Private Equity and Venture Capital Fund Formation in Hong Kong

Hong Kong has established itself as a significant centre for private equity (PE) and venture capital (VC) fund formation in Asia, alongside Singapore and the Cayman Islands. Its combination of sophisticated legal infrastructure, deep capital markets, proximity to Mainland Chinese deal flow, and tax-efficient fund structures makes it a compelling jurisdiction for managers raising institutional capital for closed-ended investment strategies. The introduction of the Limited Partnership Fund (LPF) regime in 2020 has added a locally domiciled option that is increasingly competitive with the Cayman Islands structure for Asia-focused funds.

This guide explains the principal structural options for a PE or VC fund formation in Hong Kong, the regulatory and legal requirements, and the key terms that managers and investors negotiate in the fund documentation.

Fund Structure Options

Cayman Islands Exempted Limited Partnership (ELP)

The Cayman Islands exempted limited partnership remains the most widely used fund structure globally for PE and VC funds, including those managed from Hong Kong. The Cayman ELP is a partnership formed under the Cayman Islands Exempted Limited Partnership Law, with a general partner (GP) and one or more limited partners (LPs). The GP is typically a Cayman Islands exempted company wholly owned by the fund manager, and manages the fund with unlimited liability (subject to the indemnity provisions of the LPA). The LPs contribute capital and have limited liability.

The Cayman ELP is well understood by institutional investors globally, is familiar to prime brokers and custodians, and benefits from Cayman's robust legal framework and extensive treaty and recognition network. For funds targeting US, European, and Asian institutional investors simultaneously, the Cayman structure typically offers the widest investor acceptance.

Hong Kong Limited Partnership Fund (LPF)

The Hong Kong Limited Partnership Fund (LPF) was introduced on 31 August 2020 under the Limited Partnership Fund Ordinance (LPFO) (Cap. 637). An LPF is a limited partnership registered in Hong Kong, with a GP (which must be a person registered under the LPFO as the registered GP) and one or more LPs. LPFs benefit from: a profits tax exemption for qualifying transactions (through the Unified Funds Tax Exemption, extended to LPFs in 2021); stamp duty exemption on transfers of interests in qualifying LPFs; an optional open registration (allowing the fund to hold Hong Kong property directly through the LPF structure); and a streamlined incorporation and re-domiciliation regime (allowing Cayman funds to re-domicile to Hong Kong).

The LPF has attracted increasing interest, particularly from family office and regional Asian managers who want a locally domiciled vehicle, and from managers seeking the reputational and operational benefits of a Hong Kong-regulated structure. However, the LPF is less familiar to some categories of international institutional investors, and managers should assess whether their target investor base is comfortable with the LPF structure before choosing it over the Cayman ELP.

Hybrid Structures

It is increasingly common for PE and VC managers to use a hybrid structure: a Cayman master fund (which is the primary vehicle for international investors) alongside a Hong Kong OFC or LPF feeder fund (for investors who prefer a locally registered vehicle, or for the manager's own co-investment). Hybrid structures add complexity but may be appropriate for managers with a diverse investor base.

The Management Company and GP

The fund manager typically establishes two Hong Kong entities: (1) a general partner (GP) entity, which is the partner in the fund structure and receives the carried interest; and (2) a management company (ManCo), which is appointed as investment manager under an investment management agreement with the GP and is the SFC-licensed entity responsible for managing the fund's investment portfolio.

For a Cayman fund, the GP is typically a Cayman exempted company; the Hong Kong ManCo is appointed under an investment management agreement. For an LPF, the GP must be registered in Hong Kong (either as a Hong Kong company or as a registered overseas company), and it appoints the ManCo as investment manager.

The ManCo must hold an SFC Type 9 (asset management) licence. The same Type 9 licensing requirements discussed in our guide on hedge fund setup apply here — at least two qualified responsible officers, minimum capital, a compliance manual, and AML/CFT procedures. For VC funds investing exclusively in private company equity (not in listed securities or futures), the SFC provides a registration pathway for "Registered Fund Management Companies" (RFMCs) that is less onerous than full licensing, but RFMCs are subject to restrictions on the type of capital they can manage and the amount of AUM they can handle.

The Limited Partnership Agreement (LPA)

The limited partnership agreement (LPA) is the constitutional document of the fund. It governs the relationship between the GP and LPs, sets out the investment mandate and restrictions, and specifies the economic terms. Key provisions include:

Investment Period and Fund Life

PE and VC funds are closed-ended vehicles with a defined investment period (typically 3 to 5 years, during which new investments can be made) and a fund life (typically 10 years, with options for 1 to 2 year extensions). After the investment period, no new investments are made and the fund begins realising its portfolio through sales, IPOs, and distributions. The GP has broad discretion to manage the portfolio during the wind-down period.

