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An asset class on the rise: A global guide to new fund vehicles for private assets

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This article examines some of the new or amended fund vehicles and regulatory regimes, geared towards private asset classes, which have been introduced since 2020. In particular, those that have emerged in Hong Kong, Singapore, Ireland and the UK.

The report also explores the proposed amendments to one of the European Union’s (“EU”) fund vehicles for private assets (ELTIF), which at present is predominantly domiciled in Luxembourg.

The rise of Private Assets

The market research firm Preqin is forecasting assets under management in alternative assets, including both private assets and hedge funds, to increase to USD23 trillion by 2026, from USD13 trillion as at the end of 20211. Private assets have gone from strength to strength in recent years and have continued to rise in popularity amongst investors globally. The definition of private assets is quite broad and incorporates private equity, private debt, venture capital, real estate and infrastructure. The reasons behind the rise in demand include the potential higher yields from illiquid assets, particularly when returns from traditional asset classes are under strain from economic pressures and low interest rates. In addition, there is the appeal of improved resilience to short-term market shocks and periods of volatility, with investment over a long time horizon. Investors may use alternative asset classes to diversify their portfolios, with the aim of risk reduction. Governments, including the UK and Singapore, are incentivising long-term private asset investment in order to aid economic recovery post-pandemic and assist with the funding of climate goals and technological advances. There have also been aims of aiding the “retailisation” of alternative asset classes to diversify retail investor portfolios and marry up long-term capital demands with timeframes for retirement savings.

Asset pooling may be an efficient option, both in terms of cost and scalability, when pursuing private asset strategies. The type of fund vehicle and location will be an important consideration for asset managers when deciding on their distribution strategy. The key aspects that an asset manager may consider include the domicile of the vehicle (and associated expertise for alternatives in the country), the cross-border marketing potential and the flexibility of the regulatory framework for the vehicle. The asset manager may additionally be influenced by the location, preference and the profile of the target investors, e.g. retail vs institutional. The set up costs and tax regime are an important factor, and some jurisdictions may offer tax incentives and efficiencies for particular vehicles in order to increase the attractiveness of their domicile. The choice of vehicle will also involve decisions around the flexibility and structure of the vehicle, e.g. open-ended vs closed-ended, and this may in turn be guided by the number and type of investors and desired liquidity and liability.

A variety of global opportunities

Since 2020, a number of new fund structures have been introduced, or existing ones reviewed, across some of the main global financial hubs.

Hong Kong – Limited Partnership Fund (LPF)

The Hong Kong Legislative Council passed a bill2 on 9 July 2020 to introduce a registration regime for limited partnership funds (“LPF”) to set up and operate in Hong Kong. Within the LPF is a General Partner (“GP”), with unlimited liability, who is ultimately responsible for the management and control of the LPF. The GP must appoint an Investment Manager (who may be the GP itself), licensed by the Hong Kong Securities and Futures Commission (“SFC”), to run the investment management function. The LPF must have at least one limited partner (“LP”) who, with no management or controlling rights, invests in the LPF.

Alongside the open-ended fund company (“OFC”) regime which was established in 20183, the LPF regime provides an alternative to the traditional unit trust structure in Hong Kong. The legislative aims were to diversify the available fund structures in order to harness the increased interest in Asia as an investment market, leverage the capital channels with the rest of the Greater Bay Area, and develop Hong Kong as a leading fund domicile. A re-domiciliation mechanism, to allow existing non-Hong Kong investment funds to be registered in Hong Kong as LPFs (with a similar scheme for OFCs), was introduced in 20214. The aim was to further strengthen the LPF regime and increase the competitiveness of Hong Kong as a financial centre with resultant economic benefits.

The appeal of the LPF is that a limited partnership vehicle is more often the preferred vehicle for private funds adopting strategies including private equity, venture capital, private debt, real estate and infrastructure. In contrast, OFC or unit trust structures are more commonly seen for public funds. By allowing on-shore registrations in the form of a limited partnership, private fund managers that may previously have utilised offshore locations, such as the Cayman Islands, may now domicile in Hong Kong. As outlined above, taxation is an important consideration when selecting a fund vehicle. LPFs benefit from advantageous tax arrangements, including a concessionary tax rate of 0 per cent for carried interest distributed by eligible private equity funds (subject to certain conditions). The LPF regime has been well received, with 342 LPFs newly registered with the Companies Registry during 2021, and there was a total number of 409 LPFs in existence by the end of 20215.

