• Reinvigorated CIES is central to Hong Kong’s family office agenda, not its PE agenda
• Smaller managers may benefit at the margins, as the Singapore experience suggests
• Immigration-by-investment schemes are at the mercy of government policy shifts

Hong Kong opened a new front in its campaign to woo the world’s wealthy in March, launching a revamped framework offering residency in return for investment. Backing a local private equity or venture capital fund is one of the possible routes to qualification, but it is unlikely to transform anyone’s fundraise: individual exposure is capped at a paltry HKD 10m (USD 1.3m).

Advisors claim to have received enquiries from managers interested in raising money through the Capital Investment Entrant Scheme (CIES). According to Jingjing Jiang, a partner and head of the Hong Kong funds practice at King & Wood Mallesons (KWM), work is already underway on funds that will include contributions from this channel as the GPs in question liaise with immigration consultants.

The hope is that CIES will help stimulate interest in using Hong Kong as a domicile under the still nascent limited partnership fund (LPF) regime. Others are more sceptical about enquiries translating into action.

“Once they get into the details, interest is more muted because of the investment cap. No one has asked about setting up an entirely new fund where the play is to attract CIES money. Rather, they are looking more at the possibility of setting up a feeder fund or parallel fund to facilitate contributions to the main fund. Not made that much of a splash in the PE space,” said Helen Wang, a counsel at Mayer Brown.

Many of her clients fit the target profile – managers headquartered in mainland China or led by people with Chinese backgrounds. However, there is far more interest on the public markets side because the cap doesn’t apply and as much as HKD 27m of the HKD 30m investment required for CIES eligibility can be pumped into mutual funds, real estate investment trusts, and investment-linked assurance schemes.

Asked whether the private equity cap reflects regulatory wariness of illiquid assets, industry participants wryly point to another motivating factor. “The old CIES was scrapped after being heavily criticized for driving up property prices. Now, they’ve reintroduced the scheme because the stock markets haven’t been doing well,” said Alfred Ip, a partner at Hugill & Ip, which focuses on private wealth clients.

Immigration-by-investment schemes are used by many governments to support the creation of jobs, businesses, and infrastructure. The US awards green cards to 10,000 people each year under the EB-5 visa, which has been available since 1990 and requires investment of at least USD 800,000. PE and VC fund commitments do not count; but in other jurisdictions, including several in Asia, they do.

Hong Kong joins a shortlist that features Singapore and Australia, but developments of the past 18 months underline how immigration can serve as a political lightning rod. While Singapore has set the bar higher, raising the qualification threshold for PE and VC fund investment tenfold to SGD 25m (USD 18.5m), Australia has put its scheme on hold amid widespread criticism of its efficacy.

To Peter Chan, a managing partner at Crest Capital Asia, which raised capital via the Singapore scheme for three decades through 2019, stakeholder interference fundamentally undermines the appeal of such arrangements. “These programmes are highly dependent on politics and government policy,” he observed. “You cannot rely on it as a sustainable source of fundraising.”

Strategic positioning

The rebirth of CIES is linked to Hong Kong’s efforts to remain relevant as a wealth management hub in the face of negative perceptions regarding geopolitics, asset security, and the territory’s relationship with Beijing. In part, it wants to counter the rise of Singapore, which had over 1,100 family offices as of end-2022, up from 50 in 2018, according to the Monetary Authority of Singapore (MAS).

Last year, Hong Kong introduced an income tax exemption for family offices and announced measures such as a revamp of CIES, an academy for training wealth management professionals, and streamlined oversight of philanthropic activities. Singapore has offered tax incentives under its own family office regime since 2019, and its Global Investment Programme (GIP) is equivalent to CIES.

The previous incarnation of CIES, which ran from 2003 to 2014, required a minimum investment of HKD 10m and much of that is understood to have ended up in residential real estate.

Under the new regime, applicants must place HKD 3m of their HKD 30m with Hong Kong Investment Corporation, which invests in industries of value to the territory. The rest can be spread across listed equities and debt, subordinated debt, non-residential real estate, collective investment schemes, and LPFs. Investments must be held for seven years, after which applicants qualify for permanent residency.

Private funds were not an investment option under the old regime. Now, private equity managers can use open-ended fund companies (OFCs) – part of the collective investment scheme category – or LPFs. Both are subject to the HKD 10m cap, but Wang of Mayer Brown believes the former is more popular.

