Q What is your view on fundraising activity over the next 12 months?
A We are seeing an increase in fundraising activity from investors across all asset classes in Asia Pacific. However, the funds being raised seem to be primarily targeted at institutions in North America, including pension funds and sovereign wealth funds, indicating a comfort level with the risk and reward ratio in Asia. Having said that, we are also seeing Asia-focused funds in direct competition for capital with funds focused on mid-cap America. There has been less focus on fund raising from Europe, but we don't think AIFMD is the entire cause for this, but it clearly doesn’t help! This is true for established and well-recognised fund houses. For new entrants, including a number of Chinese Fund Management companies who are setting up first-time funds and therefore lack the track record, traditional institutional investors have shied away and fundraising has primarily come from domestic Chinese investors. In addition for new start-ups in Asia, North American investors are expecting to see some serious capital raised locally before committing from afar. The Middle East also remains a market where there is at least perceived to be a lot of capital available for deployment.
Q Which are the main factors that would encourage the investment manager for an Asia-based fund to domicile offshore?
A One of the main factors for a fund to domicile offshore is driven by tax. It is absolutely key for any fund vehicle to be tax neutral. In other words, investors cannot be subject to an additional layer of tax simply because they invest through a fund vehicle as opposed to directly. The availability of double tax treaties is also relevant, and may become more relevant as tax authorities increasingly look for substance in the place where the investing entity is established, which may impact where the special purpose vehicles go. For example, Singapore with its new fund domiciled structures is looking quite attractive for India investment purposes. Investor familiarity is also an important consideration. However, there are different considerations as to where the investment manager is based. The first question is where are the investment professionals going to base themselves. We don’t see too many of the investment manager’s personnel being based in the Cayman Islands, for example! Tax structuring is also a relevant component. Other factors may include the type of regulatory regime that applies to private funds including licensing on set-up, ongoing regulatory compliance and the overall enforcement environment. On the other hand, many investors are requiring that their investment managers are subject to a robust regulatory regime. This also helps from an anti-money-laundering perspective when dealing with counterparts. AIFMD is also an example that will have an impact on where the fund and its investment manager is based, given the extra territorial reach of AIFMD on alternative investment fund managers (the so-called AIFMs). Singapore is working hard to attract both funds and investment managers. Hong Kong, while having always been attractive to investment managers, is also looking at ways in which it can attract funds and their investment managers. These include the announcements to extend the offshore funds profit tax exemption to private equity, and the introduction of an OEIC regime. There is more to come.
Q How does an investor (multi-family office/trust) set up a non-bank financial institution in Asia and how does this affect perceived transparency and investor confidence? Which party would be the best to approach to gain advice on regulation, structuring and establishment?
A Multi-family offices or trusts need to decide the type of activities they would like to conduct to determine which type of non-bank financial institution they should set-up. The majority are most likely looking to set up a fund management platform for making investments with their own money, which might also be opened up to manage friends and family money and ultimately possibly third-party capital. On the other hand, we are also seeing interest in opportunities in the shadow bank space, where the family office may start direct lending to the so-called real economy. Different types of non-bank financial institutions have different business and licensing requirements as governed by local legislation. Therefore it is important to engage an adviser(s) who has strong market knowledge of the investment management industry and broader financial services sector, that understands both the local and perhaps more importantly, global regulations. These regulations are becoming increasingly extra-territorial including AIFMD, SEC registration requirements, centralised OTC clearing, trade repository reporting to Fatca. Tax will also be very high on the issues list. Understanding the issues and compliance requirements with these regulations will to some extent influence the type of business structure which a multi-family office or trust may choose to set up. The perception that non-bank financial institutions are less transparent does not paint a complete picture. Non-bank financial institutions are usually regulated by some form of local legislation and will have to comply with all the relevant extra-territorial regulations that apply to them. As an example which is receiving quite a bit of regulatory attention on both sides of the pond, and in Asia, money market funds. While these are considered to carry on shadow bank type activities, they are currently already heavily regulated. In Europe they will be regulated as units. Here in Hong Kong they will be subject to the SFC’s unit trust code. In Hong Kong, as a lender you need to consider the Money Lenders Ordinance. If you set up some form of investment scheme, you need to consider whether, in fact, you have set up a collective investment scheme, which is regulated under the Securities and Futures Commission. Nothing is as simple as it used to be any more.