Hong Kong SAR - SFC on licences for private equity firms and family offices
Private Equity Firms
Looking at the more typical limited partnership structure for private equity firms, the SFC notes that the General Partner’s (GP) role in managing a PE fund would usually require it to be licensed for Type 9 regulated activity (asset management) as long it conducts fund management business in Hong Kong SAR. However, if the GP has fully delegated all of the asset management functions to another entity which is licensed or registered to carry on such regulated activity, then it may not have to be licensed under the Hong Kong regime.
The SFC also reminds firms that in order to be carrying out Type 9 asset management, asset managers must be granted full discretionary investment authority in respect of the funds they manage. The SFC will look at the facts of each case to determine this, including the proposed investment decision-making process, the roles of the proposed licensed individuals (including the ROs) and their involvement in the process, and whether the delegation of investment authority to the firm is properly documented. Discretion over investment authority is an area which the SFC continues to focus on, particularly in connection with the dubious transactions involving private accounts and discretionary accounts in the asset management sector (you can read our client alert on the most recent SFC circular on this topic).
The need for the correct licences to be held for entities within structures and individuals is mentioned several times in the circular, and there is a reminder for unlicensed GPs that they should not represent to any prospective investor that they manage a private equity fund in Hong Kong. The SFC does confirm that where there are investment committees, members who do not have any voting right or veto power for investment decisions and whose primary role is to provide input from a legal, compliance or internal control perspective, do not generally need to be licensed.
The SFC also touch on the use of special purpose vehicles (SPVs) for investment holding purposes. The SFC note that while some SPVs are private companies (the shares of which are not included in the definition for the regulated activity of asset management), the SFC will look at the composition of the entire investment portfolio within an SPV. If the underlying investments held through SPVs fall within the definition of “securities” under the Securities and Futures Ordinance, the SFC will regard the management of the portfolio as “asset management” and the firm would be required to be licensed for regulated activity Type 9 (asset management).
The SFC also comments on co-investment opportunities, fund marketing activities and the industry experience requirement for responsible officers. In relation to the latter, the SFC believes that it adopts a pragmatic approach and recognises a broad range of experience as long as the applicant can demonstrate that it is relevant to his or her proposed duties, including;
- conducting research, valuation and due diligence of companies in related industries,
- structuring corporate transactions, such as management buyouts and privatisations,
- private equity experience gained in a non-regulated situation.
The circular focuses on licensing requirements for single family offices versus those for multi-family offices. Of course the structuring of family offices must be reviewed on a case by case basis, but as a general rule, it is more likely for single family offices to function without a licence from the SFC in Hong Kong.