The Next Generation of Private Equity Funds in Asia: Hong Kong’s Proposed Limited Partnership Fund

Dechert LLP

Dechert LLP

The Hong Kong government on 20 March 2020 published the Limited Partnership Fund Bill ("Bill") which provides for a new limited partnership regime for private funds ("LPF") in Hong Kong.1 As we see a greater number of fund managers looking to align their business activities with their fund's domicile, achieving this by moving their fund structures from an offshore to an onshore jurisdiction (particularly in the face of myriad of changes in the laws and regulations of offshore jurisdictions), the LPF regime is expected to provide a viable, and familiar, structure for these fund managers. This is a welcome development that will strengthen Hong Kong's appeal as the private fund jurisdiction-of-choice in Asia.

The original timetable for the passage of the Bill through the Legislative Council is delayed due to cancellation of planned Legislative Council meetings as a result of the current coronavirus situation. However, the Legislative Council Panel on Financial Affairs has previously expressed general support for the Bill. Assuming the disruption to the original legislative timetable for the Bill remains minimal, and subject to the Bill being enacted, the LPF regime is expected to come into operation on 31 August 2020.

Key Features of the Bill and the LPF

1. Structure and Constitution of an LPF

Most Hong Kong and other Asian fund managers typically choose to domicile their funds in the offshore jurisdictions. Given the proposed LPF regime is now looking to attract those fund managers to Hong Kong, unsurprisingly, the structure and constitution of an LPF is similar to those seen in the offshore jurisdictions. Similarities with the limited partnership vehicle of the offshore jurisdictions include:

  • the LPF vehicle must comprise of one general partner ("GP") and at least one limited partner ("LP");
  • the LPF vehicle is formed contractually between the GP and LPs by entering into a limited partnership agreement;
  • the LPF vehicle itself does not have separate legal personality;
  • the LP's liability is generally limited up to its capital commitment and the GP's liability is unlimited; and
  • safe harbour provisions exist in both the offshore and the Hong Kong regimes which enable LPs to be involved in certain affairs of the fund2 (e.g., participating on the committees of the LPF or in votes to remove the GP) without being regarded as taking an active role in the management of the LPF, meaning that the LPs' limited liability protection is not compromised.

Other features of an LPF include:

  • it must have a registered office in Hong Kong;
  • the proposed LPs (or other partners, e.g., special limited partners) in the LPF cannot solely consist of entities in the same group of companies of the GP after the second anniversary of the registration date of the LPF. If this remains the case, the Registrar of Companies ("RoC") may strike the name of the LPF off the LPF register. This requirement appears to be intended to discourage fund managers from forming LPF vehicles without any genuine investors; and
  • the LPF must follow the naming requirements set out in the Bill. The English name of an LPF must contain "Limited Partnership Fund" or "LPF" at the end of the name. Similarly, the Chinese name must contain "有限合夥基金" at the end of the name. The name must not be the same as that of another registered LPF or body corporate.

2. General Partner

Following industry feedback given in response to the earlier consultation paper,3 the Bill contains an expanded list of entities that can be used as a GP vehicle. The list consists of:

(a) natural persons over the age of 18;

(b) Hong Kong-incorporated private companies;

(c) registered non-Hong Kong companies;

(d) limited partnerships under the Limited Partnership Ordinance;

(e) limited partnership funds; and

(f) non-Hong Kong limited partnerships.

If the GP has no legal personality because it is another LPF or a non-Hong Kong limited partnership without legal personality, the LPF must appoint an authorised representative with a legal personality4 to be (i) responsible for the management and control of the LPF and (ii) jointly and severally liable with the GP for all the debts and obligations of the LPF.

3. Investment Manager

The GP is required to appoint an investment manager to carry out the day-to-day investment management functions of the LPF. The investment manager must be (a) a Hong Kong resident over the age of 18; (b) a company incorporated in Hong Kong under the Companies Ordinance or (c) a registered non-Hong Kong company. The GP can appoint itself as the investment manager provided that it meets the above criteria.

