Will Hong Kong become the next Cayman Islands?

Once it was the Cayman Islands and Delaware as the go-to destination for funds, but Hong Kong’s entry into the race could change everything

Hong Kong’s long-awaited Limited Partnership Fund Bill will be effective from August 31 – a new law that stands to fundamentally change Hong Kong as an international asset and wealth management centre.

At the moment, funds are mainly established in Hong Kong in the form of unit trusts or open-ended fund (OFC) companies. However, not all overseas fund managers are familiar with the Hong Kong's trust law or OFC regime.

Currently, it is much more common for fund managers to establish their funds, especially private equity funds via general partner/limited partner structures, in offshore jurisdictions such as the Cayman Islands where they have the relevant Exempted Limited Partnership law tailored for funds.

All that, according to Lorna Xin Chen, Asia Regional Managing Partner, Head of Greater China at law firm Shearman & Sterling, is about to change.

“We as an industry, because I’m a member of the technical committee of the HKVCA (Hong Kong Venture Capital Association), started to push for this six or seven years ago,” she said in an interview with FinanceAsia.

“We prepared very comprehensive reports about what Delaware does and what Cayman does (because) people were asking us why does Hong Kong push (funds) away,” she said.

“Innocent clients were often saying I want to set up in Hong Kong and we had to tell then ‘no’ there’s no way you can set that up in Hong Kong.”

VINTAGE LAWS

Hong Kong's own Limited Partnerships Ordinance is currently more than a century old and is generally used to set up professional practices such as accountancy and law rather than meeting the needs of the funds industry.

It is less flexible in terms of governance concerning capital contributions and the distribution of profits and leaves much to be desired in terms of meeting the operational needs of fund managers.

Variable share capital arrangements and streamlined procedures for termination, for instance were simply not part of the Hong Kong funds landscape.

The new LPF regime is expected to not only attract more funds to Hong but drive demand for capital, talent and expertise in different sectors, in particular fintech startups and professional services.

“Obviously the industry has been very excited, especially the practitioners, because we have had so many complaints from the industry and the sponsors saying how burdensome it is or asking ‘why do I have to go out of Hong Kong to have my board meetings?’ or ‘why do I have to get to Macau to sign all the board papers?’

“They asked what we could do to fix this and we didn’t have an answer until recently.”

SINGAPORE RIVAL

Competition from Cayman and nearby Singapore is intense and Hong Kong is anxious to enter the race as a serious contender for private equity investment coming out of China – a potentially huge market.

With Singapore geographically focused on PE investment in South East Asia, Chen says Hong Kong is ideally placed for the Chinese market in limited partnership funds, the main conduit for investment in general partners; the funds doing direct investment in mainly tech start-ups.

In uncertain time, the government also wants to enhance Hong Kong’s position as an international asset and wealth management centre, although Chen says that the passing of the bill in these current troubled times in Hong Kong is merely a coincidence.

“The work on this bill is a work of six years -  that it’s being passed now has little to do with political issues around the National Security Law,” she told FA.

"We are seeing a lot of demand these days," Chen said. "Everyone is trying to tap into PE investment (and) Hong Kong's PE industry has grown to a size that the government just can't ignore now."

TRANSIT TROUBLES

While the bill will attract new funds to set up in Hong Kong, for those already established in Cayman transiting to Hong Kong could prove difficult.

Chen said she could understand fund hesitance in moving to Hong Kong after establishing their US dollar structures offshore, but in the long run the China-based funds - especially government institutions or pension fund or semi-government fund – are likely to find Hong Kong a safer place, and closer to their investments, than the Cayman Islands.

As for issues around Hong Kong’s National Security Law, Chen said ultimately it would be welcomed by the market as a sign of stability.

“For international funds, there are concerns and they may feel a bit uncertain about the future,” she said. “But Hong Kong hopes the first batch of funds to set up and operate smoothly, and this will attract more international investors in the long run.”

¬ Haymarket Media Limited. All rights reserved.

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