HK crisis may be a wake-up call for city’s PE plans

Oct 28, 2019

Hong Kong may struggle to become Asia’s private equity hub despite tax incentives thanks to the city's deep-rooted issues, suggest investment industry executives.

HK crisis may be a wake-up call for city’s PE plans

Hong Kong may have ambitions to supplant Singapore as Asia’s private equity hub but it faces bigger challenges than the Lion City that could take years to overcome – and have been made all the more pressing by its recent political troubles.

Goldman Sachs estimates that as much as $4 billion may have already been re-routed from Hong Kong to Singapore in the last five months as the extradition bill crisis has raged.

And if the unrest carries on, more local talent could also be lost as people seek opportunities in more stable investment environments, Brock Silvers, managing director of Adamas Asset Management, told AsianInvestor.

But in a Facebook post on Saturday, Ho Ching, the head of Singapore sovereign investor Temasek, said the focus needed to shift from “the movement of some money and people to Singapore” to the loss of professional Hong Konger talent more broadly to other parts of the world.

For Ho, the heart of the issue lies in Hong Kong’s relevance to China and the world, as a way to try to entice Taiwan back. If 'one country, two systems' is shown not to work, then Hong Kong's strategic value will greatly diminish.

Proposed new rules to revamp the century-old limited partnership regime in Hong Kong could potentially lend it an extra advantage as a financial centre, given its sophisticated legal system and free foreign exchange conversion.

Expected some time late next year, the proposed new rules would allow private equity managers to domicile their funds in Hong Kong with Cayman Island-like structures. Singapore has had its own limited partnerships regime since 2010.

But Hong Kong's broader ecosystem has several fundamental issues that will continue to limit its potential as an entrepreneurial hub, which are mirrored, to an extent, by its ongoing social turmoil.

Irrespective of the tax incentives that are rolled out to attract onshore private equity funds to Hong Kong, the city’s expensive real estate and education system makes it hard for local talent and entrepreneurs to flourish, one Hong Kong-based executive at a single-family office told AsianInvestor.

“Why should a [private equity] fund decide to use Hong Kong as their place of business? Yes, it makes sense from the generic tax and geographical location point of view, but definitely not from a labour force point of view,” he said. “In Hong Kong, if you start as a true entrepreneur, good luck finding housing that you can afford for the first years during your startup phase.”

Hong Kong has been ranked the world’s least affordable housing market for nine years in a row by urban policy consultancy Demographia, which categorises it as “severely unaffordable”.

ONE-TRICK PONIES?

Hong Kongers' deep-rooted convictions of what is an ideal career path can also dampen creativity. According to the city's Census and Statistics Department, close to 43% of Hong Kong’s 3.9 million-workforce were employed in the finance and real estate sectors as of June’s end.

And even then, many struggle.

“Your average income when you finish university at one of the big four [accounting firms] is HK$19,000 [$2,424] a month and still the average apartment costs HK$21,000 a month,” the family office executive said. “Anybody who wants to do something more on the creative side gets even less, which makes it impossible to support yourself, let alone a family.”

“Unfortunately, the present environment of Hong Kong creates a one-trick-pony labour force,” he added.

He sees the political unrest as something that should be a wake-up call.

“The Hong Kong government should take the current political situation as an opportunity to do more,” the executive concluded, adding that the private sector, such as Alibaba Entrepreneurs Fund, has offered support for startups in the city, whereas the government could look to rival Singapore for examples.

“If I compare Hong Kong with Singapore, where they have Temasek investing all over the world, and A-Star, which helps companies to set up in Singapore and gives them space, they are doing a fantastic jobs proactively building a diversified ecosystem that is affordable,” he said.

*This story has been updated to reflect Brock Silvers's latest job title.