Location, location, location

The Lion City celebrated its recent placing ahead of Paris and Tokyo in the Mercer’s 2010 Quality of Living Survey, while Hong Kong bemoaned the impact of recent record pollution levels on its ranking. But more significantly from a private equity point of view, a couple of leading China-focused firms – CDH Investments and Hopu Investment Management – recently relocated to Singapore, and formerly London-domiciled hedge fund Prana Capital moved its entire investment team to Singapore. This bears out the predictions that the draft EU Directive on Alternative Investment Fund Managers, even before it passes into law, even before the last lobbying and damage-limitation efforts have curbed its impact on the alternative fund management industry, is already driving firms out of the EU, to Switzerland or to its Asian peer.

Arbitrage between different locations is going to be a recurrent theme for private equity and other alternative asset funds over the next few years, both within Asia and worldwide. Australia’s policy initiatives to tax private equity profits, and now to tax the mining and resources sector, have already impacted the Lucky Country’s popularity with the industry. The Blackstone Group did finally choose to set up in Sydney, but only after holding back for some time over uncertainty on the Australian Taxation Office’s future stance on private equity. And that uncertainty still remains, pending further government review of the issue. Might some funds now conclude that Australia’s regulatory risk is just higher than calculated, despite its Western-standard market credentials, because of electorally-motivated gesture politics, and take their business elsewhere?

Meanwhile, leading Indian private equity firm ChrysCapital has just cut its $1.25-billion Fund V – India’s largest ever fund – by returning $300 million to LPs. As well as suggesting that the Indian market may not be quite as hot for private equity as hitherto hoped, the reports also mention that ChrysCapital Senior MD and co-founder Ashish Dhawan is one of the country’s highest individual taxpayers. In a country full of corporate billionaires, does Dhawan really deserve to be paying some of the biggest sums? And should Indian regulators reconsider their policy on taxing GPs if they want to retain the sector, its professionals, and its developmental contribution, within the country?

Obviously, some alternatives managers have concluded exactly that about Europe, and are acting accordingly. But the location arbitrage story is about more than just negative regulatory and political effects. For one thing, firms that recently chose Singapore to set up shop told AVCJ that a whole series of factors, including quality of life, but also taxation, cost levels and wages for high-level financial professionals, communications and so on, came into the equation. Also, Prana’s move out of London is not only about EU regulations: it is also very much about access to Asia Pacific’s growth – in contrast to stagnant European markets. Four out of the world’s ten best-performing stock markets in 2010 are in Asia, and opportunistic hedge fund managers are every bit as eager to tap these beneficiaries of Asian dynamism as private equity GPs are to tap into high-growth Asian companies.

And of course, location arbitrage is also about regulation. Much of the recent Australian move against private equity profits focused on ‘treaty-shopping’ between jurisdictions. The rule of law in Hong Kong and Singapore has long been a key selling point of both jurisdictions in the region. But new regulations, such as the pilot schemes in Shanghai to allow local incorporation of private equity partnerships, and now of qualified limited partner presences to permit direct foreign investment into RMB funds, are shifting the location arbitrage landscape rapidly. AVCJ sources already speak of the advantage that placement agents have in the eyes of LPs, simply by having a China office. The emerging RMB opportunity for international GPs and LPs alike is already making a big difference to China’s attractiveness as a domicile for global private equity, and new regulatory permissions may be every bit as important to this as access to local businesses or GPs on the ground.

Obviously, more than one factor is at play, and more than one location is going to win out. But just as obviously, every location in Asia and beyond is in play, and mobile international capital is going to choose its home objectively and dispassionately. Politicians and regulators could well bear in mind that there are more constituencies out there to play for than just local voters or factions, if they really have the best long-term interests of their economies and countries in mind.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Regulation
• The Blackstone Group
• TPG Capital
• CDH Investments Management
• ChrysCapital Management
• Hopu Investment Management