Hong Kong offers tax sweetener to attract PE managers

The Hong Kong government has extended the profits tax exemption for offshore funds to private equity funds. The announcement was made on July 17, but is enacted retroactively from April 1. 

Hong Kong-based Mandarin Capital CEO Samuel Faveur said the rule change reflected a "more friendly drive” to attract alternative asset managers.

Florence Yip, PwC's private equity tax leader for China and Hong Kong, said that it was “quite possible” that Hong Kong's rule change - first proposed over two years ago in the 2013-14 budget - would have the same effect that an earlier tax exemption had on the city’s hedge fund industry.

Since those rules were introduced in 2006, Hong Kong has emerged as Asia's leading hedge fund hub, home to over half of the region's larger hedge funds.

Hong Kong has accounted for around a quarter of Asia private equity fundraising in recent years, but PE activities have been largely limited to ancillary support and advisory work. Yip sees more key investment decision-makers being based in Hong Kong after the rule change.

A May 2015 report from data provider Preqin put the number of $1 billion-plus hedge fund managers located in Hong Kong at 22, compared to seven based in Singapore (which was second, ahead of Sydney and Tokyo). Richard Johnston, managing director of Albourne Partners, added that there were perhaps 50 to 60 $500 million-plus hedge funds in the region.

Peter Douglas, Singapore-based representative of CAIA, the regional body for alternative asset manager education, said that “the fact Hong Kong is focusing on private equity may be a strategic story – it’s where the growth is seen to be”.

Douglas sees ongoing opportunities in bank substitution strategies - such as direct lending - as banks continue to shrink risk activity. Those opportunities were highlighted last week by reports that Singapore-based Mount Nathan Advisors had closed its Asia macro hedged strategy and was focusing on illiquid bank substitution strategies. Other Singapore-based managers, such as Orchard Global, are also expanding alternative credit strategies and no longer operate traditional hedged strategies.

But as alternative strategies increasingly focus on private markets activity, PE fund managers are frustrated that regulations "seem to be written with hedge funds in mind," said Sinyee Koh, Singapore head of consulting firm Kinetic Partners. That is especially the case outside Asia, said Koh.

Although Singapore faces a backlash against perceived tighter regulations, Koh said the Monetary Authority of Singapore’s shift toward a more principles-based regulatory approach is relatively attractive, compared to Europe’s alternative investment fund managers directive (Aifmd).

Europe's securities regulator, Esma (European Securities and Markets Authority), was expected to issue a recommendation on Aifmd passporting this month. A European Commission decision on that recommendation has now been pushed back to October or November, said David Bailey, co-founder of fund administrator Augentius. He expects "some domiciles" to be authorised for passporting at that time.

Last week's rule change brings Hong Kong’s regulations into line with Singapore, which “already has tax exemption criteria,” explained Yip. Unlike Singapore, where PE fund managers have to be licensed, Hong Kong’s latest amendment extends to fund managers which are not registered with the Securities and Futures Commission, where their deal activity falls outside the scope of the Securities and Futures Ordinance.