Hong Kong needs to establish itself as a hub for private equity and venture capital funds, according to an industry body, with changes in regulation and taxing a key step.
The Hong Kong Private Equity Finance Association (HKPEFA) proposes that PE and VC funds be allowed to operate as limited partnerships – as opposed to unit trusts – which would put them on par with hedge and mutual funds.
“A successful and mature asset management sector and fund sector should have a variety of products and structures to offer, [but] at the moment in Hong Kong, we only offer unit trusts [for PE],” says Florence Yip, Greater China private equity tax leader at PwC and honorary president of the HKPEFA advisory board.
The HKPEFA’s stance matches with views presented last month by the Financial Services Development Council, an advisory body to the Hong Kong government, which contends that laws should be changed to enable private equity funds to be set up as limited partnerships.
Onshore limited partnerships for PE funds are allowed on the mainland, where the central government aims to develop asset management centres in Shanghai and Qinghai through the establishment of economic zones.
The HKPEFA says Hong Kong needs to take steps in gain an edge on the burgeoning centers, given its fully tradable currency and well-established legal framework.
Hong Kong has a “mature and very good legal system that can protect investors, as well as the mangers [and] investee companies”, says Wendy Kok, chief financial officer of Sequoia Capital China, who is also a committee director for the HKPEFA.
The association notes that Hong Kong is the preferred location for outbound investments, citing a PwC survey which finds that 79% of industry professionals believe that the city is the most suitable location for PE or VC firms to build a presence for outbound transactions.
By comparison, only 13% favored mainland free trade or economic zones, followed by Shanghai (6%) and Singapore (2%).
On the other hand, 65% believe that Hong Kong has not done enough to promote its importance for China outbound investments.
For its part, the Hong Kong government announced in February that it would consider offering profit tax exemptions to foreign PE firms with offices registered with the Securities and Futures Commission.
However, industry executives say more clarity is required, with foreign PE firms struggling to decipher proposed regulatory changes.
“We are very encouraged by the government’s initiatives,” says Simon Ho, HKPEFA chairman, “but there’s still a lot to be done as well.”