As Asian investors demonstrate a growing appetite to allocate to alternative investment funds, Hong Kong is becoming more attractive to managers looking to make the most of the opportunity.
As Asian investors demonstrate a growing appetite to allocate to alternative investment funds, Hong Kong is becoming more attractive to managers looking to make the most of the opportunity.
“We see significant opportunities for international investors here in Hong Kong. Investors do need to allocate capital to this part of the world in order to diversify their portfolios,” explains Richard Jiangdong Hu, managing director, Everbright Overseas Infrastructure Investment Fund. “Supporting managers like Everbright in Hong Kong is beneficial to investors and the industry overall. A group like ours has the advantage of mastering the rulebooks both on the international front and in mainland China.”
He outlines how the fund is making good progress in its investment in the Boreal Group – a Norwegian transportation solution provider: “The business has been successfully run, gaining meaningful market share during our ownership, and given its main business of public transportation is an essential service, it has not been affected by Covid-19 to a serious extent. We already have a number of buyers interested in this resilient business.”
The fund has a strong track record in this regard. In December 2020, it sold its 100 percent ownership of Tirana International Airport SHPK, with an eye-catching return when global air traffic had ground to a halt as a result of Covid-19. The original investment was made in 2016 and over the course of the holding period, the fund successfully increased the operator’s profit by over 50 percent by 2019.
From the perspective of a service provider, Johnson Har (pictured), head of Hong Kong at Alter Domus, outlines: “Among Asian limited partners (LPs) and institutional asset owners, we’re seeing greater appetite for investing into alternative funds. We’re also seeing bigger tickets and names we haven’t seen before, which is encouraging.
“Historically, when it comes to alternative investments, the appetite of Asian institutional investors has been lagging behind those in Europe and the US. However, this is increasing and it’s a good sign for the industry that Asian institutional investors are going to increase their allocation to alternatives, following in the footsteps of their US counterparts.”
Traction for Hong Kong funds
Discussing the attractiveness of Hong Kong as a financial jurisdiction, Har notes: “We are starting to see traction in Hong Kong’s Limited Partnership Fund Regime (LPF). Also, once managers launch an LPF and run it well, it will give others the confidence to follow suit. LPs also need time to understand the new LPF regime.
“Hong Kong is a key asset management jurisdiction. Various regulations have come into effect in the past two years and most managers are interested in learning more. It might not be the right fit for everyone, but many are taking an interest.”
This is even more relevant given the brief tax blacklisting of the Cayman Islands in 2020. Historically most funds managed by Asian managers have been Cayman-domiciled funds and although the jurisdiction was later removed from the blacklist, some hesitance may remain among investors.
However, there is still progress to be made. According to Hu, “There are certain areas which the Hong Kong government needs to focus on. For example, although it is the third largest international financial centre after New York and London, M&A transaction volume in Hong Kong is still low. There is a tremendous potential to add more depth and sophistication to Hong Kong’s investment management industry.”
Regardless, the outlook for Hong Kong remains positive. Har says: “We’re continuing to see very strong momentum in Hong Kong. All in all, the industry looks very healthy from a Hong Kong perspective and the outlook for new managers and GPs setting up here is strong. We are also seeing global managers entering the Hong Kong market as well as a fairly healthy flow of mainland China asset management companies setting up a Hong Kong team or setting up private structures which will require administrators to provide a cross-jurisdictional service.”
Launch decisions
When it comes to launching a fund, Har acknowledges the mammoth task managers face: “We are aware that launching a fund is very difficult and it gets increasingly difficult when you consider the different private structures managers could use. The structure of the fund is an essential item they need to take into account when looking to set up a new fund.”
Everbright is also mulling over options. Hu says, “We are planning to launch our second infrastructure fund this year. Though we will continue to keep an eye on Europe, we envisage this fund will focus more on investments in Southeast Asian countries. We are currently speaking with potential investors, including major financial institutions in the region. This is what we’re currently busy working on.” According to Hu, investor base and investment destinations, together with other considerations like regulations, tax and reputation of jurisdictions, will drive the structure of the fund.
Har also stresses the importance of managers performing an exercise in self-assessment: “They need to focus on the various regulatory reporting requirements, some of which are new. The process of setting up a new fund gives managers the opportunity to take stock of their internal resources and see whether they have sufficient administrative professionals across different parts of the business such as regulatory and compliance reporting, along with increasing LP requirements. They can take this time to consider whether there are any functions they need to outsource.”
Sticky relationships
The question of outsourcing can be critical to the success of an alternative investment fund. For Everbright, the support of their partners provides stability. Hu elaborates: “We value and treasure our longstanding relationship we have with our service providers. We see them as trusted advisors and have very little desire to make changes in this regard. There are different cultures, rules and communication at play, and we need to make sure we understand each other well. Therefore, our relationships with service providers tend to be sticky.”
Further, these providers support managers’ drive to expand their business and to keep up to date with the developments in the international investment management industry.
Hu comments: “Hong Kong is a small territory and we need to understand what’s going on in Europe, the US and the rest of the world. We want to know about trends in investor appetite, new regulations, new business models and value chains. This is information vital to our survival and separates us from mediocrity.
“Service providers support our plans and help putting them into action. For example, if tomorrow we acquire an asset in Malaysia, we need support to fulfil the local government’s requirements for that transaction. When we made the investment in Norway, we hired some corporate service providers to help us manage the tax vehicles. The different firms we work with provide us with specific services depending on where their strengths lie. A fast one-stop service is always preferable, but we need to make sure there are the necessary firewalls and compliance requirements in place for that to work effectively.”
Johnson Har, Head of Hong Kong SAR, Alter Domus
Johnson Har joined Alter Domus in 2018 as Head of Hong Kong SAR. He is responsible for managing Alter Domus’ Hong Kong office and driving the continuous growth of Alter Domus’ business in Hong Kong. Har has over twenty years of experience in the financial services industry across the US and Hong Kong, and completed his university education in the US and his MBA in Hong Kong.
Richard Hu, Head & Managing Director, China Everbright
Richard Hu joined Everbright Overseas Infrastructure Investment Fund during its vintage in 2016 as MD and Head. Prior to joining the Fund, he had over twenty years of investment and managerial experience serving in major financial and commercial conglomerates and listed companies across Hong Kong, mainland China and the US. Hu completed his college education in China and his MBA degree in US.
