Langham Hall Summer 2010: Langham Hall builds Asian private equity consulting capabilities

Welcome to our Summer 2010 newsletter

There is little doubt in most people's minds that 2010 has been a better year for Private Equity and Real Estate funds than 2009. Chinese sponsored funds and intra-Asian fund raising have provided a welcome boost to Asian market whilst raising from European and US investors is improving but remains a challenge for many fund managers. Looking forward to the rest of this year and next it seems clear that Asian based sources of capital will be a growing focus for the industry.

In this newsletter we bring you an update on Langham Hall's developing business in Asia, where as well as having been appointed fund adminsitator to a number of new private equity funds sponsored by PRC financial institutions, we have been developing our private equity consulting capabilities. David Egglishaw, a partner at Summit Management in the Cayman Islands, explains some of the benefits, both from a tax and governance point of view, of Cayman resident Directors for the management of private equity and real estate funds.

 

Langham Hall builds Asian private equity consulting capabilities

Langham Hall's specialist expertise in private equity fund structures and real estate is being put to good use in Asia where our Hong Kong office has been supporting limited partners and fund managers with consultancy advice on such matters as equalization fee disputes, judgmental KYC cases, distribution calculations, and the operation of bespoke structured funds. Clients have ranged from the Asian Development Bank, through to mainland Chinese fund managers, and fund managers in Hong Kong and Singapore.

The combination of the consulting experience of our senior management team, our specialist expertise in private equity, and the flexibility to tackle new problems at very short turnaround has been attractive to managers and investors who need quick answers in uncertain markets.



The benefits of Cayman resident directors in establishing offshore substance for funds

Earlier this year the Hong Kong Inland Revenue Department (IRD) provided clarification to the tax exemption rules for non-resident or offshore funds when it indicated that residency for Hong Kong tax purposes for companies, trusts and partnerships would be determined by the “central management and control” test.  According to the IRD, the location of central management and control is wholly a question of fact and that in general, if the central management and control of a company is exercised by the directors in board meetings, the relevant locality is where those meetings are held.  This means that offshore funds, including private equity funds, established as companies, trusts or partnerships whose central management and control is exercised in Hong Kong may be considered to be resident for tax purposes in Hong Kong.

The IRD further stated that the exercise of central management and control does not necessarily require any active involvement and that the place where management and control is exercised is not necessarily the place where the main operations of the business are to be found. This means that asset portfolios of private equity funds managed by Hong Kong resident fund managers may be exempt from Hong Kong tax, provided that the central management and control of the private equity fund is exercised outside of Hong Kong.

 

Appointing experienced Directors based in the Cayman Islands, holding board meetings outside of Hong Kong and demonstrating that the highest level of oversight is exercised by the board of directors in and from the Cayman Islands  can be helpful in establishing the offshore tax presence.

 

The appointment of experienced independent Directors may also improve the overall corporate governance of the fund which in turn can boost investors’ confidence and willingness to invest further capital in private equity funds.

 

Independent Directors act as agents and as a "watchdog" for investors over fund managers and other service providers to private equity funds. They bring impartiality and experience to a fund's board and its oversight of the fund's affairs and activities. Additional benefits to investors include:

 

  1. Confidence there is additional monitoring of the private equity fund, arguably this is considered more important in closed ended funds or funds with illiquid assets and where there is no or little right of redemption available to investors;
  2. Improvement in corporate credibility and governance standards;
  3. Maintaining balance in a manager dominated scenario;
  4. Playing a vital role in risk management by ensuring legal and ethical behavior at the General Partner Company and Limited Partnership fund.

With the recent increase of fund scandals and frauds, investors are taking an increasing interest in the composition of the board of directors of all funds. For example, the Universities Superannuation Scheme (a UK based pension fund) will not permit its managers to invest in funds that do not have experienced independent directors.

The information in this article is for general information purposes only and does not purport to be comprehensive or to provide tax, legal or other advice. For tax or legal advice you should always consult with an appropriately qualified advisor.