Asian GPs favor Singapore after Cayman as fund domicile - survey

Singapore and Hong Kong have both laid down a challenge to Cayman, with the introduction of the variable capital company (VCC) and Hong Kong limited partnership fund regime, respectively. A key selling point is that private equity firms could align every facet of the management process in a single onshore jurisdiction – putting the fund and management entity alongside the dealmakers and investment vehicles – thereby avoiding closer regulatory scrutiny on the use of offshore structures.

The survey covered more than 130 industry participants, with a 50-50 split between fund managers and service providers. More than half of the managers picked Singapore as their second choice, with 25% opting for Hong Kong. Only 31% of Hong Kong-based managers showed a preference for their home jurisdiction. The British Virgin Islands and Luxembourg – both of which have updated their partnership legislation in recent years – each scored 8%.

“Singapore has done well with the government committing to the VCC and initiating a grant scheme that runs until early 2023,” said Thomas Granger, a Singapore-based partner at Walkers. “That may be an appealing proposition to smaller managers in the market where this amount goes to the bottom line and improves performance.”

As of mid-October, 149 VCCs had been registered, most of them by hedge funds. Singapore already has a limited partnership structure – though it hasn’t proved especially popular with PE – and the VCC is described as a flexible structure intended to fill in some of the gaps in the jurisdiction’s product offering. However, it is essentially a corporate structure, which may deter some managers.

“Given the data indicate that private equity funds overwhelming have a preference for partnerships and given our own experience with Cayman LLCs not really being taken up as fund vehicles, I wonder when people really drill into how VCCs actually work, whether we will see Singapore in second place to Cayman dropping off,” said James Gaden, a partner with Walkers in Hong Kong. 

The survey found that partnerships remain the preferred structure for 84% of managers, with corporate vehicles second on 13%. Only 6.8% of lawyers indicated they would consider anything other than a partnership to be used as a private equity vehicle. Investor familiarity and tax were identified as the most important factors in choosing a fund structure. Much the same applies to the choice of jurisdiction, which explains the enduring popularity of Cayman.

Questions were asked about Cayman’s long-term future earlier this year when it was added to the EU blacklist of non-compliant jurisdictions, based on criteria set down by the Organization for Economic Cooperation & Development (OECD) to stop investors artificially shifting profits to low or no-tax jurisdictions. Cayman was removed from the list this month following a series of reforms.

These include a requirement that private funds must be registered and more closely monitored, including an annual audit signed off by a local regulator. Last year, regulators decreed that most fund management entities – as opposed to funds – must demonstrate local substance or relocate elsewhere. The latest guidance states that the management entities can remain provided their functions are limited to “providing non-binding investment advice.”

While some Asia-based managers are putting substance in Cayman, most are relocating these entities to jurisdictions in Asia such as Hong Kong. It is suggested that the funds could follow, driven by a combination of reputation, practicality, and cost. Much as many European institutional investors prefer their portfolio managers to use Luxembourg rather than Cayman, Chinese managers could be directed to use Hong Kong as a domicile.

“We have already received a lot of queries from clients who are interested in this new regime due to changes in Cayman’s private fund law and the economic substance requirements,” Anthony Lau, a Hong Kong-based tax partner with Deloitte, told AVCJ in July.

Gaden disputes certain elements of this assessment. First, he observes that the uncertainties surrounding Cayman have been resolved. Second, large institutional investors ultimately have the most influence over where global managers domicile funds and there is no evidence that they – and US-based LPs in particular – are losing faith in Cayman.

“It’s a high-minded goal to have all things in one place, and on paper it sounds really convenient, but convenience at the cost of not getting investors into a fund? I think that’s a price most managers looking at a global offering would not be willing to stomach,” he said. “A US investor is going to look at a Hong Kong or Singapore structure and jump through a lot of mental hoops in terms of getting up to speed with the structure, regulations, and AML [anti-money laundering] rules.”

Gaden highlights tax as an additional concern, questioning whether Hong Kong can offer the same level of tax efficiency to US investors as Cayman. Satisfying the qualification requirements for Hong Kong’s tax exemption is costly and time-consuming. Meanwhile, tax laws are subject to change. “A domestic investor might get more comfort from it, but international investors tend to prefer to commit capital into a tax neutral jurisdiction where you can get a tax exemption certificate,” he added.

Survey respondents identified US taxable investors as the most prolific participants in the asset class, represented in 34% of funds. Family offices and Hong Kong high net worth individuals came second and third, on 32% and 30%, respectively. Sovereign wealth funds, US tax exempt investors, and Hong Kong and China-based institutions were each on 21%. A relatively high number of respondents are Hong Kong-based.

Other segments of the survey focused on fund terms and compliance costs. Nearly 80% of managers said that management fees and carried interest are the most heavily negotiated terms. Co-investment and issues concerning compliance, tax and regulation each scored approximately 30%. Legal advice is the biggest ongoing compliance cost, followed by auditing and licensing.

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• Topics
• Funds
• Advisory
• Fundraising
• Asia
• tax
• Cayman
• Hong Kong (China)
• Singapore
• Fund formation
• Offshore