Capital Commitments and Drawdowns

Investors in a PE/VC fund commit to invest a specified amount of capital over the fund's life. Capital is not paid at closing — instead, the GP issues capital call notices (also called drawdown notices) requiring LPs to pay their committed capital as and when needed to fund investments, fees, and expenses. LPs typically have a short window (5 to 10 business days) to fund each capital call. Failure to fund a capital call on time makes the LP a "defaulting LP" and triggers default consequences (including interest on the defaulted amount and, in some cases, dilution of the defaulting LP's interest).

Management Fee

The GP or ManCo receives an annual management fee, typically calculated as a percentage of aggregate commitments during the investment period (commonly 2%) and then as a percentage of invested cost or NAV thereafter (typically 1.5% to 1.75%). The management fee covers the running costs of the management company and is payable quarterly in advance or arrears. LPs increasingly negotiate management fee reductions for larger commitments.

Carried Interest

Carried interest (or "carry") is the GP's share of the fund's investment profits. The standard carried interest is 20% of profits above the return of capital and the preferred return (hurdle rate). The most common structure is the European (or "whole fund") waterfall: distributions are first applied to return 100% of contributed capital to LPs, then to pay the preferred return on contributed capital (typically 8% per annum, compounded), then to pay a GP catch-up (in which the GP receives 100% of further distributions until it has received 20% of the total profits distributed), and then to split further profits 80% to LPs and 20% to GP. This whole-fund model means the GP does not receive carried interest on a deal-by-deal basis but only after the fund as a whole has cleared its hurdle.

Clawback

The clawback provision requires the GP to return carried interest received if, at the end of the fund's life, the GP has received more than its entitled share of profits (for example, because early successes were followed by later losses). The clawback ensures that the GP bears the economic risk of carry received before the whole-fund waterfall is fully cleared. Clawback obligations typically survive for a period after the end of the fund (typically 2 to 3 years) and may be secured by an escrow arrangement (where a portion of carry is held in escrow pending final settlement).

LP Advisory Committee (LPAC)

Most institutional-grade PE funds have an LP Advisory Committee, typically composed of representatives of the fund's largest LPs. The LPAC does not have management authority over the fund's investment decisions (which remain with the GP), but is consulted on or must approve certain matters, including: related-party transactions involving the GP or its affiliates; potential conflicts of interest; extensions of the fund life or investment period; key-man succession; and waiver of certain fund restrictions. The LPAC serves as a governance check on the GP without creating the formal partnership authority issues that would arise from LPs taking a more active role.

Key-Man Provision

A key-man provision suspends (or terminates) the GP's authority to make new investments if one or more specified key principals of the GP ceases to be involved in the management of the fund. The key-man trigger protects LPs by ensuring that the specific individuals who motivated their investment decision remain active in running the fund. The remedy upon a key-man trigger is typically automatic suspension of the investment period pending LP vote on whether to continue, resume, or terminate the fund.

No-Fault Removal

LPs typically have the right to remove the GP (and terminate the investment management agreement with the ManCo) without cause, by a specified supermajority vote (usually 75% to 80% in interest). No-fault removal provides LPs with a nuclear option in cases of severe disagreement with the GP's strategy or conduct, even where the GP has not committed any breach of the LPA.

Investor Eligibility and Fund Closing

PE and VC funds in Hong Kong are distributed exclusively to professional investors under the private placement regime — no SFC authorisation of the fund itself is required. Most funds have a first close (at which the initial capital commitments are funded and the fund begins investing), followed by one or more subsequent closes within a specified closing period (typically 12 to 18 months after first close). LPs who join in later closes pay a catch-up interest amount (to equalise their cost of capital with earlier LPs) and may be subject to dilution of their pro rata interest relative to first close investors.

Tax Considerations for the LPF

For an LPF, the Unified Funds Tax Exemption (as extended to LPFs in 2021) provides an exemption from profits tax for qualifying transactions made on behalf of qualifying LPF investors. Qualifying transactions broadly cover securities, derivatives, foreign exchange, and private company shares. The exemption applies to the GP's income from the fund (including carried interest on qualifying transactions) and to the management company's fee income attributable to qualifying activities — significantly reducing the effective tax rate on fund-related profits compared with a Cayman fund managed from Hong Kong without the exemption.

How Alan Wong LLP Can Help

Alan Wong LLP advises PE and VC fund managers on all aspects of fund formation and documentation in Hong Kong, including: advising on fund structure (Cayman ELP vs LPF vs hybrid); drafting and negotiating limited partnership agreements and side letters; advising on SFC licensing for the management company; advising on tax structuring for the fund and carried interest; drafting investor subscription documents and transfer procedures; and advising on LPAC governance and LP relationship management. We work with both first-time fund managers launching their debut fund and established managers adding new strategies or vehicles to their existing platform.