Hong Kong has lagged Singapore in revamping its limited partnership regime to attract more private equity (PE) investment, but the city’s resilience in battling the coronavirus outbreak coupled with China’s economic rebound could give its stalled PE initiative a new-found edge.

With cashed-up investors and fund managers ready to pounce on assets that are hit by the pandemic, Patrick Yip, vice-chair of Deloitte China, said that the city might be able to “make a head start and grab back market share” lost to Singapore. 

On March 20, at the height of the outbreak, Hong Kong published its limited partnership fund bill that aims to overhaul its century-old laws to become Asia’s private equity hub. The new structure is mainly modelled after that of the Cayman Islands, which is widely used by fund managers. 

While Singapore’s PE regime has been up and running since 2010,  Hong Kong’s revamped rules are only expected to come into effect on August 31. It’s understood that a consultation on how carried interest, or fund managers’ performance fee, will be taxed is underway. Yip said that the eventual outcome he is hoping for is that Hong Kong will follow US’s practice and consider carried interest as long-term capital gains which should not be taxed.

Patrick Yip
Patrick Yip

GRABBING BACK MARKET SHARE

Hong Kong now has the “upper hand in controlling the virus”, said Yip. China-focused funds, and those with exposure to Asia Pacific, will be “very interested in moving to Hong Kong”, as the new PE regime is being finalised, he added.

Hong Kong had 1,034 confirmed cases as of April 23, versus 10,141 cases in Singapore. Hong Kong and Singapore have a population of 7.4 million and 5.6 million respectively.

China, formely the epicentre of the coronavirus outbreak, has already shown signs of revival in private equity activities. According to data from the Asian Venture Capital Journal, fundraising by Chinese start-ups and technology companies surged six-fold in March to $2.5 billion from $410 million in February. However, based on year-on-year comparisons, the virus’s impact is pronounced with venture capital financing in the first quarter falling by more than half to $3.8 billion from the same period last year.

But with China easing its lockdowns on cities, its economy is expected to recover from the outbreak quicker than others, such as the US, whose number of confirmed cases reached 852,703 as of April 23.

“Money will probably find these regions to be more of a safe haven than the more developed countries in the west”, said Yip, adding that Asia-Pacific or China-focused funds could even thrive even as other parts of the world struggle to recover from the pandemic.

CHALLENGES REMAIN

However, there are concerns that the bill could be delayed. According to Florence Yip, the Asia Pacific tax leader of financial services and asset and wealth management for PwC Hong Kong, the first reading of the bill has been delayed twice from March 25 to April 1, and then again from April 1 to April 25 due to the coronavirus outbreak.

With Covid-19, we will have to wait and see whether or not this intended operating date [of the new limited partnership regime] could be a reality, she said.

“As with all these things, it's one thing to have an expected date but another thing to know precisely when it's going to be passed because there are a lot of stakeholders who will have input in this particular law,” said Michael Wong, a Hong Kong-based partner of Dechert.

Another challenge stems from convincing fund managers to switch to the new regime, as they have historically been using offshore structures, including those from the Cayman Islands.

A Hong Kong-based insurance executive said the firm prefers Cayman funds over the short to medium term unless “the Hong Kong regime proves its worth over the existing one”.

“I think this is what the Hong Kong government needs to do, to propagate the benefits of having this vehicle; otherwise people will just get back to the old routine whenever they want to set up a fund; they will go to Cayman,” Yip said.

Meanwhile, investors and fund managers are keeping a lookout for potential private equity prospects. The unnamed insurance investment executive told AsianInvestor the pandemic presented a good opportunity to take advantage of reduced asset prices. However, he said so far there hasn’t been many fire-sale opportunities.

A sizeable Malaysian asset owner also said the institution is considering how to “leverage the current environment and not simply buying because it's cheap”.