FastTrack to Asia Pacific Funds Market – Navigating the Complexity of Entering a New Jurisdiction

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Annie: Hello, everyone, and welcome to today's webinar, "FastTrack to Asia-Pacific Funds Market: Navigating the Complexity of Entering a New Jurisdiction." My name is Annie Triboletti, and I am a member of the CSC webinar team.

Joining us today are Ling Khor and Delphine Jones. Ling is the Head of Fund Services Asia-Pacific and a member of the management team of Intertrust Group, which is a CSC company in Hong Kong. In her role, she oversees the development of business and the delivery of services to alternative investment fund clients in Asia-Pacific. Delphine is a managing director of Client Solutions with CSC Global Financial Markets. She has more than 25 years of investment fund experience, including more than 10 years concentrating on alternative investment. And with that, let's welcome Ling and Delphine.

Delphine: Hello and thanks again for joining us for "FastTrack to the Asia-Pacific Funds Market." During today's webinar, we will cover a bit about CSC, discuss trends in the Asia-Pacific, common fund structures, why choose a third-party service provider, and how CSC can help.

CSC is a 120 year old, privately owned company that provides services in every phase of the investment life cycle, from entity setup and registration to final termination and liquidation. We provide tailored fund administration and solutions to alternative asset managers across multiple fund structures and strategies in more than 140 jurisdictions in the Americas, Europe, Asia-Pacific, and the Middle East.

Ling, inflation has been a hot topic in the U.S. and Europe. The global inflation rate increased to 7.4%, yet the APAC region has so far avoided the worst impact with inflation reported at only 5.6%. Can you start by telling us what is happening in APAC, especially in the private capital market?

Ling: Sure and thanks for the questions. I mean, obviously, we don't have a crystal ball to tell if inflation in APAC will catch up later. However, it will not surprise me that things that happen in the U.S. and Europe will somehow impact Asia as well perhaps just a matter of time. Just by the increase in the interest rate at that rate it has somehow impacted or influenced the monetary policies of many central banks in this region as well.

So I would say globally, including APAC, we are seeing greater uncertainties in debt. In terms of private capital space in APAC, if I were to compare last year to year 2021, the overall deal value, exit value, fundraisings are all declined. On the other hand, dry powder continues to build up and higher returns were actually reported in Asia last year. So I will go a little bit later on each of this by reference to the Asia-Pacific Private Capital Report published by Bain just a few months ago.

Let me start with deal value. So APAC deal value dropped by approximately 44% last year, from USD 354 billion to USD 198 billion 2022. There are lesser deals in number, and the average deal size is smaller as well. I mean, obviously, the depreciations in local currency have played a part and impact the deal size in terms of U.S. dollars. Similar decreasing trends we see on the exit values. Exit values reduced from USD 199 billion to USD 133 billion last year.

A similar trend also noticed for the fundraising trend in Asia, very similar to the global trend where we're seeing a slowing down last year, about USD 100 billion being raised as compared to USD 184 billion raised in '21. I would say that the APAC focused dry powder, which is the undeployed capital commitment, it marks another record high at USD 676 billion last year.

As for overall returns, which are very important for investors, the APAC have equities returns increased to a new height of 15% from 13.9% in 2021.

Delphine: Okay. Fantastic results. So APAC then continues to be a hot spot for investments and, as you mentioned, with a record high level of dry powder. We understand that new fund structures are being introduced by local governments to facilitate the growth. What are the respective local developments? And if we can, let's start with Australia and China.

Ling: Sure. To start with Australia, obviously, CSC we do have an office in Melbourne and Sydney, including funds teams that are already supporting many international managers investing in Australia and New Zealand. So Australia has been making very good progress in the technology and fintech sectors . Of course, real estate continues to be a very important asset class for the Australian market. Australia is now ranked fourth in the JLL Global Real Estate Transparency Index, which covers 94 countries and more than 150 cities globally.

For China, QFLP, which is qualified foreign limited partnership, is one of the options available for foreign investors and GPs to invest in China. So QFLP first launched in 2010, and there's a total of 90 foreign institutions that have received approval for QFLP programs, which amounts to USD 7 billion as of June this year. So we continue to see names of well-established foreign GPs added on to the QFLP list, which is very, very encouraging.

Delphine: Okay. Let's move on to Hong Kong and Singapore. They both play important roles as APAC financial centers. Hong Kong continues to be the largest asset management hub in Asia, and Singapore has shown a strong growth in recent years. Can you share your observations for both jurisdictions?

Ling: Yes, more than happy to. So to start with, I must say it is not uncommon for a GP to operate in both Singapore and Hong Kong to set up funds or investment structures in offshore jurisdictions, such as the Cayman Islands, BVI, Delaware, and etc. Traditionally, there is very limited choice of fund structures available in the APAC region, and offshore structures continue to be a very popular choice as we speak. Having said that, both Hong Kong and Singapore governments have instilled new local structures over the past few years, which I think is a very good thing for investors and GPs with more options available to them.

