New ordinance opens more doors for investors

This aims to attract private equity and venture capital funds to set up and operate in Hong Kong.

In recent years, private equity (PE) funds are gaining popularity amongst investors and driving the growth of wealth and asset management (WAM) business. However, Hong Kong’s existing legislation for limited partnerships, the Limited Partnership Ordinance (Cap. 37) or LPO was enacted about a century ago, which makes it difficult for it to meet the needs of investment funds, which are a relatively modern invention.

Thus, a new framework for the constitution of limited partnership funds (LPFs) was gazetted in the form of the Limited Partnership Fund Bill (LPF Bill) on 20 March.

This follows the Financial Services and the Treasury Bureau (FSTB) proposal on a limited partnership regime specifically for use by investment funds in Hong Kong. The bill is now expected to be enacted as the Limited Partnership Fund Ordinance (LPFO) will come into effect on 31 August.

Simmons & Simmons’ partner Rolfe Hayden notes that the primary benefit of the LPF Bill is that it will allow Hong Kong fund managers and advisers to use a Hong Kong domiciled, domestic closed-end fund vehicle. Instead of establishing a fund offshore Hong Kong, a fund will be able to be set up in Hong Kong and enjoy similar contractual freedom as in other jurisdictions but with greater Hong Kong legal certainty.

This seeks to attract investment funds, including private equity and venture capital funds, to set up and operate in Hong Kong. It is also said to provide for the registration of funds as limited partnership funds similar to other jurisdictions, which use registration schemes such as Cayman Islands- or Delaware-registered limited partnership.

Although there are many similarities, Eversheds Sutherland partner Paul Moloney and of counsel Helen Wang said that one notable difference is that the LPF regime requires the general partner (GP) to appoint an investment manager who can be itself but needs to be a Hong Kong resident over the age of 18, a company incorporated in Hong Kong, or an overseas company registered in Hong Kong.

This is said to be the same with Singapore’s requirements in registration, but there is no such limitation in the Cayman Islands regime, which could make it more transnational and versatile for those managers with global presence and who may not want to be perceived to have any particular ties to Hong Kong or Singapore.

Aside from this, a fund shall be constituted by a limited partnership agreement, has one eligible general partner and at least one eligible limited partner, has registered office in Hong Kong, is not set up for an unlawful purpose, and all its partners must not have come from corporations in the same group of companies to be registered as an LPF.

What will be the differences between Limited Partnership Fund Bill and the Limited Partnership Ordinance?

The main difference between the LPF Bill and the LPO is that LPO was first enacted in 1912 and is not fit for purpose in a private equity fund context. Simmons & Simmons’ Hayden notes that the LPO has never been really over-hauled and updated to cater for funds.

For example, the LPO does not have provisions for flexibility in capital contributions and distribution of profits, or allow a fund to have the necessary contractual flexibility, or provide a straightforward winding-up mechanism.

These absences are said to discourage fund managers from establishing PE funds in Hong Kong in the form of a limited partnership and are said to hamper the development of a more thriving domestic PE market locally, according to FSTB’s proposal.

“The existing law is unclear and limited in scope on the freedom of the partners to contract on the commercial terms. There is limited protection for investors with safe harbour activities also being unclear and very limited in scope,” said Eversheds Sutherland’s partner Moloney and Wang.

Moreover, there is a lack of confidentiality with information about the limited partnership and its limited partners which makes the HK limited partnership vehicle unsuitable as a private equity fund structure. Eversheds Sutherland’s partner Moloney and Wang notes that a 0.8% tax on all contributions from limited partners acts as the “final nail in the coffin.”

In contrast, the LPF Bill is designed specifically for the PE/venture capital (VC) industry, adopting many of the key points made by the industry, and the shortcomings mentioned are resolved.

How will the bill enhance the attractiveness of Hong Kong's asset and wealth management industry?

FSTB’s proposal notes that the bill is expected to bring more jobs and business opportunities to the local fund and related industries. With the growth of PE funds, the LPF regime offers a viable structure that will enable Hong Kong to compete with other major fund centres globally.

Eversheds Sutherland’s partner Moloney and Wang adds that once the LPF bill has passed into law, it will promote Hong Kong as the vibrant centre in Asia not just for PE/VC fund managers but also to the WAM industry more generally.

“In addition, if the LPF regime is a success, foreign private equity houses may consider the LPF regime as a factor in choosing to locate into Hong Kong as a China or regional base. Moreover Hong Kong service providers, including Hong Kong law firms, will also benefit as the fund formation ecosystem is developed further,” said Simmons & Simmons’ Hayden.

He adds that given the SFC has clarified licensing requirements for General Partners (GPs) and the Hong Kong tax regime was changed from 1 April last year, the availability of Hong Kong LPS will provide greater choice and will be able to rely on Hong Kong’s numerous double tax arrangements as well as minimise operating and establishing costs.