“With the extension of the government grant for OFCs [introduced in 2021 to subsidise set up and redomiciling costs], small asset managers that are pinching their pennies would look more favourably at the OFC if they were looking to establish a CIES-compliant fund,” she said.

Darren Bowdern, a partner in the Hong Kong tax practice at KPMG, is of a similar mind. He sees limited scope for LPF take-up – beyond its use as a feeder vehicle in certain situations – because bureaucratic and structural roadblocks are preventing GPs from taking advantage of the fund-level tax exemption that goes some way to making the elevated disclosure requirements worthwhile.

Moreover, he is puzzled by the latitude granted to LPFs and OFCs under CIES, with no restrictions as to the currency, strategy, or location of underlying investments. “Some advisors are saying applicants can set up an OFC, get a rebate that covers up to 70% of their legal fees, and then invest in anything. You can choose any manager. You could even put it on deposit,” Bowdern said.

Ip of Hugill & Ip argued that concerns about exposure to sub-optimal outcomes – and managers – are negated by the flexibility of CIES. Multiple asset classes qualify for the scheme and private equity is capped. At the same time, GPs are regulated by the Hong Kong Securities & Futures Commission (SFC). KWM’s Jiang, meanwhile, points to flexibility as a competitive advantage.

“The old CIES was so limited in terms of investment choice, so many investors lost money. Under the new scheme, there is no screening, no fund manager list. Investors can compare products and go with the manager they trust. It’s more of a market-driven approach,” he said. “The Hong Kong fund could be a feeder for a fund in the Cayman Islands, Luxembourg, or Delaware.”

Changing faces

Overseeing an immigration investment programme involves satisfying the needs of multiple stakeholders, including government, and addressing the notion that returns are not the primary objective of most applicants. Schemes evolve over time, with Singapore serving as a case in point.

Crest Capital’s participation predates the launch of GIP in 2004 by more than 15 years. According to Chan, he was invited to establish an immigration fund by International Enterprise Singapore – to promote the regionalisation of local businesses. The minimum commitment size was set at SGD 1m.

“When we started there were only three funds, we had a clear mission, and AUM [assets under management] were small. More came in when they saw the traffic flow during the golden years, and people began caring about performance more as the commitment level stepped up,” Chan explained.

“There needed to be a lot of education upfront. We had to make sure people understood private equity and the illiquidity. If they overlooked this amid the excitement of trying to get immigration status and then come back and said they didn’t understand this or that, it would have been bad for us.”

Crest Capital stuck with the programme through its formalisation under the Economic Development Board (EDB) and the increase in the minimum investment to SGD 2.5m, which had to be held for five years. The firm raised five funds, the largest being about SGD 400m.

By 2012, there were 16 GIP-eligible managers, according to an EDB document. The likes of UOB Venture Management, Tembusu Partners, and Phillip Capital are still active; the websites of at least six more on the list appear dormant. At least one fund from this vintage – F&H Singhome Fund I, a USD 101m fund raised by F&H Fund Management (now FengHe Fund Management) – ended up being restructured.

The problem wasn’t so much the portfolio as the fund structure, according to one source familiar with the situation. It had a lifespan of five years; in line with the GIP qualification requirement but wholly insufficient for a collection of growth-stage investments. “They didn’t run out of time, it was a stupid timeframe,” the source said. “Five years would only work for a single asset.”

Committed Advisors, which led the deal, declined to comment. A second source added that the fund comprised “USD 1m apiece from 100 different Chinese investors, none of whom was that interested in the return.” He described it as “a very local product” largely limited to “third or fourth-tier managers.”

Two steps forward

Reform came in two phases. First, fund selection criteria were overhauled, which led to the appointment of two managers: Jungle Ventures and Phillip Capital. The emphasis was on working with groups that could enrich the Singapore ecosystem and deliver market returns, explained Chee Hiong Yeo, an associate in Jungle’s investor relations department.

Second, in March 2023, EDB reconfigured qualification requirements. Previously, applicants could commit SGD 2.5m to a local business, a GIP-approved fund, or a family office. Those thresholds rose to SGD 10m, SGD 25m, and SGD 200m (in terms of AUM, of which SGD 50m must be deployed locally). Applicants must also meet specific criteria in terms of skills, experience, company size, and net worth.

Seven GIP-approved fund managers were announced shortly thereafter: B Capital Group, East Ventures, GGV Capital (now Granite Asia), Hillhouse Investment, Insignia Venture Partners, Jungle, and Vertex Venture Management.