Singapore – Variable Capital Company (VCC)

Singapore’s Variable Capital Companies Act 20186 came into force on 14 January 2020, introducing the variable capital company (“VCC”). The variable capital structure allows for flexibility in share issuance and redemption, with the share capital equal to the net asset value. Furthermore, it allows for distributions out of capital. A VCC may take either an open or closed-ended form. This flexibility of the structure may be an important factor to asset managers when selecting their preferred investment vehicle and domicile.

The VCC is supervised by the Monetary Authority of Singapore (“MAS”) through the Securities and Futures Act7 with authorisation required for VCCs marketed to retail investors. VCCs may be classified as restricted (for accredited investors which are institutions or high net worth individuals meeting defined thresholds) or exempted (which includes private placements and small offerings). The VCC must be managed by a registered/licensed fund management company. Tax incentives are in place to make the VCC an appealing structure to investors and managers.

This new investment fund vehicle was introduced as an alternative to unit trusts, limited partnerships and general company structures. Whilst the VCC was designed to support traditional fund strategies, it additionally caters to alternative fund strategies including private equity, venture capital and real estate. The other structures in Singapore lack this flexibility in strategy support and corporate form. At its introduction, the VCC was described as a “game-changer in Singapore’s drive to be an Asian hub for fund management and fund domiciliation”8. In order to further increase Singapore’s presence and competitiveness as an Asian financial centre, it is possible for overseas fund managers to re-domicile comparably structured investment funds and register in Singapore as VCCs. The VCC has proved to be a popular vehicle to date with 522 VCCs in existence as at the end of March 20229. With an eye to the future, MAS is already considering extending the VCC framework to family offices in Singapore, as part of the VCC 2.0 enhancement plans which are being proposed by the newly established Singapore Funds Industry Group. Singapore is also exploring enhancing their limited partnership vehicle in order to make it a more attractive proposition, with amendments proposed to the Limited Partnerships Act via a consultation in October 2021 by the Accounting and Corporate Regulatory Authority (“ACRA”)10. This includes considering a re-domiciliation framework for fund LPs.

Ireland – Investment Limited Partnership (ILP)

Ireland’s Investment Limited Partnerships (Amendment) Act 202011 was enacted on 23 December 2020. This bill amended and extended several acts relating to Ireland’s Investment Limited Partnership (“ILP”), including the Investment Limited Partnerships Act 1994. The ILP is a form of regulated EU Alternative Investment Fund (“AIF”) authorised by the Central Bank of Ireland. It is constituted under a limited partnership agreement between the GP(s), who with unlimited liability is responsible for managing the partnership business, and LPs.

The rationale behind the amendment to the ILP Act was partly to modernise it to incorporate developments to EU funds legislation, anti-money laundering requirements and to the international financial services industry, since it was originally published in 1994. In addition, it was seen as an opportunity to revisit the offering around private equity as part of the Irish government’s “Ireland for Finance” strategy. This looked at the development of Ireland’s international financial services sector to 2025, with one goal to be a global location for private equity funds via the ILP. The ILP is a popular structure for private equity and real estate investment funds due to its tax transparency, lack of legal risk-spreading obligations, organisational flexibility and limited liability for LPs.

The amendments to the ILP provided for greater flexibility in the structure, including the ability to establish umbrella ILPs to allow for separate strategies or investor types to be accommodated via distinct sub-funds. Amendments to the limited partnership agreement can now be approved by a majority of the GP(s) and LPs, removing the requirement for all LPs to approve an amendment. It also provided a clearly defined “White List” of activities that LPs may engage in without affecting the limited liability status, for example board participation. To promote Ireland as an investment hub, existing partnership structures can migrate into Ireland in advance of termination in their country of origin, thereby allowing for continuity of the partnership structure. Secondly, an alternative foreign name for an ILP can be officially registered to assist with the operation of an ILP in a non-English speaking jurisdiction. The Irish Funds Industry Association expects that the amended ILP can attract up to EUR20 billion per annum in global private capital and be key in enhancing Ireland’s global competitiveness12.

