Hong Kong to Revamp Limited Partnership Regime to Attract Private Funds

Background

Hong Kong has a strong reputation as a global and regional hub for the asset management and funds industry and is clearly looking to maintain and improve its competitiveness in this sector. In the recent 2020-2021 Budget, and particularly in the current political and economic climate, the Hong Kong government has been keen to promote economic growth initiatives one of which is promoting the local private equity fund industry (including venture capital, real estate, infrastructure, etc. funds).

The Budget foreshadowed progress in two areas under consultation with industry: a specific Hong Kong limited partnership vehicle designed for private equity funds and the clarification of carried interest tax treatment for private equity funds. While the government continues to consult with industry on potential tax concessions in respect of carried interest, it took a major step toward the creation of a more suitable local private equity fund vehicle by introducing a bill for a ‘Limited Partnership Fund’ (LPF) regime on March 20, 2020.^[i] The LPF is significantly improved from the outdated limited partnership which can be formed under the Limited Partnership Ordinance (Cap. 37) (LPO) today.

What are the key features of the new legislation?

Key eligibility requirements and characteristics

• The fund must be constituted by a limited partnership agreement and have at least one general partner and at least one limited partner.
  • The general partner may be a natural person over 18 years old, a private Hong Kong company, a non-Hong Kong company registered with the Registrar of Companies as a registered non-Hong Kong company, a limited partnership under the LPO, another LPF or a non-Hong Kong limited partnership with or without legal personality.
  • The limited partner may be a natural person, a corporation, a partnership of any kind, an unincorporated body  or any other entity.
• The fund must have a registered office in Hong Kong for receipt of notices.
• The application for registration must be submitted by a Hong Kong solicitor/firm.
• The fund will not have separate legal personality.

Legal Liability

• In line with the limited partnership regimes of other key funds jurisdictions the general partner has unlimited liability for the debts and obligations of the fund and generally each limited partner is not liable for the debts and obligations of the fund beyond the amount of the limited partner’s agreed contribution unless it takes part in the management of the fund.
• A ‘white list’ of permitted activities which will not be regarded as limited partners taking part in the management of the fund is included and is broadly similar to other key funds jurisdictions.

Compliance requirements

• The general partner must appoint an investment manager (which may be the general partner itself or another person which is a Hong Kong resident over 18 years old, a Hong Kong company or a registered non-Hong Kong company) to be carry out the day-to-day investment management functions of the fund.
• The general partner must appoint an auditor to carry out audits of the financial statements of the fund.
• The general partner has a duty to ensure proper custody arrangements for the assets of the fund as specified in the limited partnership agreement (however, note that additional custody requirements may apply in relation to the fund manager’s license from the Securities and Futures Commission of Hong Kong (SFC)).
• The general partner must appoint a responsible person (which may be the general partner or another person) to fulfil certain AML functions. The responsible person must an authorized institution, a licensed corporation, an accounting professional or a legal professional.

Confidentiality

• The fund must maintain certain records in relation to audited financial statements, register of partners, AML information, records of fund transactions and the controllers of the fund partners.
• Such records of the fund may be inspected by certain Hong Kong government agencies (but there is no indication that they will have access to any other fund documents).
• The limited partners only have a right to inspect the audited financial statements of the fund.
• No fund records are available for inspection by the general public.

Can existing limited partnerships become an LPF?

• Existing limited partnerships under the LPO which fulfil the eligibility requirements for an LPF may apply to migrate to become an LPF.
• There is currently no prescribed mechanism for redomiciling offshore funds to become an LPF although there is a possibility that this may be introduced in the future.

When will the legislation come into effect?

• The Limited Partnership Funds Bill is expected to become law on August 31, 2020.

The Road Ahead

These features put the LPF on substantially equal footing with limited partnerships in other key fund jurisdictions such as the Cayman Islands, Delaware, Luxembourg and Singapore. Nonetheless how the LPF regime will evolve and the level of uptake amongst private fund managers will undoubtedly also be impacted by other shifts taking place in Hong Kong. In recent months the SFC has been consulting with the local private equity industry on how Hong Kong licensing requirements apply to private equity firms conducting business in Hong Kong and it released a circular providing further guidance in January.^[ii] Given the historically wide variance in practice of Hong Kong private fund managers in respect of SFC licensing, any decision whether to use the LPF will at least partly be informed by whether a manager is, or will become, licensed to carry out SFC-regulated activities in Hong Kong. Furthermore, the attractiveness of the LPF regime in practice will also likely depend on the extent of the Hong Kong government’s tax concessions in respect of carried interest.

In any event, the LPF regime will certainly be a welcome option for local private fund managers to consider given that Hong Kong’s long-time regional rival Singapore is already a number of steps ahead in developing legal, tax and regulatory regimes to attract private fund managers. In addition, although the Hong Kong private funds industry has traditionally used offshore jurisdictions such as the Cayman Islands, these offshore jurisdictions inevitably involve a double layer of regulation and administration (e.g. auditors, lawyers and administrators) and have been increasing their regulatory compliance burdens (e.g. AML regulations, economic substance requirements and the proposed Private Funds bill) which could make a local fund vehicle alternative relatively more attractive.

If you would like to discuss how the LPF regime may benefit your business then please contact Gregory Barclay or your usual Goodwin contact.

[i] https://www.legco.gov.hk/yr19-20/english/bills/b202003201.pdf  
[ii] https://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=20EC2