A new Hong Kong structure for private equity funds: limited partnership funds

The Limited Partnership Fund Ordinance (LPFO), which provides for registration of eligible funds as limited partnership funds (LPFs) in Hong Kong, will come into operation on 31 August 2020.

The enactment of the LPFO is a very welcome development, and is part the Hong Kong government’s stated aim to enhance the competitiveness of Hong Kong in becoming a preferred centre for international asset and wealth managers in Asia. The LPF features as outlined under the LPFO are in line with those of limited partnership structures in other jurisdictions. The LPFO contains provisions which (i) allow flexibility in capital contributions and distribution of profits, (ii) allow the parties in a LPF to freely contract according to their commercial intentions, (iii) provide for a simple registration process with the Registrar of Companies; and (iv) provide a straightforward and cost-efficient dissolution mechanism.

New fund structure

Under Hong Kong’s current legal framework, a fund may be established in the form of a unit trust or an open-ended fund company. However, the preferred structure for private equity (PE) funds is the limited partnership, and Hong Kong’s existing Limited Partnership Ordinance does not provide an attractive framework. Its restrictive provisions with respect to capital contributions and distribution of profits, the lack of contractual flexibility of the partnership and the absence of a straightforward dissolution mechanism has discouraged fund managers from establishing PE fund vehicles in Hong Kong. The LPFO seeks to address these concerns.

With regards to PE funds, the government’s commitment to strengthen Hong Kong’s competitive edge in the asset management space is evidenced by a multi-pronged approach: in addition to the introduction of the LPF regime, the Financial Secretary’s budget earlier this year announced the possibility of tax concessions for carried interest, and an industry consultation in relation to the details is underway.

Fund managers, in particular those who have an office and a team based in Hong Kong, will now have a viable option to establish their PE funds in the form of a limited partnership in Hong Kong, as an alternative to other offshore jurisdictions such as Delaware and the Cayman Islands.

The key features of the LPFO are set out in our publication A new structure for PE funds in Hong Kong dated 27 March 2020.

Going forward

The LPF regime will be seen by PE industry stakeholders as a positive step towards bringing Hong Kong’s active PE market onshore, particularly as the industry is anticipating attractive tax concessions on carried interest to complement the LPF regime.