Side Letter: HK’s carry tweaks, DD gets tough in EM

Hong Kong has slashed tax rates for carried interest in a bid to seduce PE managers. Plus: How the pandemic has impacted due diligence in emerging markets and Mercer's predictions for 2021. Here's today's brief, for our valued subscribers only.

They said it

Even if you’re six hours on Zoom … it’s better than nothing … but you don’t put €20-€30 million because of Zoom. You want to meet the GP, you want to be in their office, you want to meet other members of the staff, and this is only possible if you’re on the ground”

A managing partner at a European family office advisory firm tells Private Equity International they can’t wait for in-person meetings to resume

Just happened

Carry on Hong Kong
Hong Kong’s carried interest reform is nearing fruition. Back in September, PEI looked at three potential revisions to proposals for what the government pledged would be one of the world’s most competitive tax treatments. An updated version was presented to a Legislative Council panel on 4 January and the final bill is expected next month. We spoke to Gavin Anderson, an HK-based partner at Debevoise & Plimpton, to discuss key takeaways from the latest draft:

  • 0 percent: “The headline here is the 0 percent [tax] rate, because there was no assurance that was going to be the case.” Carry was previously treated as a fee and subject to tax.
  • Scope: “Another improvement is the scope of investments covered. It’s now clear that the proposals aren’t limited to a narrow definition of private equity, but could cover some private credit investments, for example.”
  • Private only: A reference only to private companies may exclude take privates or exits via IPO. “It’s not really clear how that will interplay, and we hope it will be clarified. Otherwise it could create some weird distortions or incentivise firms towards a certain type of exit.”

Dealing with a pandemic
It’s day two of PEI‘s Emerging Markets Week. Our latest instalment looks at the extent to which the coronavirus has affected GPs’ ability to get deals done in emerging markets. Industry practitioners tell PEI diligence is tougher with “a bit of a gap or surprise between what investors believe they’ve underwritten and what they may end up seeing”. Without in-person meetings, resolving issues discovered during due diligence, such as allegations of undisclosed relationships with suppliers or customers, also becomes more of a challenge.


Permira flies solo
Permira‘s co-managing partner Tom Lister has stepped away from his role, PEI reported on Monday. Kurt Björklund, with whom Lister had co-managed since 2008, has become sole managing partner. Lister remains at the London-headquartered firm as a partner and will continue to sit on the investment committee for its latest flagship vehicle, the €11 billion 2018-vintage Permira VII.

Out of favour
GPs’ legal counsels could be driving a wedge between US managers and their LPs, according to a report from LP advisory firm Mercer. It noted that law firms have expanded their roles and billable hours in fund documents, side letters and most-favoured-nation negotiations while charging the expenses to the funds and, by extension, their LPs. Examples of unfavourable terms include hurdles as low as 0 percent; escalating carried interest rates as high as 30 percent or with accelerated vesting schedules that are shorter than the fund life; and excessive organisational expense limits.

Big TA-rget
TA Associates plans to seek $11 billion for its next flagship fund, per the Wall Street Journal. If successful, the vehicle would be 30 percent larger than its $8.5 billion predecessor, which closed in 2019. Mega-funds have made hay during the pandemic as uncertainty and an inability to complete on-site due diligence have prompted a flight to quality in private equity.

Today’s letter was prepared by Alex Lynn with Adam Le and Carmela Mendoza.

Subscribe now and get Side Letter delivered to your inbox each day
To find out how, email our team: