A recent circular issued by the Hong Kong Securities and Futures Commission (SFC) has created a pathway to listing closed-ended alternative asset funds in Hong Kong, generating interest among both local private market participants and managers with funds listed abroad.
The "democratisation" of alternative assets is increasingly cited as the next step in the development of the private capital industry. Listed alternative asset funds would offer retail investors access to an asset class that is currently unavailable to them in the Hong Kong market.
From the product providers' point of view, evergreen funds are potentially attractive solutions for GPs grappling with longer holding periods due to illiquidity in the usual exit markets for private assets.
Another group from which there is much interest in this new listing pathway is listed funds in London. These funds have long suffered from adverse market conditions in the London market and are in search of new pockets of demand in a quest to bring the price at which their shares trade closer to their net asset value (NAV) per share.
In a further boost for the new listing pathway, Hong Kong's US$140 billion Mandatory Provident Fund Authority (MPFA) has recently updated certain of its FAQs to permit inclusion of listed alternative asset funds in MPF pension schemes. This increases the attractiveness of listing an alternative asset fund in Hong Kong given the potential monthly demand represented by inflows from the MPF system.
Looking further ahead, admitting listed funds to Stock Connect – which allows investors to trade eligible securities across the Hong Kong, Shanghai and Shenzhen markets would create another valuable source of demand. No announcement on access has been made so far, however.
As private capital shifts towards evergreen structures and accessing pockets of demand beyond the typical institutional limited partners, this listing pathway has the potential for success. However, questions remain around the precise application of local regulations, and in particular the SFC's Code on Unit Trusts and Mutual Funds (UT Code), to this product.
In this article, we share the key initial considerations for private fund managers thinking about listing an alternative asset fund in Hong Kong, such as the current state of the demand side in the Hong Kong market, where the regulatory complexities are, considerations for second listings, and key open questions.
The Circular
Published on 17 February 2025, the SFC's "Circular on listed closed-ended alternative asset funds" (Circular) sets out the circumstances under which the SFC will consider authorising closed-ended collective investment schemes that invest mainly in private, illiquid assets under section 104 of the Securities and Futures Ordinance (SFO) and permit their listing on the Hong Kong Stock Exchange (Exchange) under Chapter 20 of the Listing Rules.
Such funds would typically not meet the liquidity and other investment requirements under Chapter 7 of the UT Code and, without the SFC's forbearance as set out in the Circular, would therefore not be eligible for authorisation under section 104 of the SFO and Chapter 20 of the Listing Rules.
The listing pathway for alternative asset funds that the SFC is seeking to create through the Circular is intended to replace Chapter 21 of the Listing Rules for investment companies, which has fallen out of favour for multiple reasons.
The use case for private fund managers with and without existing listed funds
The new listing pathway will be most attractive for:
- private fund managers looking to solve liquidity issues tied to the end of life of a private fund by rolling assets into a listed continuation vehicle, thereby tapping demand from new pockets of investor capital (the successor vehicle could have a fixed life or be evergreen in nature); and
- international managers with existing listed vehicles looking for a second listing to boost investor demand and reduce "discount to NAV" by accessing new pools of capital.
It is less likely that a Hong Kong listed fund would be a pure "blind pool" established to make first investments. Our expectation is that substantial assets will be required for a successful launch to become authorised by the SFC and attract sufficient investor demand.
For London-listed funds, a second listing in Hong Kong could offer a way to introduce demand which could reduce substantially the high discounts to NAV prevailing in the London market. Funds listed in London have in recent years suffered (despite regular positive NAV growth) from a lack of demand from new investors in the London market. Two potentially significant sources of capital could provide regular demand for their shares if such funds were also listed in Hong Kong:
- the mandatory provident fund system of Hong Kong; and
- Stock Connect southbound trading from Mainland China.
If the discount to NAV narrows as hoped through a second listing of a London-listed fund, Hong Kong investors would benefit from the share price correction that comes with the transformation of the discount to NAV.
The demand side
Whether demand in the Hong Kong market will materialise cannot be said with certainty, although the Hong Kong MPF system and Stock Connect are seen as the major potential sources driving demand.
MPF
The MPFA recently added two FAQs to the MPF Trustee FAQ section on its website indicating its willingness to approve what it calls "listed PE funds" for inclusion in the portfolios of MPF funds. We query whether the MPFA means to only include listed funds investing in private equity or if "PE" here is to be understood as alternative assets more broadly, considering that listed funds investing in infrastructure or renewable energy assets would also be suitable.
The FAQs confirm that an MPF fund may only invest in listed alternative asset funds approved by the MPFA. Approval is to be granted on a case-by-case basis under a reserve power in section 8(2)(c) of Schedule 1 to the Mandatory Provident Fund Schemes (General) Regulation (Regulation) and the MPFA will consider the following criteria:
- whether the fund primarily invests in private equity (see our comment above on the asset class description) in its underlying assets;
- whether the fund's volatility is within an acceptable level;
- whether the fund's ongoing charge is reasonable; and
- that the fund should not be used as a means to circumvent existing MPF investment restrictions (e.g. investing in an MPF non-permissible asset class).
The MPFA treats listed alternative asset funds differently from REITs. Certain REITs are approved as a class of securities under section 8(1)(c) of Schedule 1 to the Regulation. That means that any REIT that falls within that class is automatically approved for inclusion in MPF funds. The same treatment is not extended to listed alternative asset funds, with individual approval being required.
The MPFA requiring approval of listed alternative asset funds under section 8(2)(c) of Schedule 1 to the Regulation also means that only 10% of an MPF fund may be invested in this product. This investment limit does not apply to REITs.
We are hoping for further guidance from the MPFA and a principles-based and generally permissive approval practice. In particular, it would be helpful to understand what the MPFA would regard as circumvention of existing MPF investment restrictions.
Stock Connect
Additional demand from the massive Mainland China market would be a key differentiator for Hong Kong as an alternative asset fund listing venue.
The 2024 inclusion of REITs in Stock Connect offers a blueprint for listed alternative asset funds although inclusion will require the approval of the China Securities Regulatory Commission (CSRC). It is currently unknown if the HKSAR Government and the CSRC are discussing listed alternative asset funds.
Regulatory complexity
Compliance with the UT Code and Chapter 20 of the Listing Rules is complex.
The requirements under the UT Code are too numerous to explain fully here, but four important aspects are:
- The UT Code contains conduct as well as product regulation, including rules for manager removal and fee structure;
- The UT Code contains detailed rules for the content of the offering document and key product statement, which need to be prepared in English and Chinese;
- Certain scheme changes, such as an increase in fees, require SFC approval;1 and
- There are transparency requirements, such as annual disclosure of holdings, that are unfamiliar to private fund managers.
Managers registered under the US Advisers Act or licensed as alternative investment fund managers under the EU's AIFMD regime (or the UK equivalent version), especially those currently managing listed funds, will be well prepared for this type of regulatory environment.
Other managers, including unlicensed general partners in particular, should carefully consider whether building the necessary compliance system for this product is proportionate to the benefits expected to accrue.
Listing structures for second listings
Paragraph 16 of the Circular states that "[t]he SFC may authorise for listing on SEHK a well-established Alternative Fund that is (a) currently listed and regularly traded on internationally recognised stock exchange(s) open to the public and (b) subject to comparable regulatory requirements".2
Second listings are by their nature complex. Strategically, managers will want to consider two initial questions.
- Dual primary or secondary listing?
