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Hong Kong body to make LP legislation recommendations

Some members of the local legal community are also expecting a public consultation on changes to limited partnership legislation that would allow private equity funds to be established on-shore.

Hong Kong-based Financial Services Development Council (FSDC) is expected to publish within the next few weeks a lengthy paper with recommendations on changes to limited partnership legislation.

The FSDC is a research and advocacy organisation that seeks to promote Hong Kong as a financial centre.

Industry advocates are seeking the introduction of new legislation or amendments to the existing limited partnership law to allow private equity funds to be domiciled and registered in Hong Kong.

“New legislation that would allow funds to be brought onshore would allow Hong Kong to build a fully integrated fund management centre,” said John Levack, chairman of the Hong Kong Venture Capital and Private Equity Association (HKVCA) technical committee and managing director of Electra Partners Asia.

If private equity funds could be established in Hong Kong, it would become more effective, efficient and attractive as a centre for financial services, he said.

Some members of the Hong Kong-based legal community are also anticipating a public consultation on changes to legislation impacting limited partnerships.

Public statements from the Hong Kong government and lobbying by industry groups, including the HKVCA, suggest a public consultation on changes to the existing law is likely, said Dechert partner Angelyn Lim.

Any public consultation on LP legislation would follow a recent consultation on open-ended fund legislation that ended in June.

The Hong Kong Government has supported creating open-ended investment company structures for mutual funds and hedge funds and the aim is to extend this concept to private equity funds, which normally use limited partnership vehicles, and our hope is that the government will support this as well, said Levack.

Jane McBride, head of the licensing, compliance and regulatory team at Deacons in Hong Kong said there was a ground swell of support for changes to the rules, which she noted would follow other jurisdictions such as the UK which are making their own amendments to LP legislation in order to compete better. This could be part of the drive for change in Hong Kong, she said.

Some mainland Chinese private equity fund managers would be very interested in setting up Hong Kong private equity funds, McBride said.

There has already been some legislative change to the benefit of private equity funds. In July, tax exemption on profits was extended to offshore private equity funds. Lim described this a “welcome development”.

Under the current limited partnership rules, an investment manager has to incorporate a fund as a LP in a tax neutral jurisdiction, such as the Bahamas or the Cayman Islands. The investment sub-manager would be incorporated in Hong Kong and licensed to engage in the business of asset management. In some cases no licensing is required because of the limited nature of the activity in Hong Kong.