Hong Kong opens new doors for onshore private equity
Over a year in the making, Hong Kong’s Limited Partnership Fund Bill (‘LPF Bill’) provides a new structure for private equity funds in the city. The passage of the LPF Bill is a move by the Hong Kong government to encourage fund managers to domicile their funds in Hong Kong, and establish itself as the new home of private equity funds in Asia. Despite over 500 venture capital and private equity firms based in Hong Kong, managing over US$ 150 billion, almost no fund used a Hong Kong fund vehicle. The existing regime was highly restrictive and largely perceived as outdated with the current Limited Partnership Ordinance failing to address issues integral to asset management, such as capital distribution or confidentiality.
Favouring the Cayman Limited Partnership regime, fund managers were clear that they would have no interest in setting up their firms in Hong Kong unless significant changes are made to the current regime. The new law may be that change, being a key element in an effort to compete against Singapore for a better position in the asset management space. Welcomed by the industry at large, the new Bill provides for a flexible framework for funds with a removal of the existing restrictions on asset strategy and the scope of a fund’s investment. Similar to other LPF regimes, there will be no separate legal personality for the fund and unlimited liability will lie with the General Partner (‘GP’). A Limited Partner’s (‘LP’) liability is naturally limited to their contributions. Only if the LP takes on a greater role by being involved in the day-to-day management of the fund would the liability be shared between the General and Limited Partner. Several safe harbour provisions have been made in the LPF Bill protecting the LP’s limited liability. For example, an LP neither participating in fund committees nor voting for the removal of the GP qualifies as activities constituting day-to-day management.
Overview of the new Regulatory Requirements
The new private equity regime brings with it a host of new regulatory requirements. While the Bill itself does not make licensing requirements, there are external requirements requiring the GP of an LPF to be licensed by the Securities Futures Commission (‘SFC’). If the entity which has been appointed as the GP does not have their principal place of businesses in Hong Kong, they would require an SFC license.
The responsibility and liability of keeping records falls on the GP or Investment Manager, as the case may be, of the LPF. This includes all transactions, documents and information on the operations of the fund. All financial records are subject to scrutiny by law enforcement officers when necessary. Each LPF must appoint an independent auditor to conduct a yearly audit of the LPF’s financial statements. Each auditor must also have fulfilled the requirements under the Professional Accountants Ordinance. Every GP must appoint an SFC licensed corporation, an authorised institution, or a legal or accounting professional to carry out anti-money laundering and counter-terrorist financing oversight.
The identity of the LP’s must not be recorded on the LPF Register, not reported to the Inland Revenue Department and are to be kept confidential. Their details must only be recorded by the fund for the purpose of investigation by law enforcement.
Regulatory oversight and enforcement will be conducted by the Registrar of Companies (‘RoC’). The RoC will be granted a number of powers to enable compliance by the LPF. This includes a host of different requirements which include the filing of annual returns, registration compliance among several others. It even has the power to revoke an LPF’s registration under certain circumstances and disputes related to the LPF register will be heard by the Court of First Instance). Any changes made to the register or any registration documents or details, the RoC must be notified within 15 days.
Aiming to be enacted by 31st August 2020, Hong Kong may have finally created enough space to attract onshore private equity and strengthen its position in the industry.
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