Finding a voice

The Alternative Investment Fund Managers Directive has provoked uncertainty in Hong Kong because of the implicit questions it asked about how PE is regulated and whether this would impact GPs' ability to market to EU investors.

Those selling to Hong Kong investors or offering financial products subject to separate oversight were regulated, but more than half of the HKVCA's membership base was not. Although a number of Hong Kong-based PE firms have chosen to register with the Securities & Futures Commission (SFC), the regulator's response was limited: why should it take responsibility for funds that are domiciled offshore with nothing more than an advisory presence in Hong Kong?

The association's technical committee has emerged as a means of engagement with regulators. It collaborated with the Financial Services Development Council (FSDC) on recently released proposals intended to introduce a relevant framework to attract more funds to the territory.

Last week the Hong Kong Private Equity Finance Association (HKPEFA) also entered the fray. This association is primarily for CFOs, COOs, controllers, accountants, administrators and legal counsels in the PE community. Its remit is broad, taking in everything from education to networking, but these people are intimately familiar with the regulatory obstacles to the territory becoming a top asset management hub.

The HKPEFA released an industry survey to coincide with its inauguration that touched on several of these issues.

Nearly 80% of respondents said Hong Kong is the best place for PE and VC firms to build a presence if they are targeting outbound investments from mainland China. Nearly two thirds don't think Hong Kong is doing enough to promote its usefulness in this regard, with 71% saying the territory is losing its competitive edge (just as Singapore upgrades its infrastructure to encourage funds to domicile locally).

When asked to name the credentials for making a fund hub successful, a favorable tax regime ranked first, followed by a friendliness and clarity of the regulatory framework, cost competitiveness and the availability of financial intermediaries. Respondents gave similar answers as to what are the key factors in attracting international and Chinese funds to Hong Kong.

While 61% are encouraged by the announcement in this year's budget statement that the profits tax exemption for offshore funds would be expanded to include private equity, they think the rules are unclear and the government has yet to offer further guidance.

By extending the tax exemption, PE firms with funds domiciled offshore would no longer have to set up structures designed to avoid triggering permanent establishment in Hong Kong and becoming liable for local tax. It should also make it easier to access the tax treaty network. Funds must meet local substance requirements to qualify for treaty benefits and this could be done without risking local tax liability.

The FSDC proposals offer a degree of clarity, specifying that the exemption would apply to offshore special purpose vehicles controlled by funds as well as the funds themselves and identifying particular circumstances in which funds would not qualify for the exemption.

However, regulation has yet to be resolved. The FSDC proposes that the exemption only applies to managers licensed by the SFC and there is no mechanism allowing unlicensed managers to benefit as well. Then there is the longer-term objective of updating limited partnership legislation so that funds could fully domicile in Hong Kong.

Lobbying is a relatively new phenomenon in Asian private equity (Australia is the exception). Regulation of the industry globally has initially been addressed by groups in Western markets, but managers have an interest in the outcome almost regardless of geography, making engagement with local stakeholders vital. There is plenty for Hong Kong's industry associations to get their teeth into.

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• Topics
• Regulation
• Greater China
• regulation
• China
• Hong Kong (China)