Why more and more private equity fund managers are moving to Asia | Allen & Overy LLP
Asia is rapidly maturing as a market for alternative asset management providing exposure to some of the world’s most dynamic, innovative and diverse economies. While the Cayman Islands and the British Virgin Islands (BVI) are still the places most fund managers choose to domicile their funds, many Asian-based managers are turning their attention closer to home.
The phenomenal growth that we have seen in the Asia-Pacific alternatives is only increasing. Preqin predicts Asia-Pacific’s private capital assets under management will grow from $ 1.7 trillion in 2020 to $ 6.1 billion by 2025, as the region rapidly gains ground in the largest market alternatives to the world, North America.
New structures based on international best practices
Eager to take advantage of this growth, Hong Kong and Singapore have implemented new fund structures and attractive tax incentives. These structures have been modeled on international best practices and are designed to attract private capital to their jurisdictions and strengthen their position as leading centers for wealth and fund management.
The Hong Kong Limited Partnership Fund (LPF) scheme was introduced in 2020 and targets private equity funds, venture capital funds, real estate funds, buyout funds and infrastructure funds. It offers no restrictions on the scope of investment and is flexible in terms of capital contribution and profit distribution.
Offshore fund managers who are considering setting up an LPF in Hong Kong find that it is similar to other limited partnerships in common law jurisdictions. Few surprises as to its operation and the appearance of the documents. It is therefore relatively easy to convert the documents that they may have used before.
The LPF is also as flexible as the other partnership vehicles used for funds in this space. It can be used as a fund vehicle and as an investment structuring vehicle, in the same way that offshore partnership vehicles have been used in the past.
At the same time, investors have also found it more acceptable to invest in a new structure that looks a lot like structures that they are familiar with.
Impressively, more than 300 LPF have been recorded since August 2020.
In addition, Hong Kong introduced a 0% tax rate on qualifying deferred interest, which exempts qualifying deferred interest from income tax and payroll tax. In practice, deferred interest payments become tax neutral in Hong Kong. Any fund, wherever it is established, can benefit from the ‘0% carry’.
Singapore, meanwhile, introduced a limited partnership regime in 2009, also inspired by global best practices. This scheme has now gained ground with sponsors and investors, and was recently joined by the Structure of the Singapore Variable Capital Company (VCC) in January 2020.
Managers of private capital funds can set up a VCC as a corporate structure for a stand-alone fund or for an umbrella fund with umbrella funds. A CCV can also be established for traditional and alternative strategies (open and closed).
In addition to the usual tax incentives, the Singapore government has made the structure more attractive by paying a grant of SGD 150,000 to any fund manager who sets up a VCC within the first 18 months of a fund launch.
As with the Hong Kong LPF, it has proven to be popular, with over 250 VDC established by March 2021.
But can Hong Kong and Singapore challenge the dominance of the Caribbean?
Against the backdrop of significant growth in alternative assets in Asia – including an increase in the number and size of Asia-based fund managers – we believe the two Asian centers are well positioned to take advantage of a growing share of the private capital cake.
The future of private capital in Asia
In our experience of working with fund managers to set up new structures – LPFs in Hong Kong and Singapore in particular – we have found the process to be efficient, straightforward and easily transferable from the traditional models of the Cayman Islands and BVI.
We see that the trend to relocate funds and investment platforms to Asia will continue to gain ground, especially as the new regimes in Hong Kong and Singapore provide for a very competitive fund framework.
The two jurisdictions have succeeded in putting this framework in place within a short period of time, with attractive incentives. The structures and incentives are attractive, and operating in local time zones is a bonus. Fund managers are also aware of the continuing trend by international tax authorities to increase their scrutiny of the substance of investment holding companies in jurisdictions such as the Cayman Islands.
The Cayman Islands and BVI may not be under imminent threat as the world’s top fund destinations. However, as familiarity with the new structures in Asia grows, more funds based in Asia will use them rather than their Caribbean counterparts.