4. Licencing requirements for the GP or the Investment Manager

The Bill does not specifically require the GP or the investment manager of an LPF to be licensed by the Hong Kong's Securities and Futures Commission ("SFC"). However, our view is that either the GP or the investment manager must be licensed. This is based on the requirements of the Securities and Futures Ordinance ("SFO") and the views expressed in the SFC Circular issued on 7 January 2020 relating to private equity firms ("SFC Circular").5 The reason for this is as follows:

  • Section A of the SFC Circular provides that GPs of a fund structured in the form of a limited partnership that conduct fund management business in Hong Kong are required to be licensed by the SFC for the conduct of Type 9 regulated activity (asset management). This appears to be consistent with section 114 of the SFO which requires a person who "carries on or holds himself out as carrying on a business in a regulated activity" to be licensed by the SFC. Note that the SFC Circular further provides that the GP itself does not need to be licensed it fully delegates the discretionary investment authority to an investment manager that is licensed by the SFC for Type 9 regulated activity (asset management).
  • The Bill sets out a list of entities that are permitted to act as a GP of an LPF (as listed in section 2 above). With the exception of natural persons and non-Hong Kong limited partnerships (for which see the final bullet point below) all the entities are required to have a principal place of business in Hong Kong. This means that if the entity that is acting as a GP appears on the limited partnership agreement with a Hong Kong registered office (as opposed to a place of business in Hong Kong), it would most likely be regarded as "holding itself out as carrying on a business" in asset management in Hong Kong and therefore would be subject to the licensing requirements.
  • Section 20 of the Bill requires that the GP of an LPF must appoint a person (who may be the GP or another person, see section 3 above) as an investment manager. Such person must be a natural person over the age of 18, a company (which is defined to mean a company incorporated in Hong Kong under the Companies Ordinance), or a registered non-Hong Kong company. If the person appointed as the investment manager of the LPF is a company or a registered non-Hong Kong company, it would be required to be licensed for Type 9 regulated activity (asset management) under section 114 of the SFO, as it would either be carrying on or holding itself out as carrying on a business in asset management.
  • Where the GP is a non-Hong Kong limited partnership, it cannot appoint itself as the investment manager since it would not meet the requirements set out in section 20 of the Bill (as it is not a natural person, a company or a registered non-Hong Kong company). The non-Hong Kong limited partnership GP must appoint a natural person over the age of 18, a company or a registered non-Hong Kong company to act as investment manager of the LPF. As mentioned above, if the person is a company or a registered non-Hong Kong company, then it would be required to be licensed for Type 9 regulated activity (asset management) under section 114 of the SFO.
  • While the Bill permits "natural persons" to act as the GP and as investment manager of the LPF, the only way that "natural persons" would not be subject to the licensing requirements under the SFO is if they operate in such a way that they are not viewed as carrying on a business in Hong Kong or holding themselves out as carrying on a business in Hong Kong. In reality however, operating in such manner does not appear to be possible given that an LPF is required to have a registered office in Hong Kong, and by extension, the natural person would in practice be conducting a business in Type 9 regulated activity (asset management) or holding itself conducting as such at or through such registered office.

5. Other Requirements

Custody Arrangements

The Bill requires the GP to ensure there are proper custody arrangements for the assets of the fund as specified in the limited partnership agreement of the LPF. There is no requirement for the LPF to appoint a third party custodian. While the custody requirements are brief in the Bill, investment managers that are licensed by the SFC to conduct Type 9 regulated activity (asset management) should note that they are subject to the custody requirements set out in the Fund Manager Code of Conduct published by the SFC.


The LPF is required to appoint an independent auditor to carry out an annual audit of the LPF's financial statements. The auditor must be a practice unit as defined in section 2(1) of the Professional Accountants Ordinance.6


The GP must appoint a "responsible person" to carry out anti-money laundering/counter-terrorist financing functions under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. A "responsible person" can be an authorised institution (such as a bank), a licensed corporation (that is a person holding a licence issued by the SFC), an accounting or a legal professional.7

Record Keeping

The GP or investment manager must maintain a proper record of documents or information in relation to the LPF's operations and transactions. The financial accounts of an LPF must be made available to all partners and, as and when necessary, to law enforcement officers.

Similar to the regimes of the offshore jurisdictions, the Bill proposes that the identity of LPs of the LPF are kept confidential, are not recorded on the LPF register nor reported to the Inland Revenue Department. However, the LPF will need to ensure that details of the LPs are maintained, and if required, made available to law enforcement agencies.

