, you cannot call capital before you make your filing as a private fund. And for that private fund application, you need to fill out a form of like 17 pages. So, a lot of disclosures are required for registration. And given that you cannot call capital before your filing is completed, it's like an approval because without that the registration, the fund cannot operate. Public access to LP information - it's a no in both places. But in Cayman, as I just mentioned, you need to disclose a lot of information of the fund to CIMA, although it's not accessible to the public. In Hong Kong, it's all private. You don't need to disclose anything about the fund, or fund document, or your LP to the Company Registry. The only thing you disclose is the identity of the GP, the manager, or the responsible person, but nothing about the details of the fund, and nothing detailed about the LP. And the Safe Harbour, as I said, both places, there are Safe Harbour activities. And if you are interested, you can compare, you will find that in Hong Kong the Safe Harbour activities list is much longer than in the Cayman Islands.

And the distinction between open-ended, this is also one important feature because in Cayman Islands, if you want to have flexibility of redemption of transfer without GP’s consent, probably your funding will be deemed as open ended fund and is subject to different requirements. But for Hong Kong, there is no such distinction. So, people asking me whether we can use the LPF as an open-ended fund or hedge fund. The answer is yes, you can, because there is no such distinction and legal counsel, of course, if you use Hong Kong, then there is no need to have legal counsel. (Next page, next page, please.) The GP can be an individual body corporate or limited partnership. The investment manager in Cayman, there is no requirement to appoint a manager, although in reality - given that a GP usually does not have operations and a team in Cayman - so, usually, they will appoint a manager or advisor onshore. The investment manager in Hong Kong, the GP must appoint an IM but the IM can be the GP itself. Licensing requirement - in Cayman, if you have a manager, the GP does not need to be licensed, but if you have a Cayman manager or advisor, you need to be registered as a registered person under the SIBL. Under the Hong Kong LPFO it does not require the IM to have a license. Of course, whether you need a license depends on what activities the manager carries out in Hong Kong. If you carry out regulated activities, you will need a license. Next slide.

The custodian - in both places it does not require the fund to engage an independent custodian. So, the custodian, the GP, as long as they can make sure they can keep proper custody of client assets, then there is no need to appoint a third-party custodian. Auditors, in both places, you need to engage in a local auditor. In Hong Kong you need a Hong Kong auditor and in Cayman, you need a Cayman auditor. For Administrator, there are no requirement. But, of course, nowadays it's more common to, for the fund, to engage an administrator to help with the client on-boarding, compliance, valuations and other stuff. Valuer, there is no requirement in Hong Kong and, in Cayman Islands, there is a requirement for independent third party to do the valuation, which usually is the fund administrator. Next slide, the AML and KYC. So, in Hong Kong, as I just mentioned before, the fund needs to appoint a responsible person to be responsible for the AML exercise. And the responsible person should be either a bank, a licensed entity, accounting professional, or legal professional. And in Cayman Islands, you need to, as you are probably aware of, you need to appoint three officers. One is the anti-money laundering compliance officer, and another is the money laundering reporting officer, and then the deputy money laundering reporting officer. So, you have to appoint those three officers and at least two persons basically, to act as both officers after you launch the fund. Filing - Annual filing, as I just mentioned, in Hong Kong, there is an annual filing requirement and in Cayman as well, but in Hong Kong, annual filing is very simple.

If you look at the form, annual filing form, there is only one question and you just tick the box. The question is to ask you to confirm whether, in the past 12 months, you are in an operation or operate as a fund, or in the next 12 months, you will expect to operate as a fund. So, that's the only thing that you need to disclose in the annual return. So, unlike the annual return for a Hong Kong company, where a lot of information needs to be disclosed, for annual filing and the return of LPF is very simple. And for an accounting standard in Hong Kong, there is no requirement. But, in Cayman, it requires IFRS or GAAP in the US or other non high-risk jurisdictions. Record keeping in both places requires the GP to maintain a proper record of the information and documents with the fund. For the AML documents, you need to keep it for five years. And that five years does not mean five years from the time you onboard the client; it means five years from the date the client ceases to be a client. Basically - it means when your fund terminates. And the transaction record, you need to keep it for seven years. In Cayman, you need to keep all the records for five years. And the last page is the most exciting one, because it’s where we're comparing the cost. The set-up time is similar, although for the LPF, how long the Company Registry will take to issue the registration certificate is not confirmed yet, but we expect it will be similar. The set-up cost, as you can see, is very cheap. For the LPF, it takes less than USD $400 as a government fee in Cayman Islands It's around USD $1,200. The corporate service fee, in Hong Kong it is around, depending which service provider you're using, but in a range of USD $400 to USD $700. In Cayman, it is at around USD $1,200 to USD $2,000. The private fund registration fee, so, if you have funds in Cayman, then for the initial registration, you need to pay USD $4,600, and you need to pay USD $4,268 as an annual fee. But in Hong Kong, there's no such charge. And annual filing fee, so, as you can see, so when I look at the number, I was shocked as well, because they only charge HKD $105 which is USD $13. So basically, I mean, with that much money, you can only buy a lunch, right? So, with your lunch money you can do the annual filing for the LPF, basically. In Cayman Islands, because now the need to do the filing, so the cost will be around nearly USD $10,000 dollars. So if you add up all the costs, the set up cost and the annual fees, basically, the cost of setting up or maintaining a Hong Kong LPF, is roughly 15% of the cost of running a Cayman Islands fund. So, if budget or cost is an issue nowadays in this challenging fundraising environment, both GP and LP, they want to save money. So, I mean, you can consider LPF. So that's the end of my part, so, I would just hand the floor to Vanessa.