So in Hong Kong, the local government introduced open-ended fund company, the OFC in 2018. So there are more than 100 OFCs, with more than 200 sub-funds registered with the SFC now. Another Hong Kong structure is called limited partnership funds, the LPF, has also been introduced in 2020. So as of July last year, more than 500 Hong Kong LPFs have been set up. The LPF has attracted quite a bit of attention with local and international managers to set up LPFs for their investments in Asia.

So the Singapore government likewise introduced a new fund structure a few years ago as well, the variable capital company, the VCC. There are over a thousand VCC registered as of Q2 this year. Most VCCs have small to medium asset size. I mean, the VCC itself not only gained attention from the traditional fund professional. In fact, also very well received by the private wealth sector. In terms of split, half of the VCCs are set up for private wealth related investments, and the other half are evenly divided between hedge funds and private equity funds.

Delphine: Ling, you mentioned local structures in APAC earlier. We understand that APAC funds have traditionally used an offshore fund and investment structure. Can you tell us a bit more about the local fund structures in APAC?

Ling: Sure. You have already pointed out that it's very common to use offshore structures for funds raised and/or investments in APAC. So offshore structures again remain important to this part of the world indeed. Having said that, I myself as a very longtime fund professional and I believe the same as many of my peers in the market, we are really happy to see the local initiatives to introduce and to promote local structures.

I will talk through a few available local structures in Australia, China, Hong Kong, and Singapore. Just to be to be clear, this is not a complete list of structures available in APAC. You can talk to our experts if you are you interested to know more about those.

So let me start with Australia. Unit trusts, limited partnership funds, corporate collective investment vehicles, and the CCIV are among the available structures in Australia. The unit trust can be used on both open-ended and closed-ended funds. It is simple to establish and provides great flexibility. Limited partnership funds, these are usually used in the venture capital space. They need to be registered with relevant state regulator. CCIV is managed by a single corporate director. It has similar tax treatments to a trust structure.

Going to China, so we will introduce three available structures in China. The first one is limited liability partnership, the LLP. This is the most common structure for domestic private equity funds in China. Share base of fund structures are far less common in this region.

Qualified domestic limited partnerships, the QDLP, QDLPs allow foreign managers to market their offshore investment products in China, mostly targeting institutional investors and high-net-worth individuals in China. This program is quota-based, which means the managers need to obtain local approvals before they can launch the product in China.

Another one is called QFLP, the qualified foreign limited partnership. This is one of the important channels for foreign investors to invest into China. Very similar to QDLP, one would need to get local government approvals to operate QFLP funds as well.

Next on Hong Kong and Singapore, to start with, both Hong Kong and Singapore are practicing common law, and as such there is a high level of similarity to operate these local structures as compared to other well-established offshore structures.

Hong Kong, there are two new fund structures available in Hong Kong, we talked about this slightly earlier, namely open-ended fund company, the OFC, and limited partnership funds, the LPFs. OFC is an open-ended structure in corporate form, with limited liability and variable share capital. OFC can be a single fund or an umbrella fund with sub-funds, where each sub-fund has segregated liability. The applications for OFC will go through the Hong Kong Security and Futures Commissions, the SFC. SFC is the equivalent of SEC that we have in the U.S.

The LPF is very much similar to other partnership structures in other jurisdictions. It allows the GP and LP to freely contract according to their intentions and investment plans.

Singapore, the Singapore VCC, again we mentioned that before, has attracted a lot of attention since launch. It is meant to cater to all types of investment funds in Singapore. The VCC can be formed as a single standalone fund and/or as an umbrella fund with sub-funds, each holding different assets.

Delphine: Ling, is it common for international managers to outsource fund operations in APAC to third-party service providers?

Ling: The short answer is yes, most managers outsource some if not all of their funds or general operations to a third-party service provider. This slide gives you a few reasons or outlines some reasons why third-party service providers are used in this part of the world.

So number one, relatively less international managers have a full presence in Asia. And as you would imagine, there is a lot of effort and investment needed to set up a new office, a new team. Just to name a few, such as office space, systems, hardware, people, and etc. Also APAC, as a region, covers a number of countries and jurisdictions, which means one needs to manage and master different local requirements, rules, and regulations.

Another reason for outsourcing is people. Just like everywhere else in the world, the post-COVID norm has also impacted the working patterns in APAC. This brings challenges when it comes to recruiting and moving employees to new jurisdictions to a certain extent. Unless and until we have a big enough setup locally, the typical setup is smaller in each location in APAC, which means lesser support and operations infrastructures. With that, it's very common and almost a pattern, if I may say, that managers come into APAC to adopt a full or hybrid outsourcing model.

Delphine: Ling, can you share with us the type of challenges that fund managers and GPs will face when they first operate in APAC?

Ling: There are certainly many challenges that one can expect. Maybe I can answer this by giving a few examples instead. So let me start with like picking examples such as a compulsory staff retirement funds contributions to start with.