6. Registration Requirements

LPFs need to be registered with the RoC by the proposed GP. Once the RoC is satisfied that the application contains the relevant documents and the relevant information has been provided in the specified manner and the specified fee is paid, the RoC will register the fund as an LPF and issue a certificate of registration to the LPF as proof of its registration.

The GP must also apply for a business registration certificate under the Business Registration Ordinance8 within one month of the date on the certificate of registration.

If the GP makes any changes to the registration particulars, including changes in investment scope, it must notify the RoC within 15 days of the change and must pay a lodgement fee.

7. Enforcement Powers

The RoC will be provided with a range of enforcement powers to enable it to oversee LPFs' compliance with registration, annual return filing and other requirements. In particular, the RoC will have the power to revoke a registration of LPF under certain conditions designated in the Bill. Under the Bill, the Financial Secretary of Hong Kong is empowered to make regulations for the purpose of the Bill and prescribe certain arrangements. The Court of First Instance ("Court") will have the power to rectify or remove any information on the LPF register.

8. Dissolution and Winding Up

In line with regimes of other key funds jurisdictions, the winding up mechanism in the LPF regime is flexible and provides a number of ways to bring the fund vehicle to an end. These mechanism are:

  • Dissolution by partners' agreement: The partners of an LPF have the right to agree among themselves the conditions and procedures under which the LPF could be dissolved voluntarily. The GP must file a notification to the RoC within 15 days of the fund being dissolved.
  • Dissolution in the absence of GP: Where the GP (or the authorised representative) is bankrupt, dissolved, dead, subject to a winding-up order by the court in or outside Hong Kong, or ceases to be a GP (or authorised representative), and the GP (or authorised representative) is not replaced within 30 days, the LPF will be dissolved automatically. The GP or authorised representative (or where there is no GP nor authorised representative, each LP) must file a notification to the RoC within 15 days of the fund being dissolved.
  • Dissolution by with court order: An LPF may be dissolved by the Court for investor protection purposes where the Court determines that such action is being taken on just and equitable grounds.
  • Winding up: Where a winding up petition is presented to the Court against an LPF under certain conditions, the LPF may be wound up by the Court as an unregistered company in accordance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance.9

Tax Implications

An LPF meets the definition of 'fund' under section 20AM of the Inland Revenue Ordinance and, subject to satisfying other conditions of the profits tax exemption regime for private funds that was introduced in 2019,10 the LPF will be treated as a tax transparent entity.

From a stamp duty perspective, the partnership interest in the LPF will not be considered a share, stock, debenture, loan stock, fund, bond or note. Accordingly, transactions relating to the transfer and withdrawal of partnership interests in the LPF will not ordinarily be subject to stamp duty.11

Going Forward

As various onshore jurisdictions try to capitalise on the shifting trend of fund structure transitioning from offshore to onshore, the LPF regime offers a viable structure that will enable Hong Kong to compete with other major fund centres globally. It is positive to see that the Bill adopted key points made by the private fund industry as part of the consultation process, and the result is a structure that is familiar to those regimes seen in other key funds jurisdictions.

The Bill is part of a combined effort to promote Hong Kong as a competitive, international, asset management centre. The next, crucial piece of the puzzle will be how the Hong Kong government prepares to implement a proposed tax concession for carried interest that was announced by the Financial Secretary of Hong Kong in the 2020-21 Budget speech. The proposed tax concession is currently undergoing industry consultation.


1) The government conducted a public consultation in July-August 2019 and put forward the proposals for consideration by the Legislative Council in December 2019. Our update on the earlier consultation paper and the proposal can be found in this article.

2) See Schedule 2 of the Bill for a full list of these activities.

3) See footnote 1 above.

4) That is, a Hong Kong resident who is at least 18 years old, a company incorporated in Hong Kong under the Companies Ordinance, or a registered non-Hong Kong company.

5) Further details are set out in our update.

6) Chapter 50 of the Laws of Hong Kong.

7) Each as defined in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

8) Chapter 310 of the Laws of Hong Kong.

9) Chapter 32 of the Laws of Hong Kong.

10) For further information, please refer to Dechert OnPoint, New Hong Kong Profits Tax Exemption Regime Currently Effective.

11) Exceptions include in-kind distribution and contributions of dutiable assets such as Hong Kong stock or immovable property.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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