Hong Kong licensed private equity funds and their third-party fund distributors, such as placement agents, will have to jump through more regulatory hoops when raising money from high net-worth individuals, according to Rolfe Hayden, partner at Simmons & Simmons.
The proposed regulation, which Hayden says will likely be implemented by the Hong Kong Securities and Futures Commission, says that people who (either alone or with a spouse or child on a joint account) have a portfolio of not less than HK$8 million (€790,584; $1 million), including investment vehicles wholly owned by them or by family trusts, will be counted as a non-professional investor.
The private equity firm or placement agent will then have to get SFC authorization to market funds to individual investors, who commonly invest in private equity funds, particularly China-focused vehicles.
“The fact that an individual has liquid assets of HK$8 million will no longer exempt an intermediary from the need to do suitability assessments,” Hayden said.
“At the moment, they don’t have to do anything at all assuming the individual has consented to being treated as an individual investor, but going forward they will have to consider the investment profile of the individual, in particular whether the investment fits in with the investment objectives of the individual.”
Going forward they will have to consider the investment profile of the individual, in particular whether the investment fits in with the investment objectives of the individual
The regulations are relevant to any private equity fund licensed in Hong Kong, regardless of where the potential LP is based.
Nevertheless, the changes in regulation will likely have a minimal impact on private equity firms and placement agents, according to Vince Ng, partner at Atlantic Pacific Capital in Hong Kong.
He said, “Active high net-worth investors in Asia, particularly in Hong Kong, are generally split into two groups. One [group] are so high net-worth that they have their own family offices, so you are approaching a family office, which is a licensed institution, a professional institution and you treat them like a typical institutional investor. Those below that, who are moderately high net-worth, don't typically go directly themselves [to funds] but would go through a private wealth platform with UBS or Goldman Sachs, for example, which means you are not dealing with individual investors per-se but more institutionalised platforms in order to get access to such investors.”
Hayden added that also under the new proposals, corporations making commitments to private equity vehicles will have to go through less burdensome regulatory checks than they do currently.
“For corporate professional investors, for example a listed company that manufactures clothing in China, the code of conduct requirements are being made more flexible in terms of dealing with those sorts of investors. The existing provision has a knowledge and experience assessment which hinges around how often the professional investor has dealt with similar investments in the last few years.”
Under the proposal, corporations would be able to invest without such stringent assessments of their in-house capabilities.