Different locations and jurisdictions have their own rules and governance by respective local requirements or regulations. Imagine if you have one staff located in each location, say one in Sydney, one in China, one in Hong Kong, and the other one in Singapore. This means that your HR needs to operate with four sets of rules. So for Australia, you will need to follow the superannuation funds requirement. In China, you need to understand how the pension insurance works. Whereas in Hong Kong, we have Mandatory Provident Funds, the MPF system. And at the same time, you also need to know how the CPF, the Central Provident Fund operates in Singapore. Isn't that a lot just to cover four staff and only on the pension contributions?

So another example that I can give here is around FATCA reporting. So different jurisdictions have different practices or requirements when it comes to FATCA reporting. Taking Singapore and Hong Kong as examples, Singapore adopts Model 1 IGA, while Hong Kong operates under Model 2. With this, one would need to understand how to fulfill your FATCA requirements or obligations in Hong Kong and Singapore, yet you need a different process and workflow to do the reporting in Hong Kong and Singapore.

So for Hong Kong, all FFI, the foreign financial institutions, which for FATCA reporting, they're required to report directly to the IRS, which is different from the Singapore FATCA reporting.

As much as we want to align our operations process, it's somehow difficult to streamline and standardize the workflow when we operate in multiple jurisdictions. I hope I answered your questions here.

Delphine: Yes, you did. Thank you so much. Well, with all these challenges, how can CSC support managers new to APAC?

Ling: Certainly we can support. With our combined organizations, CSC has a number of APAC offices, including China, Hong Kong, Japan, India, Singapore, Australia, and New Zealand. From a governance perspective, CSC has a strong control and governance framework at both global and local levels. As an example, our funds business in Hong Kong and Singapore is certified under SOC 1 and 2 reporting and undergo regular audits and testing by the Big Four firms.

As for people, of the 7,500 staff we have globally, about one-third are based in Asia, sitting across different business units. Taking China as an example, we have more than 20 years experience operating in mainland China and more than 40 years in Hong Kong. The in-depth knowledge and local experience is very key for us to be able to support new GPs in this very dynamic and active market.

In terms of product offerings, apart from fund solutions business, which we talked about this whole session, we also have strong corporate and legal service presence in this region. Capital market is another offering we have in APAC as well.

So in terms of governance, people, market knowledge, we are also well positioned to reach any communications between international managers and investors when they operate in APAC.

Delphine: Ling, you've shared with us some overviews of how CSC can help. Can you give us a little bit more information on what CSC can do in the different areas?

Ling: From our service offering perspective, CSC provides end-to-end service to fund managers from the GP structures, be it onshore or offshore, to SPV level. This slide summarizes the types of service that we can offer.

For GP structures, we can help to set up and maintain the structures. We can also cover the accounting and reporting work based on the local required accounting standards. Other than that, we can also support corporate secretarial, tax reporting, directorship, payroll, cash management, and board meeting support and other services as needed.

In terms of funds and underlying structures, which is the second half of this slide, we can act as fund administrator to the funds, covering service for investors, fund itself, SPV, and a portfolio company.

Our fund admin service can be broadly grouped into four categories if I may. Number one type of service that we have is around accounting and NAV calculations. We help to maintain the accounting books and records on behalf of the fund and its underlying SPV. We are capable of preparing reports in IFRS, U.S. GAAP, or any local GAAP, including the PRC GAAP for China. You will be supported by qualified accountants with in-depth fund knowledge to cover complex calculations, including equalization calculations, waterfall, and many others.

As part of our service, we will also cover matters relating to fund investors. We assist to maintain the registers of investors and manage the investors due diligence checking based on the AML requirements of the applicable jurisdictions. Investment reporting is another key area that we cover as fund administrator.

The third area that we can support is around FATCA and CRS reporting. We can act as the point of contact for the structures and assist with the reporting filing to the tax authority on annual basis.

Apart from accounting, investor services, FATCA and CRS reporting that I just mentioned, we also support the treasury operations and other administrative work on an ongoing basis.

In the previous slides, we talked about the end-to-end service offering for funds in APAC. The fund solutions offering is managed by the Funds Solutions team, which you will now see in the middle section of this slide. Yet this is not all we can offer from CSC in APAC.

I will take this opportunity to also introduce the other two service units that we have in APAC. To start with, the Corporate and Legal Services, the CLS business unit, the CLS units manage and provide services, including company formations and incorporations, domiciliation and entity management, entity administrative services, payroll services, accounting and reporting, tax compliance services, corporate secretarial, treasury management, escrow, global subsidiary management, and private wealth clients services as well.

Another product offering we have in APAC is Capital Market, the Global Capital Markets business line, which is the GCM. So the GCM teams provide service for orphan SPV structures, trustee services, loan administration, escrow services, process agent, and facility agent.

Delphine: Ling, thanks again for giving us such valuable information about the APAC marketplace. When it comes to solutioning within CSC, the corporation provides services again throughout 140+ jurisdictions in the areas of business administration and compliance, transactions and lending, capital markets, fund solutions, domain security and brand protection. The various services that are offered by CSC can be easily accessed by going to our website. If you would like more information, please reach out to us at any time and we will be sure to connect with you to answer any questions that you might have.

If you would like more information specific to the APAC market, please reach out to Ling directly. Her website and address is currently on the screen.