Thanks JingJing, thanks everyone. Yes, before I talk about the taxation treatment of an LPF in Hong Kong, maybe I just want to quickly run over some of the tax drivers for introducing this LPF. I'm conscious of time, so I will cut it short. Actually, there are two main drivers, one of them is, as JingJing has mentioned, is because of the current economic substance requirement. Nowadays it's no longer easy or simple or cost efficient to set up a Cayman fund. And because of that, Hong Kong wants to solve, you know also introduce a legal vehicle, such that there is no need to concern about the Cayman economic substance requirement anymore. Another reason is because of the treaty reason. In the past, right, when we have a Cayman fund an offshore fund, but when you come to investing into the project, normally we set up a SPV in a different country, and it's very typical to also set up a Hong Kong SPV to invest into the private investment project. The concern here is for the Hong Kong SPV, in order for it to become a Hong Kong tax resident, there will be some concern here because at the back of it is actually a Cayman fund. And normally, the SPV doesn't have lots of substance. So, the concern here is whether the Hong Kong SPV would really consider as a Hong Kong tax resident, therefore it can be out of the treaty. But with the LPF, as JingJing has mentioned, you can have everything in Hong Kong. You can have the GP in Hong Kong, you can have the investment fund manager in Hong Kong. Of course, you have the fund vehicle, which is the LPF, in Hong Kong, and underneath it, you can have the Hong Kong SPV, so everything in Hong Kong. It becomes very strong in terms of argument that the substance is in Hong Kong. The management and control is in Hong Kong. So, it does bring lots of benefit in terms of treaty claim argument. So I’ll quickly run over the taxation of the LPF. As the LPF is a limited partnership, and is a Hong Kong registered partnership, so you will be regarded as a taxable person in Hong Kong. However, I'm pretty sure that many of you may be aware that Hong Kong has the fund exemption regime. And that means, that regardless of the legal form of the fund vehicle, as long as you can meet those exemptions, your fund can also be exempt from Hong Kong profits tax, despite that you have the Hong Kong manager managing the fund. In the next two slides, I will very quickly run over some of the conditions of the fund exemption regime.

Thanks very much. So, basically this page summarizes the conditions that are needed in order for the LPF to be able to qualify for the exemption under the Fund Exemption regime. And if you look at your right-hand side, there are only two gateway conditions. As long as you can meet those conditions, your fund is eligible for an exemption, despite its set up in the form of LPF. And the two gateway conditions are pretty simple. Firstly, the LPF would meet the definition of fund, which you guys are probably aware is actually leverage on the definition of CIS collective investment scheme under the SFO. And the second gateway condition is, actually has two legs of it. The first leg is that if your fund structure has this SFC license to manage the fund or as investment, sorry, go back. The previous slide. Yes. So, the second gateway condition is that, if you have a SFC, license as investment manager or investment advisor, then you can meet the specified person condition. That's it. But if you don't have a SFC license as the manager or advisor, you can still qualify for the fund exemption if your funds can meet the qualified investment fund definition, and, and among the other conditions, one of them is to have a minimum number of investors. So, once you meet this two-gateway condition, then profit arising to the LPF from your qualifying transaction, as well as, those income that is incidental to the qualifying transactions would be exempt from the profit tax. Also, I want to highlight, in the third box on this page, that the fund exemption also provides exemption not only to the fund vehicle, but any SPE that is set up under the fund vehicle. So, this is particularly relevant for a PE fund – normally, PE fund will set up an SPV to make an investment in the private investing company. So, if your SPV is set up purely for the purposes of holding and administering, then those underlying private investments genuinely qualify as a SPE as defined under the fund exemption regime and the SPE itself can also be eligible for the fund exemption. Just want to highlight one point which is that if your LPF is actually relying on the unified fund exemption regime for the fund exemption, one point you need to be aware of is that, if you have a Hong Kong resident investor, then potentially there is an anti avoidance provision that could impact your Hong Kong resident investor - normally we call it (xxxxx) - and that would happen if you have a Hong Kong resident investor holding more than 30% of the beneficial interest in the fund - then the Hong Kong resident investor would potentially be deemed to derive Hong Kong source revenue profit from the fund - and that will affect the Hong Kong profits tax position of the investor, although it doesn't really impact the fund status, but as client relationship management, right? So if you have Hong Kong investors as an investor, then you need to be paying attention to that. Going to the next slide. I just want to quickly run through that under the funding exemption regime, if you are using an LPF to invest in some private company, other than those two gateway conditions that I have mentioned just now, for private company investment, there are additional tests that you need to fulfil in order to get the exemption

