Hong Kong’s limited partnership regime may attract funds to set up domicile, boosting city’s role as Greater Bay Area private equity hub

Despite private equity managers raising and advising capital in the city, none uses a Hong Kong fund structure and opt instead to domicile in Cayman

Changes to limited partnership regime could bring more funds and managers to Hong Kong, and keep systemic risks in check, lawyers and analysts say

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A view of Hong Kong island during the warmest winter this year on 2 March 2019. Photo: SCMP/Felix Wong

Published: 12:56pm, 19 Mar 2019Updated: 10:51pm, 19 Mar 2019

The Hong Kong government’s legal infrastructure to promote the city’s private equity industry may just work, encouraging more funds to set up domiciles locally and augment its role as a centre for private capital in the “Greater Bay Area”, according to fund managers and analysts.

Hong Kong was the base for 529 private equity (PE) and venture capital (VC) firms last year, with US$159 billion under management, according to AVCJ’s data. While they helped raise funds and advised on how the capital was used, almost no one used a Hong Kong fund vehicle.

PE and VC firms had close to zero interest in setting up funds in Hong Kong due to the limited options of the fund structure available to managers and investors, and an outdated limited partnership regime. The existing limited partnerships ordinance does not cover capital distribution, and confidentiality issue that are pertinent to PE funds.

That is about to change, after the city’s financial secretary sought to introduce a limited partnership regime in his FY2019 Budget that is catered to PE funds, as part of the government’s move to promote the city’s asset management industry.

A limited partnership regime provides the benefit of being tax neutral, which means the structure does not lead to a duplicative layer of taxes borne by investors. Additionally, it also provides investors with significant contractual flexibility in structuring their relationship as partners.