Law firm Clifford Chance expects the launch of a new Citic Securities fund on the Hong Kong stock exchange under Chapter 21 listing rules to lead to more such applications in 2011.
Citic Securities International Investment Management (HK) has just launched the China New Economy Fund on the bourse’s main board. It raised about HK$286.6 million ($36.9 million) from professional investors via private placement, with each committing at least HK$515,000.
The fund focuses on new technology and new servicing industries – including clean energy, software and internet-related industries – which stand to benefit from China’s transformation into a consumption-driven economy.
CSIIM is the fund’s investment manager and Clifford Chance the legal adviser.
“The distinctiveness of a listed fund under Chapter 21 is that it is not authorised by the Securities & Futures Commission [SFC] and is not open to the general public,” notes Elizabeth Mifsud, senior associate for Clifford Chance.
“In contrast, SFC-authorised listed funds, which are investment vehicles under Chapter 20, must fully comply with the SFC’s code on unit trusts and mutual funds.”
However, there hasn’t been any such listing in the last six years. Mifsud partially attributes this to the stringent requirements of Chapter 21 on the fund management team and directors.
“They need to demonstrate sufficient experience in third-party asset management,” she notes. “A trader on a proprietary desk will not be allowed to manage a Chapter 21 listed fund.”
Mark Shipman, Hong Kong corporate partner of Clifford Chance, notes that a number of hurdles have existed for fund managers in terms of Chapter 21 listed funds.
“For example, with a minimum of 300 ‘professional investors’ required to complete the listing, even those managers who have had their fund structures approved by the exchange have been unable to meet this final step,” he says.
But Shipman suggests that the Hong Kong exchange is becoming more receptive to Chapter 21 fund applications after conducting a soft consultation with key industry players in late 2009 to determine the reasons that managers were not making applications under Chapter 21.
He expects the fund’s listing to open the door for more Chapter 21 funds to follow. “We’ve seen some initial interest already and expect to see more Chapter 21 applications in 2011,” he says.
Craig Lindsay, managing director and chief operating officer at CSIIM, also notes that the closed-end structure of Chapter 21 funds “allows us to look for investment opportunities both in private and public equity markets over different time horizons”.
Compared with most exchanged-listed funds which are open-ended, the closed-end structure offers appeal given that fund managers suffered widespread redemptions in the wake of the global financial crisis.
James Wang, managing director and chief investment officer of CSIIM, adds that between 20% and 40% of the fund’s portfolio will be invested in private equity and the rest in public stocks.
With the principal objective to achieve long-term capital appreciation, the fund will offer “professional investors better diversification of risk over the long run and easy access to public and private equity opportunities, while retaining the favourable liquidity nature of traditional equity investments”, says Wang.