As the trend for establishing funds and conducting private equity businesses shifts from offshore jurisdictions to onshore, investment managers may find themselves having to reassess their preferences and consider the increasingly favourable opportunities in Hong Kong. In contrast to the recent regulatory changes in the Cayman Islands, which require closed-end funds to be registered with the regulatory bodies and placing a heavier compliance responsibility on the offshore funds, Hong Kong’s new limited partnership fund (LPF) regime offers an attractive alternative at a considerably lower cost. On 31 August 2020, the Limited Partnership Fund Ordinance (Cap. 637) came into force in Hong Kong while as of 1 August 2021, a total of 310 LPFs had been registered.
Important notes for auditors and lawyers in handling LPF matters
An auditor must be appointed by a general partner (GP) to carry out annual audits of the financial statements of the LPF. The auditor must be independent from the GP, the investment manager and the authorized representative (if applicable) of the LPF.
It is also noteworthy that in contrast to the accounting standard required for an exempted limited partnership (ELP), which must adopt either International Financial Reporting Standards or Generally Accepted Accounting Principles in the United States or any other non-high risk jurisdictions, there is no specific accounting standard requirement for LPFs.
The responsible person must be appointed by the GP to carry out the anti-money laundering and counter-terrorist financing measures set out in Schedule 2 in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). It must be any of the following:
To register a fund as an LPF, the proposed GP must direct a Hong Kong law firm or a solicitor to apply to the Hong Kong Companies Registry (CR).
The difference between LPFs and Cayman Islands’ ELPs
LPFs have often been compared to the Cayman Islands’ ELPs. Though ELPs are regarded as more conventional fund vehicles, it is now arguable that the new Hong Kong LPFs are more business-friendly due to a lower level of regulatory scrutiny. Fund managers or investors should also note that while an LPF is likely to only engage Hong Kong legal counsels, establishing an ELP in the Cayman Islands with business operations in Hong Kong may require legal advice from both jurisdictions’ legal counsels, the cost of which may need to be taken into consideration in the long run as an operation cost.
In order to attract offshore investment funds to establish and operate in Hong Kong, the Hong Kong government has taken steps to introduce the Limited Partnership Fund and Business Registration Legislation (Amendment) Bill 2021 to the Legislative Council.
Under the proposed bill, subject to the fulfilment of certain conditions, offshore funds can be moved to Hong Kong as LPFs. It is expected that a specific application form and application process will be in place to effectuate a redomiciliation of funds, requiring the applicant to provide, among others, the name and place of establishment of the foreign fund and a confirmation of its deregistration from its place of establishment. The application will be submitted by a Hong Kong law firm or a solicitor on behalf of the proposed GP to the CR and if successful, the CR will register the fund as an LPF and a certificate of registration will be issued.
The government’s recent proposal to attract foreign funds to operate in Hong Kong further shows its determination to boost Hong Kong’s fund industry. This new business investment vehicle can also be seen as a development in the asset management industry of Hong Kong. Investment fund managers who are based in Hong Kong should consider LPFs as a cost-effective alternative to offshore limited partnerships such as the Cayman Island’s ELP. As for accounting professionals and legal practitioners, this is likely to present an invaluable opportunity for further collaboration and potential business.
About the course
In my e-Series course “Limited Partnership Funds – a view from the legal perspective,” which will be available at the end of the month, participants will learn more about the operations of the LPFs and the differences between LPFs and ELPs from a legal perspective. We will also discuss the latest development of LPFs and its tax advantage under the Carried Interest Tax Concession Regime, of which accountants should be aware.
Eric Lui is a banking and corporate finance specialist. He has extensive experience in funds formation, corporate finance and cross-border finance. In approximately one year since the implementation of the LPF regime, Lui has advised more than 15 establishments in their management of LPFs. Lui is also familiar with business in the Mainland and he is a China Appointed Attesting Officer appointed by the Ministry of Justice of the People’s Republic of China.