GIP applicants haven’t changed much in origin – China still dominates – but the step up in commitment size means there is now a greater focus on investment. “They want to be more involved, they want to know where the money is being deployed and to have a say in that,” said Su-Jin Wong, another associate at Jungle. “Some want direct co-investments as well.”

She added that the applicants are encouraged to make concentrated commitments rather than spread them across multiple managers. And then at least 50% of any GIP money raised – or SGD 50m, whichever is lower – must be invested in Singapore-based companies in government-approved industries.

With commitments made to managers rather than specific funds, there is a lot of flexibility in deployment. GIP capital pools are treated like separately managed accounts that can invest alongside main funds, without being wedded to them. “As long as we meet the local investment requirement, they have left it very open for us to structure,” Wong added. “We can create unique solutions for clients.”

An EDB spokesperson said that alterations to GIP are driven by shifts in the global economy, the evolving investment interest of business owners and founders, and feedback from industry experts and stakeholders. Increasing the commitment threshold is expected to boost the local start-up ecosystem, generating greater positive spin-offs for the Singapore economy and creating more job opportunities.”

This has been accompanied by a tighter focus on compliance. Ling Yi Que, a partner in the family office practice at Dentons Rodyk, observed that areas such as local job opportunities created through the new business investment channel and the personal criteria applicants must meet – which is distilled into four different profiles, from business owner to family office principal – receive a lot more scrutiny.

“For example, with the fast-growth company founder profile, there are valuation methods they don’t approve of but don’t necessarily spell out. We’ve done submissions and they’ve come back and said we can’t accept those numbers, so we must double-check what they want,” she said.

Creature of policy

It mirrors a tightening up of Singapore’s family office regime – raising AUM thresholds, and adding local employment requirements – intended to redress a previous emphasis on quantity over quality. The surge in family office setups has abated, with industry participants claiming to see a lot of rejections.

Australia’s immigration-by-investment journey has been more circuitous, and its future is shrouded by uncertainty. The Significant Investor Visa (SIV) programme started in 2012 and currently necessitates a minimum investment of AUD 5m (USD 3.3m) over five years, with at least 10% going to a local VC fund or fund-of-funds, 30% to small-cap companies, and the rest to a general balancing portfolio.

PE and VC firms are one step removed from the process, with wealth managers raising capital from SIV applicants and then coordinating the asset allocation process. The approach has evolved over time, but Crest Capital’s Chan – who raised a dedicated SIV fund in the early years of the programme – described it as overprescribed.

However, domestic criticism of the scheme has focused on economic outcomes. A 2023 government review of the migration system found that the Business Innovation and Investment Program (BIIP), of which SIV is part, isn’t fit for purpose. BIIP targets migrants who drive innovation, but the economic and fiscal contribution per head is lower than for both other classes of migrants and the average Australian.

Other assessments have been more cutting, from a Grattan Institute report claiming bias towards migrants who are “older, speak little English, and earn lower incomes” to Transparency International Australia telling the BBC in March that the scheme had been abused by corrupt officials and kleptocrats. This followed Australia’s home affairs minister saying she planned to scrap the system.

“The future of the SIV scheme in Australia is uncertain, with the government undertaking a review of its entire visa framework, including SIV,” said Daniel Bowden, a partner at Stafford Capital Partners, which has been part of the scheme – via relationships with wealth management groups – since 2017.

Neither the emotive nature of the debate nor the policy direction is unprecedented. The Australian experience is a timely reminder that immigration-by-investment programmes exist only as long as they serve an economic end and don’t present a political problem.

CIES can expect to ride on a steady tailwind because of its broader strategic relevance to Hong Kong, but its usability is still being established. For example, it is unclear how much of a hurdle will be posed by a requirement that applicants from mainland China must have permanent residency in a third jurisdiction.

Jiang of KWM believes CIES could be a game-changer for smaller managers in a challenging fundraising environment, especially those that exist in and around the family office world, raising single-project funds and using bespoke structures. Yet his bullishness is tempered by a recognition that it will take a couple of years for the scheme to become stable and fully understood.

“Not many people know about CIES, especially in the private equity space,” added Wang of Mayer Brown. “As they become more familiar with it and think of different ways to target this new pool of capital, maybe we will see a bit more traction. So far, it’s very early days.”