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Financial Secretary John Tsang
Asia is where the world of business and finance wants to be. This region has emerged as both a source of capital and investment opportunities, with capital under management doubling, from US$253 billion in 2009 to US$523 billion in 2013.
This trend is mainly driven by the region's rapid economic growth and wealth creation, the growing experience of private-equity managers investing in Asia, the increased liquidity of the Asian private-equity market, and the need of global asset owners to diversify beyond developed markets.
In particular, the private-equity industry in Mainland China continues to mature since its birth at the turn of the current century. Despite the slowdown of private-equity activities in Mainland China in 2012-13, industry players still see continuous capital flow, as investors seek returns.
Chinese insurance companies, for example, were recently allowed to invest in private equity. Other onshore capital sources include private enterprises, state-owned enterprises and high net-worth individuals.
Capturing private-equity growth
Hong Kong is well-positioned to capture much of the growth of Asia's private-equity industry. For that, you can thank our efficient capital markets, deep talent pool of investment professionals, the rule of law, our proximity to major investment destinations, the cluster effect of top business services and a simple taxation regime.
Last year, I spoke about new government policy initiatives to encourage the growth of the asset-management industry. Today, I am pleased to update you on these initiatives, especially those created with private equity in mind.
Allow me to begin with some encouraging numbers. Total capital under management in Hong Kong's private-equity funds reached US$99 billion at the end of 2013, a year-on-year increase of 16%. Hong Kong is home to some 380 private-equity firms. Over 330 of them base their regional headquarters here.
Hong Kong ranked second, after Mainland China, for capital under management in the region, accounting for 21% of the total at the end of last September. And Hong Kong and Mainland China together manage more than 60% of Asia's private equity.
Institutional investors flock to city
Besides private-equity managers, we are actually seeing more institutional investors setting up in Hong Kong. They vary from pension and endowments to sovereign wealth funds. Some of the prominent asset owners make annual private-equity allocations. And that can only make Hong Kong’s rise as a private-equity hub more sustainable.
The growth of our private-equity industry is impressive. But this should not stop us from looking for further opportunity, given the intense competition from other asset-management centres in the region.
We shall soon introduce a bill into the legislature to extend the profits tax exemption for offshore funds to private equity funds. This will allow offshore private-equity funds to enjoy the same tax exemption as those now available to other offshore funds.
Exemption to benefit majority
Taking into account your feedback, the proposal will allow offshore private-equity funds to enjoy tax exemption for profits gained through the disposal of their portfolio companies incorporated outside Hong Kong. This will benefit an overwhelming majority of the industry.
In clarifying tax rules for the private-equity industry, I am hopeful that Hong Kong will become a magnet for fund managers from around the world.
Still on tax initiatives, we also introduced a bill recently to waive the stamp duty for the trading of ETFs, the exchange-traded funds. This was done to promote the development, management and trading of ETFs in Hong Kong.
We are also working to attract more funds to Hong Kong. To this end, one major initiative is to broaden our legal structure for investment funds, introducing an open-ended fund company, or OFC, structure.
Under the current law, an open-ended investment fund may be established only as a unit trust. The OFC proposal will allow funds to be set up in an open-ended structure, just like a company, but with the flexibility to create and cancel shares for investors.
Mutual funds recognition set
The arrangement for the mutual recognition of funds between the Mainland and Hong Kong is yet another move to attract funds to Hong Kong. Consensus has been reached between the regulators, and we are now waiting for a go ahead from Beijing.
Under the proposed arrangement, qualified Hong Kong funds would become "recognised Hong Kong funds" in the Mainland, while qualified Mainland funds would enjoy a similar status in Hong Kong. These recognised funds could then be sold directly in each other’s market.
The arrangement will bring a wider choice of products to the public in both markets.
On the ven-cap fast track
As I have always maintained, venture capitalists and private-equity fund managers are blessed with the skills and resources to fast-track high-value ideas from the drawing board to the investor.
In particular, private-equity managers are unparalleled at increasing the revenue sources of portfolio companies, optimising their cost and capital structure, carving out non-core business and improving operational efficiency.
Your rewards on exit are considerable. They range from a trade sale to strategic buyers, to sales to other private-equity funds and going public. Among the top 30 Asian private-equity and venture-backed IPOs in 2013, 15 were deals done in Mainland China, 13 of which exited through the Hong Kong stock exchange. This underlines our stock market's liquidity and easy access to international investors.
Last year, our stock exchange ranked second in raising equity funds through IPOs. The launch last November of the Shanghai-Hong Kong Stock Connect makes our stock market even more attractive.
Stock Connect widens opportunities
The programme enables investors in Hong Kong and Shanghai to trade eligible shares listed on each other's stock market. It gives Mainland investors easy access to investment opportunities in companies from around the world. And that can only attract more foreign companies to list in Hong Kong.
If your exit strategy is to go public, our stock market, with a much larger investor base covering Mainland investors, welcomes you.
The Government is committed to enhancing the competitiveness of Hong Kong's asset-management industry. And that includes the private-equity sector.
Global connections
Indeed, more than helping you realise Mainland China opportunities, in Hong Kong you can tap into opportunities throughout Asia and around the world.
Turning to the calendar, to the march of time, the Year of the Sheep – or Goat or Ram, if you like – begins in less than a month. Chinese zodiac doyens promise peace and harmony in this coming New Year.
I'm not sure whether tranquility is good or bad for private equity. But I am confident that investors will continue to “flock” your way. And that none of you will end up a bleating scapegoat. Sorry for the punt.
On that decidedly sheepish note, I wish you all a rewarding forum and a happy, healthy and prosperous New Year.
Financial Secretary John Tsang gave these remarks at the Asia Private Equity Forum 2015.