And probably you have been hearing about the immovable property test, the holding period test, the control test, as well as the short term asset test, and this diagram actually summarizes what tests that you need to fulfil in order for the profit arising from the private company investment to be eligible for the fund exemption. If I can go two slides back, because other than the profits tax position, I also want to quickly summarize what is the other tax implication for an LPF? So, Hong Kong stamp duty, people may ask, an interest in the LPF, would that be considered as a Hong Kong stock, such that any transfer of the LPF interest or any contribution or withdrawal would constitute any stamp duty implication? The short answer is no, because the interest in an LPF is not considered as a Hong Kong stock. Another thing you probably don't want to ask is capital duty, because that is a big thing under the Limited Partnership Ordinance, the 01, however, under this new limited partnership ordinance, the limited partnership fund would not trigger any capital duty. That means when the limited partner is making any capital commitment or capital contribution, that would not be any capital duty applicable. The final two points, another minute for me, is that on the Hong Kong investment manager, because as Jingjing mentioned, under the LPF, you would need to have a Hong Kong investment manager. Generally, the investment manager clearly is providing investment management service in Hong Kong, so any management fee derived by the Hong Kong investment manager would need to be subject to Hong Kong tax. However, Hong Kong has a territorial basis of taxation. That means that only Hong Kong source management fees will be subject to tax in Hong Kong. And what it means is that if the Hong Kong investment manager, when they are providing investment management services, they actually need to render some of the services outside of Hong Kong. Say for example, that you must have bases outside of Hong Kong, so some of the fund raising activity has to be undertaken outside of Hong Kong or the deal is actually outside of Hong Kong, so some of the due diligence activity has to be undertaken outside of Hong Kong. Then you can actually attribute part of the management fee to this offshore management activity and claim offshore credit in his tax return. And therefore that portion would not be taxable. Final point, that I'm pretty sure that every one of you is very interested in, it's about the taxation of carried interest. And in fact, last Friday, the FSTB, the government has issued a consultation paper regarding the Hong Kong taxation treatment of carried interest and the Hong Kong government is intending to put out a concessionary tax treatment for carried interest if certain conditions are met. So now it’s in the consultation stage, industry and funds are welcome to provide their comments to the consultation paper, which is due on the 4th of September. If any one of you have any comment and want to speak to anyone of us feel free to as well, because I think every one of us would want this concessionary tax treatment to be workable, so that the carried interest that is distributed starting from the 1st of April, 2020, can be eligible for the tax concessionary treatment. So that's all from my side. I hope I can catch up some time for you guys!

Thank you Vanessa. Thanks for your sharing. Here we we've got some questions from the audience. The first question is from Jimmy. I think it is a question that JingJing already mentioned about, but maybe Jingjing could stress more to us. So the question is “Do I need to be regulated as a Type 9 SFC license in order to manage the new HK LPF or can I be an exempt manager and still manage the LPF?” I noticed that you mentioned this a bit, but then maybe you could explain more for Jimmy.

