Strengths of an OFC and an LPF
The choice between an OFC and an LPF depends on various factors including market practice, manager’s preference, background of investors and their familiarity with the structure, regulatory considerations, nature of the fund, investment scope, and tax incentives.
In general, an OFC can be established as an open-ended fund or a closed-ended fund, a standalone fund or an umbrella structure with multiple sub-funds, and a public or private fund. The following are some of the key strengths of an OFC:
- It is a corporate structure with separate legal personality and limited liability.
- Shares in the OFC may be created or cancelled to meet shareholder subscriptions and redemption requests. Such flexibility is not available to conventional companies incorporated in Hong Kong.
- The law recognizes that the assets/liabilities in each sub-fund can be segregated from the assets/liabilities of other sub-funds, thus allowing greater flexibility in investment strategies.
- Assets are entrusted to a custodian for safekeeping.
- Private OFCs are not subject to investment restrictions.
- Distribution of assets out of share capital is permissible provided the statutory solvency and disclosure requirements are met.
An LPF is a fund that is structured in a limited partnership form and does not have a legal personality. The founder/promoter is a key operator, takes the role of the general partner (“GP”) and has unlimited liability. Investors are limited partners (“LPs”) and enjoy limited liability up to the amount of their agreed contributions. The structure is used for the purpose of managing assets for investors as LPs and is a popular form of private equity and venture capital funds. The key strengths of an LFP include:
- It allows flexibility in the limited partnership agreement between the GP and LPs, subject to certain basic statutory requirements, e.g. the LPs cannot take part in the management of the LPF.
- LPFs are not subject to investment restrictions.
- Its establishment does not require approval from the Securities and Futures Commission of Hong Kong (“SFC”).
- There is no minimum capital requirement on partners.
- No Hong Kong stamp duty is imposed on any contribution or withdrawal by any partner or on any transfer of partnership interest.