UK – Long-Term Asset Fund (LTAF)

The UK’s Long-Term Asset Fund Instrument 202113 came into force on 15 November 2021. This introduced a new distinct category of authorised open-ended investment fund, the Long-Term Asset Fund (“LTAF”). The LTAF differs from some of the structures described above as, rather than being a legal form, the LTAF is a regulatory regime which can take various structural forms (an authorised unit trust, an open-ended investment company or an authorised contractual scheme).

LTAFs are designed to facilitate access to long-term, illiquid assets including private equity, private debt, venture capital, infrastructure and real estate. The LTAF offers the portfolio diversification opportunities of private assets, whilst offering important structural safeguards. Regulatory protections are in place for investors with authorisation required by the Financial Conduct Authority (“FCA”). A full-scope Alternative Investment Fund Manager must be appointed with the knowledge and experience of the activities and assets of an LTAF and the associated risks. To match investor liquidity commitments with the nature of the invested assets, the redemption policy of the LTAF must be consistent with the fund’s liquidity profile and investment strategy. The regulations require a minimum 90-day notice period for redemptions, and redemptions must be no more frequent than monthly. The strong liquidity management requirements are accompanied by high levels of disclosure and governance features.

The LTAF is intended to be an attractive proposition primarily to defined contribution pension schemes but also to institutional and sophisticated retail investors. The LTAF is a key result of the UK government’s review of the UK funds regime, published in January 2021, which aimed to make the UK a more attractive location for asset management and for funds. LTAFs are expected to bring wider benefits to economic growth and financial stability, ideally supporting the transition to a low carbon economy. Further enhancements to the LTAF regime are in the pipeline, with the FCA planning to consult further in 2022 on potentially widening the distribution of LTAFs to certain retail investors and on alternative ownership registration options for assets.

EU – European Long-Term Investment Fund (ELTIF)

The European Commission (“EC”) published proposed amendments to the European Long-Term Investment Fund (“ELTIF”) regulation14 on 25 November 2021. The ELTIF was originally introduced in 2015 as an innovative form of EU AIF with closely defined asset classes, to facilitate long-term investment in real assets. Eligible investments include infrastructure, real estate, intellectual property and small and medium sized enterprises. The ELTIF regulation is a regulatory regime that may take the various legal forms available to an AIF in the country of domiciliation.

Key regulatory improvements have been proposed, with an intended renewed interest in the vehicle. These encompass removing barriers to entry for retail investors and amending restrictive fund rules to increase the uptake of the ELTIF. The proposed amendments include the relaxation of marketing restrictions for retail investors, permitting the ELTIF to be more widely promoted. The existing EU-wide passport can continue to be utilised to distribute to both professional and retail investors. Within the proposals, the scope of eligible investments has been broadened and the thresholds for investments amended. It is proposed that the diversification requirements and other funds rules are amended to be less restrictive, particularly for ELTIFs marketed to professional only investors.

The ELTIF revision proposals form part of a package of measures that deliver on some of the key commitments in the 2020 Capital Markets Union Action Plan which aims to improve the flow of investments across the EU, to benefit investors and companies. The EC expects the proposed enhancements will make the ELTIF a more appealing proposition for global asset managers and diversify investment opportunities for retail investors. They also aim for improved access to funding for companies, particularly post-pandemic, and resultant benefits to economic growth, ideally supporting the green and digital transitions. Whilst around 60 ELTIFs have been launched since their introduction in 2015, and domiciliation has been limited to Luxembourg (in particular), France, Italy and Spain, there are promising signs of renewed interest in the ELTIF. Recent statistics have shown that more than half of the ELTIFs in existence by the end of 2021 were registered during 2020 and 2021, and assets under management have been put at around EUR7.5 billion, EUR5 billion higher than previously estimated15.

Private Assets are here to stay

Regulatory developments across Hong Kong, Singapore, Ireland, UK and the EU since 2020, have demonstrated the desire of regulators to harness the huge interest in private asset investment and the potential benefits this can bring to the economy, companies and investors. The ability of a jurisdiction to develop a competitive fund vehicle for private assets, offering features such as flexibility of structure, appropriate regulatory protections, liquidity management and tax incentives, is seen as a key differentiator in the pursuit to be the domicile of choice for private asset investment. It will be extremely interesting to see the extent to which these new or amended fund vehicles are adopted over the coming years, and which jurisdictions prove to be global leaders in this field. With the vast projected growth in private assets during this decade, investors and markets can only hope to benefit from the renewed regulatory focus to create and tailor fund vehicles for private asset investment.

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