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20 July 2021

Asia's Financial Hubs Battle for Alternatives Authority

As investor interest in private market assets continues to flourish, Asia’s financial services hubs are battling for precedence as the region’s centre of choice for alternative investment funds.

The Hong Kong government’s latest move came in April with passage of a bill introducing tax concessions for carried interest distributed by eligible private equity funds. Without an incumbent statutory framework to demonstrate how carried interest should be taxed, the bill brings much-needed clarity, not to mention a highly-competitive carried interest regime.

The carried interest concession follows a budgetary measure announcement in February 2021, whereby the government will subsidise up to 70 percent of the cost of establishing a new open-ended fund company (OFC), or re-domiciling an offshore fund to Hong Kong within the next three years. The investment restrictions previously imposed on private OFCs, which rendered them unsuitable for many funds, were removed in September 2020 to encourage more funds to incorporate in Hong Kong using the OFC structure.

Hong Kong’s Limited Partnership Fund (LPF) Ordinance regulation, introduced in August 2020, is designed to further promote the jurisdiction as Asia’s leading private equity and venture capital funds hub, and encourage fund managers to onshore their operations in Hong Kong. The regulation targets private fund managers that previously opted for an offshore limited partnership funds structure (e.g. in the Cayman Islands), by improving the legal framework for establishing limited partnerships as investment vehicles. The goal is to tap into the growing wealth in Hong Kong and China, along with investor appetite for private markets and their increasing exposure to Asia Pacific.

With over 10,000 managers in China, the expectation is many will want to set up in Hong Kong and broaden their fund portfolios—including taking advantage of the LPF umbrella structure to launch multiple funds—as they seek to diversify their assets and investor base.

Following Singapore’s footsteps
Hong Kong faces tough competition though, from Singapore. The city-state has been one step ahead to date in its efforts to attract private equity funds and managers, having already introduced a series of regulatory regime changes, tax incentives, and structures.

The most recent is its Variable Capital Company (VCC) platform, launched in January 2020. The VCC is a flexible corporate entity structure that can be used for all traditional and alternative fund strategies (both open-ended and close-ended). A VCC can be established as a standalone or umbrella entity with multiple ring-fenced sub-funds, and offers significant operational and tax efficiency benefits.

Take advantage with the right capabilities
Which jurisdiction ultimately comes out on top remains to be seen. Either way, for fund managers and the administrators that service them, the need for an adaptable, multi-asset class support infrastructure remains the same.

What does that look like in practice?

Flexible fund vehicle support is a key prerequisite. A technology platform that can combine comprehensive instrument coverage with an ability to handle open-, closed-end and hybrid funds enables managers to support all their investment strategies on a single solution. Having this kind of integrated one-stop shop optimizes internal efficiencies, fosters firm-wide data consistency, and helps improve investor servicing and transparency.

Managing umbrella funds is another. The legislative initiatives introduced in both Singapore and Hong Kong allow for umbrella structures, with many managers now planning to use such vehicles to expand their fund portfolios. A platform that can account for complex, multi-tiered fund structures—including master-feeders and mini-masters—will be crucial.

The ability to accurately track, account for and report on the investment commitments, capital calls and drawdowns associated with private asset funds is also critical. Determining how capital gains are allocated between investment participants requires a sophisticated waterfall calculator to calculate and allocate the different distribution waterfall schedule tiers. Tracking and calculating funds’ management fees in turn demands detailed look-through from an investor to the investments—a time-consuming and error-prone chore without the proper system functionality.

As investor and regulatory scrutiny intensifies, enhanced transparency and reporting capabilities are an ongoing priority.

Only by tightly integrating portfolio management and investor accounting can funds track their investors across multiple investments, and provide detailed look-throughs to the underlying assets to reveal the portfolio constituents and how they’re performing. Generating comprehensive reports then, depends on automatically tracking the different P&L components, management fees, partnership expenses, capital calls and drawdowns, and waterfall calculations.

These system capabilities are essential. With investor appetite for Asia-domiciled alternative investment funds promising strong and sustained asset growth, only those managers with the right technology platforms will be equipped to take full advantage.