Hong Kong Securities Regulatory Commission strengthens guidelines for authorized funds to invest in private equity assets

The Zhitong Finance App learned that on September 3, the Hong Kong Securities Regulatory Commission issued a circular to provide guidance on private equity credit and private equity investments (collectively referred to as private market assets) of funds approved by the Securities Regulatory Commission, with the aim of improving the transparency of related investments and the risks involved. Funds approved by the SFC for sale to the public in Hong Kong are subject to applicable investment restrictions under the Unit Trusts and Mutual Funds Code. For example, a fund's investment in securities and other financial products or instruments that are not listed, listed or traded on the market cannot exceed 15% of the fund's total net asset value. Funds can participate in investing in private market assets by directly investing in banks or non-banks by providing loans to unlisted companies or holding direct loans in the form of equity; they can also participate indirectly in private equity market assets by investing in business development companies, debt-backed securities, or financial derivatives.

Recent market developments have prompted regulators to pay closer attention to private equity market assets. The Hong Kong Securities Regulatory Commission has observed that some funds may indirectly participate in investing in private equity assets through various types of investments, thereby allocating assets and increasing returns. The Hong Kong Securities Regulatory Commission also notes that some of these indirect investments involve multi-layered structures and complex financial instruments, or lack transparency, so Hong Kong retail investors may have limited understanding of private equity market assets and the risks involved.

In view of this, the Hong Kong Securities Regulatory Commission strengthened disclosure requirements for such funds in a circular, requiring fund managers to provide clear, complete and balanced explanations on the characteristics, nature and risks involved in the fund's investment in private equity market assets. Furthermore, the Hong Kong Securities Regulatory Commission may strengthen its scrutiny of such funds where appropriate and classify them as complex products subject to stricter distribution requirements when offered in Hong Kong. For existing funds approved by the Securities Regulatory Commission that may invest in private market assets, the Hong Kong Securities Regulatory Commission also expects fund managers to review their funds and update the fund's sales documents as soon as practicable.

Ms Ng Ka-lai, Executive Director of the Investment Products Division of the Hong Kong Securities Regulatory Commission, said, “As the market evolves rapidly, fund managers must provide investors with clear and meaningful information on their funds approved by the Securities Regulatory Commission to help them make informed investment decisions. The strengthened guidelines have strengthened Hong Kong's regulatory framework for retail funds involving private market asset investments by improving the transparency of relevant investments and introducing appropriate investor protection measures.”