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.