This is, I think, the most asked question from the clients basically. So the answer is that, probably a bit more history is that when the LPF was first drafted, the intention of the government is that the GP and the manager need to be licensed. And of course when the industry saw this then they feel like it's not proper. So I think that the voice from the industry is that you should not require the GP and the manager to be licensed, and that's why in the final version of legislation, they removed this. So there is no mentioning of the GP or the manager to be licensed or not, as I just mentioned in my presentation, so whether you need a license, it's a different analysis. So managing LPF yourself does not need a license. So in that case, the answer is you can manage an LPF without a license. However, if an LPF is a PE fund, investing in private equity, private companies outside of Hong Kong, then based on SFC’s position, you are carrying out because those investment decisions in a private company also constitute investment in securities. The definition of securities under the SFO only exclude the securities of a private company. So if your fund is investing in a private company in mainland China, or in Cayman or BVI, then from SFC’s perspective, you are still carrying out regulated activity, so you need to be licensed. However, if you are saying real estate funds, you set up LPF investing in real estate property in Hong Kong, and for tax reasons, probably you won't do that because that's when, as I said, you cannot pass the immovable property test. So I'm just saying an example, if you do that, then you are managing a real property fund in Hong Kong, then you don't need a license. If you are managing a fund, investing in wine or art then you don't need a license. So it really depends on the activities and underlying portfolios you are managing. If the underlying portfolio includes securities like bonds, shares of the private company offshore, shares of the public companies, then it's most likely that you need a license. And to be clear, the GP is not required to be licensed. So, the manager needs to be licensed. So the GP, if it does not have a license, it can set up just as a shell company and you can engage a licensed company to act as the investment manager

Thanks JingJing. And, regarding to this, actually I want to add some more because actually, we deal with SFC every day, and currently, we have more than 70 cases on hand regarding to the SFC license application. Here I would like to share some practical opinions. Actually there is a circular issued in January this year to PE firms thinking to be licensed in Hong Kong. The question is actually the SFC point out that whether you need to be licensed or not, it depends on whether you're conducting Type 9 relevant activities in Hong Kong. Actually as Jingjing mentioned, it’s not a requirement, but it quite depends. Under the section 114 of the SFO in particular pointing out a licensed GP should not represent it to any prospective investor that they can manage as a PE fund in Hong Kong. So you must be really careful regarding to market in Hong Kong as a portfolio manager in Hong Kong. Thanks for Jimmy's question, and then there is another question for Vanessa actually, Taxes, everyone cares about the tax and could you share us the advantage of using a Hong Kong structure over a traditional Cayman structure from a tax perspective?

Yes sure. I briefly mentioned that when I talked about the driver for introducing the LPF. Well clearly, at least from the fund perspective, a Cayman fund versus a Hong Kong fund, would be on par largely, from the fund taxation perspective, because actually the fund exemption regime would apply to both a Cayman fund, as well as a Hong Kong fund. I think, the advantage using the LPF of course, everything will have the pros and cons. But when I really think of the advantage of using LPF versus the Cayman fund is that, firstly, as I mentioned, you don't need to be concerned about the economic substance, so you don't need to concern about whether a GP will fall within the ES requirement or the Cayman fund manager would fall within the economic substance requirements. You will have everything in Hong Kong. Then the second point, as I mentioned is about the treaty access, because with the LPF, you will basically have the whole fund structure that is situated in Hong Kong. You have the fund vehicle itself. You have the GP, and also the IM and the underlying SPV would also be set up in Hong Kong. So it's likely that the Hong Kong SPV could rely on - we call it the halo substance - of the fund management structure in Hong Kong, such that it will be much easier for the Hong Kong SPV to be able to get the Hong Kong tax residency certificate. Of course, getting the Hong Kong tax residency certificate, does not necessarily mean that you will be able to get the treaty benefit, because at the end of the day, you will be the treaty partner, in the other side of the jurisdiction which generates the income to decide whether they will grant you the benefit or not. At least you have the first step that you will be more successfully in enabling to get the (xxxxx) for the Hong Kong SPV, .

Thank you Vanessa. One more question for JingJing. Can we set up a co-GP structure by having two GPs in one limited partnership fund?

Especially, I think because co-GP structure maybe is not very common in a Western fund structure, but in this part of the world, I think we often have the request from a PRC background that a GP or fund manager to do a co-GP structure. The co-GP structure, traditionally you can do it two ways. Either the two GPs set up a joint venture, and the joint venture acts as GP, or sometimes the GPs will both act as GP of the fund. So in Cayman, this is doable, but if you look at the LPFO, it says, the fund must have one GP and at least one LP. So it means you cannot have two GPs basically. And this one, we also checked with FSTB and the intention is not allowing two GPs because they think this will overcomplicate things, and given that the co-GP structure can be achieved by way of doing a JV, and also in reality is not that common for PE industry, and therefore they make it this way. So if you want to do a co-GP structure, then you have to structure the JV instead of two GPs.