Hong Kong's latest tax incentives are expected to lure large numbers of investment houses from the mainland to raise their first offshore private equity funds in the city to compete with big international names such as Blackstone and TPG, in a reversal of previous trends.
Just a few years ago, global private equity firms were heading to the mainland to raise yuan funds, as Beijing pledged to open up its financial services sector further to foreign investors. Many, however, eventually backed out in the face of myriad difficulties, including technical and tax concerns.
John Levack, vice-chairman of the Hong Kong Venture Capital and Private Equity Association, said private equity players are now heading in the opposite direction after the Hong Kong government introduced new tax incentives to encourage funds to make their home in Hong Kong.
Last month the financial secretary, John Tsang Chun-wah, said the government would propose changes in the city's investment laws to allow private equity funds to enjoy the same tax exemption as offshore funds.
He also said he planned to allow Hong Kong funds a more flexible structure by amending the current law that requires investment funds established in Hong Kong only to take the form of trusts.
"This will make a private equity guy's life much easier," Levack said. The policy change would help attract many mainland investment firms to launch private equity funds and offices in Hong Kong, he said. That, in turn, would add to financial jobs in the city, where global banks such as HSBC and Citigroup have been forced to cut back, partly because of cost pressures in their home markets.
These days, Levack said, mainland firms stand a better chance in competing with big Western names to raise money for their Hong Kong-based private equity funds.
"They [mainland firms] may not have connections outside China but they will argue they have lots of connections inside China, which is now more important," Levack said.
David Pierce, chairman of the Hong Kong Venture Capital and Private Equity Association, said competition between mainland and Western firms for fundraising in Hong Kong was good for the city's long-term development and its position as a major global asset management centre.
"Chinese [investment] firms are going abroad for sure. This is already happening. It is just a question about going where," Pierce said. "Singapore is another option, but the disadvantage for Singapore is the distance."
Hong Kong is home to less than 1 per cent of funds globally, research by PricewaterhouseCoopers shows. Some industry watchers have predicted that the new policy will catapult Hong Kong to second place by 2020.