Listed on SEHK: Alternative Exit Avenue for Alternative Funds
Background
On 17 February 2025, the Hong Kong Securities and Futures Commission ("SFC") issued a circular on listed closed-ended alternative asset funds ("Circular"), clarifying the SFC's requirements for authorising closed-ended alternative funds ("Alternative Funds") which seek listing on the Stock Exchange of Hong Kong ("SEHK")("Listed Alternative Funds"), as well as the requirements applicable to the distribution of these funds by intermediaries.
The regulatory framework for authorising closed-ended funds in Hong Kong has traditionally been complex, with only one SFC-authorised Alternative Funds, HSBC China Dragon Fund, launched since 2007. This Circular signifies a shift, providing clearer guidelines to encourage private funds to list on the SEHK, aligning with the Hong Kong Government’s 2024 Policy Address aimed at broadening private equity distribution and attracting global capital.
These Alternative Funds investing mainly in private and illiquid assets, such as private equity funds, private credit funds, private infrastructure funds and private fund-of-funds, may not meet the liquidity and other investment requirements for SFC-regulated retail funds. This Circular introduces an alternative exit route through secondary market transactions for both private fund managers and investors, moving beyond the traditional exit routes such as relying on the portfolio companies' IPOs. This initiative underscores the Hong Kong Government's efforts to enhance Hong Kong as an international asset and wealth management centre.
SFC's Requirements for Authorising Listed Alternative Funds
In order to be a Listed Alternative Fund, both the eligible Alternative Fund and its offering documents must be authorized by the SFC and listed on the SEHK. The table below sets out some of the key requirements for obtaining the SFC's authorisation under the Circular.
Distribution of SFC Authorised Listed Alternative Funds by Intermediaries
SFC-authorised Listed Alternative Funds are considered to be a complex product. Intermediaries must assess whether clients (excluding institutional and qualified corporate professional investors) have knowledge of investing in these Alternative Funds or relevant alternative assets before executing a transaction on their behalf. If the investor does not possess such knowledge, the intermediary may proceed only if it has provided adequate training to the investor on the nature and risk of the relevant alternative assets.
In addition, intermediaries should provide clients with risk disclosure statements specific to the relevant alternative assets and SFC-authorised Listed Alternative Funds, and also ensure that their clients have sufficient net worth to assume the risks and bear the potential losses of trading SFC-authorised Listed Alternative Funds.
Looking Forward
The listing of Alternative Funds represents a shift in the landscape of private investments, as it introduces an alternative exit avenue that diversifies the strategies available to private fund managers and investors. Traditionally, private equity and venture capital (PE/VC) firms in the Asia market have primarily relied on the portfolio companies' IPOs as their main exit route. However, given the current market conditions and tightening global political environment, the traditional exit channels are increasingly challenged. The SFC-authorised Listed Alternative Funds undoubtedly create additional exit pathways for the PE/VC industry through secondary market transactions, which can be particularly beneficial for the primary market investments. Looking ahead, this initiative not only bolsters investor choice but also fosters market innovation, providing a robust investment framework for fund managers and investors alike.
How Howse Williams Funds Team Can Help
The funds partner of Howse Williams funds' team has assisted in the ongoing SFC compliance of Hong Kong’s first closed-ended listed fund, HSBC China Dragon Fund, and has extensive experience in both closed-ended funds and retail authorised funds. Howse Williams' funds team is well-versed in navigating the complexities of alternative funds, ensuring regulatory compliance while unlocking opportunities for our clients. Please feel free to connect with us if you would like to discuss how we can help you with your company's fund offering strategy.
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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice. Please contact [email protected] if you have any questions about the article.