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Hong Kong Plugs Its Advantages For Private Equity Funds


During a speech at the 12th Hong Kong Venture Capital and Private Equity Association (HKVCA) China Private Equity Summit on June 11, the Under Secretary for Financial Services and the Treasury, Julia Leung, emphasized the current strengths of, and future opportunities for, the private equity (PE) industry in Hong Kong.

Asian-focused PE funds have grown significantly over the last decade. The industry is estimated to have had about USD422bn in assets in 2012, and the Asian region now accounts for more than 12 percent of total global PE investments, up from 6 percent in 2000.

Leung quoted the Asian Venture Capital Journal to show that, in terms of total PE funds raised in 2012, Hong Kong accounted for USD9.3bn, around 20 percent of the Asian total, and second only to Mainland China's 50 percent share. Some 45 percent of funds raised last year in Hong Kong were also destined for PE investments on the Mainland.

She expected the rising trend of investments on the Mainland to continue, not only because of attractive investments, but also because of a further increase in opportunities as Mainland authorities continue their easing of capital controls to allow local funds to invest overseas and for foreign PE funds to bring offshore money to the Mainland.

Over the last year, Leung noted that the pace of Chinese opening up to allow portfolio inflows has gathered momentum. For example, the application threshold for a Qualified Foreign Institutional Investors quota was lowered, to a minimum of USD500m from USD5bn, allowing PE funds to apply if they wish to get into public debt/securities investments.

Mainland institutional investors, including pension funds, are also now considering investments in PE funds. That could provide, she said, significant new opportunities for PE fund managers to tap into Mainland insurance funds.

In addition, she looked at the pilot Qualified Foreign Limited Partnership program, which was introduced in 2010 in Beijing, Shanghai, Tianjin and Chongqing, and allows foreign PE funds to raise RMB funds onshore and bring in foreign funds from overseas, and the prospective development of the special economic zone at Qianhai, in Shenzhen, as enhancing Chinese financial liberalization.

Although difficulties are still being seen in those programs in finding a way that would enable PE funds to acquire unlisted companies as and when they are ready to, just like local PE funds, without having to deal with conversion and settlement issues from the State Administration of Foreign Exchange and Ministry of Commerce for each and every deal, Leung confirmed the willingness of the Mainland authorities to find a solution.

She stressed that Hong Kong is well positioned to take advantage of these Chinese opportunities. Financial institutions based in Hong Kong, she added, are "by far" the largest intermediary for capital flows into and out of China, although the Government is fully aware of the strong competition among financial centers, and there is no room for complacency.

To stay competitive, she continued, Hong Kong conducts "constant reviews to ensure that this Government provides clarity and certainty in tax, regulatory and legal frameworks for funds to operate in Hong."

In that respect, she noted that, in the Budget announced in February this year, the Financial Secretary has proposed an extension of the profits tax exemption for offshore funds, to include transactions in private companies which are incorporated or registered outside Hong Kong, do not hold any Hong Kong properties, and do not carry out any business in Hong Kong. That would allow PE funds to enjoy the same tax exemption as offshore hedge funds.

However, with regard to that initiative, she disclosed that the Government needs to consider how it can prevent abuse of the exemption arrangement for tax avoidance. She understood that the HKVCA is putting forward its advice to the Financial Services Development Council, and the Government looks forward to commencing the relevant legislative exercise as soon as practicable.

At the same time, the Budget also proposed introducing Open-Ended Investment Companies that, it had been noted, have become an increasingly popular form used by the fund industry to set up investment funds. Together with the Securities and Futures Commission, legislative proposals are being formulated to permit the establishment of such companies, and to provide for a regulatory framework governing them, so as to offer an additional choice for the market, and attract more funds to be based in Hong Kong.


Related jurisdictions:
Hong Kong