In the case of issuers whose shares are already listed on another exchange when its shares are listed in Hong Kong, the issuer may seek either a "dual primary" or "secondary" listing, depending on factors such as its expectation of whether the Exchange will be the primary trading market. The listing process is substantially the same for both a "dual primary" and "secondary" listing on the Exchange, though a secondary listing will benefit from a range of "automatic" exemptions from certain requirements of the Listing Rules and the Exchange will routinely grant other waivers depending on the circumstances. Broadly speaking, there is a narrower range of dispensations available to a dual primary listing applicant and the applicant would need to apply for many of such waivers on a case-by-case basis.
Both a "dual primary" and a "secondary" listing should in principle be possible for existing alternative asset funds listed elsewhere, however, the Circular does not provide any guidance on this point.
While currently listed alternative asset funds have not been accepted for eligibility for Stock Connect (see above), it is important to note that currently, eligibility for Stock Connect for issuers more generally requires a primary (including dual primary) listing.
- Introduction or offering?
Both an introduction of existing shares and an offering of new shares are possible.
In the case of a London-listed fund trading at a substantial discount to NAV, the existing discount would present a commercial challenge. We expect that any second listing by such an issuer will initially be by way of an introduction of existing shares.
Open questions
With no market practice and limited guidance on the listing pathway, listed alternative asset fund applicants should consider the following issues and address them with the SFC in preliminary discussions.
- Application of the UT Code
The UT Code was mainly written for retail funds investing in liquid assets structured as unit trusts. The rules frequently assign regulatory obligations to the trustee and apply these functions to either the custodian or the directors of a fund that is a company.
This may not be workable in every case, considering the different characteristics of trust arrangements and the contractual/company law arrangements that underpin a custody arrangement or directorships.
We expect that most listed alternative asset funds will be structured as companies – at least those funds seeking a second listing will typically be in corporate form. Further discussions with the SFC on the precise application of the rules will be necessary for the first funds approved under this pathway.
- Listing agent or sponsor?
Paragraph 9 of the Circular states that "[t]he SFC reserves the right to require a listing agent to […] be regarded as a sponsor where appropriate".
There are no guiding principles for when the SFC will require a sponsor, although we expect that a fund seeking a second listing will not be required to appoint a sponsor. Applicants should address this point with the SFC in early discussions.
Paragraph 20 of the Circular states that the management company of an SFC-authorised listed alternative asset fund is expected to carry out extensive investor education before launching the fund in Hong Kong - a requirement from the Overarching Principles Section of the UT Code.
No guidance is offered on satisfying this requirement, but investor education could include:
- media briefings and press interviews to inform investors of the characteristics of the fund in particular and the asset class in general;
- brochures and explanatory notes provided to investors on online banking platforms; and
- analyst briefings to local brokerages/research houses that cover Hong Kong-listed companies and collective investment schemes.
Section 8.11(c) of the UT Code requires that an authorised scheme has "in place measure(s) and mechanism(s) which are fair and equitable to holders to address any prolonged significant discount of its secondary trading price on the SEHK to its net asset value".
Our past conversations on addressing this issue with the SFC have centred around buybacks, a commonly adopted mechanism.
The London market has several other mechanisms that could also be considered for the Hong Kong market:
- redemption/tender offer facilities;
- continuation votes; and
- rolling discount triggers.
All, however, require cash or the ability to generate cash quickly (and not through borrowing) which may not be compatible with the illiquidity of the alternative assets envisaged. Any requirement to hold cash would result in a drag on investment returns and a need to alter the investment policy of an existing listed fund materially, which would likely be unpalatable to its existing shareholders whose approval would be required.
For further information, please contact our partners listed below.
1 Some changes require investor approval, although this is in circumstances one would typically expect, for example in the case of a material change in investment objective, policy or restrictions of the fund.
2 In addition, the Circular provides that:
"For SFC-authorised Listed Alternative Funds established outside Hong Kong, other requirements under the UT Code (for example, the requirement under Chapter 4 of the UT Code regarding trustee/custodian) may be waived if applicants are able to demonstrate to the SFC that there are other comparable measures acceptable to the SFC."
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