THE NEW LIMITED PARTNERSHIP FUND ORDINANCE IN HONG KONG

September 2020

The Limited Partnership Fund Ordinance (Cap 637 of the Laws of Hong Kong) (“LPF Ordinance”) has commenced operation on 31 August 2020. The LPF Ordinance allows eligible private funds to be registered as Limited Partnership Fund (“LPF”).

Hong Kong has been recognized as a leading international financial hub for the past 30 years. Mutual funds have long been well applied by financial institutions, investment banks, asset management companies and family offices as one of the effective and efficient financial vehicles for the purposes of raising funds and making investments worldwide. Surprisingly, Hong Kong had never had a mutual fund related law or legislation until very recently whilst other Asian countries have well established such fund laws and regulations for years.

In the past, the only fund structure in Hong Kong which was being used by the market players in the fund industry before 30 July 2018 was Unit Trust Fund, for which a licensed trust company registered in Hong Kong shall act as a trustee and a licensed asset management corporation (Type 9) shall act as the investment manager. The Securities and Futures (Amendment) Ordinance 2016, which commenced operation on 30 July 2018, introduces a new form of company in Hong Kong called “Open-ended Fund Company” (“OFC”). Likewise, an OFC is required to engage a licensed asset management corporation (Type 9) in order to operate in Hong Kong. From observations, OFC is not very popular in the eyes of the market players.

The LPF Ordinance is proposed to change all that and to attract investment funds from other countries (including private equity and venture capital funds) to establish and operate in Hong Kong.

With the increase in the annual compliance and maintenance costs for offshore vehicles with more stringent anti-money laundering as well as economic substance requirements, it is envisaged that most of the market players in the private equity (“PE”) industry should consider the LPF structure in Hong Kong more preferable for making PE investments for the reason that the annual operation costs and maintenance costs per year will be less than the offshore structure and that without the licensed or regulated entity being involved, the LPF will not be subject to the governance of the local securities authorities, such as the Securities and Futures Commission.

The main advantage of the LPF is that if it does not engage in any of the regulated activities or asset management involving securities under the Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong), it is not necessary to engage an external licensed investment manager (“IM”) to manage the investment affairs for the LPF while the general partner (“GP”) of the LPF may, subject to certain conditions, assume all the functions as the IM and of course, the GP may choose to delegate all its functions to an external licensed IM as it sees fit. An external licensed IM is only necessary when the LPF invests in securities, undertakes regulated activities or engages in asset management business regulated by the Securities and Futures Ordinance.

The LPF Ordinance sets out the eligibility criteria to be met and the ongoing compliance requirements in order to be registered as LPF in Hong Kong. It imposes no minimum capital requirement and no restriction on the investment scope and strategy of LPF. Some of the salient conditions include the following:

The LPF must be constituted by a limited partnership agreement (“LPA”). Parties have freedom to structure their own investment scope and strategy in the LPA so long as they are legitimate and in compliance with the local laws.
The LPF to be registered must have a registered office in Hong Kong in order to be registered in Hong Kong. Such newly registered LPF would bear the name as “Limited Partnership Fund” or “LPF” in its English name or “有限合夥基金” in its Chinese name.
The LPF must have an IM responsible for daily management of the investment and such IM must be a Hong Kong resident or a company either incorporated or registered in Hong Kong. The GP may, subject to certain conditions, assume such a role itself.
The LPF must have an auditor as well as a responsible person to carry out the anti-money laundering functions.

In addition, there must be one GP and at least one limited partner (“LP”) for the LPF. The GP can be a natural person, a company incorporated or registered in Hong Kong or a limited partnership in various forms. It has unlimited liability for all the debts and obligations of the LPF and is ultimately responsible for the management and control of the LPF. There is no separate legal personality for LPF.

The LPs are normally the investors, which can be a natural person, corporation, partnership, unincorporated body or any other entity or body, that participate in the income and profits arising from the fund and their liabilities are limited to the commitment they make to the fund. The LPF Ordinance allows their participation in the LPF business in certain safe harbour activities.

In order to obtain the certificate of registration of LPF, the application of registration must be submitted to the Registrar of Companies by a Hong Kong law firm or a Hong Kong solicitor.

Once registered, the Registrar of Companies will maintain a register of LPFs and an index of the names of every LPF. The general public will not be able to search the identity of the LPs as this information is not open to public for inspection. However, the relevant information relating to the identities of the LPs must be maintained and kept and made available to law enforcement agencies whenever required.

For those existing funds established in Hong Kong under the Limited Partnerships Ordinance (Cap 37 of the Laws of Hong Kong), it is possible to register them as LPFs if they meet the eligibility requirements. However, for limited partnership funds established in other jurisdictions, it is not yet possible to directly re-domicile them to Hong Kong under the new LPF regime.

The introduction of the LPF Ordinance is a big step forward from the OFC regime. Even though it has only been commenced since August 2020, the LPF Ordinance has successfully attracted attention from personnel in the PE industry in Hong Kong as well as investors from the PRC. The advent of the LPF structure as envisaged by the LPF Ordinance should be able to further enhance Hong Kong’s position as an international asset and wealth management centre.