Navigating funds in the Asia-Pacific region

5 June 2024
Private equity funds domiciled in Asia-Pacific countries present challenges for fund managers that are often different from those in other regions.

To understand these challenges, we spoke with three Asia-Pacific (APAC)-based private equity professionals. Our discussion covered regulatory complexities, cultural and geopolitical factors, and other areas fund managers should consider before domiciling funds in the APAC.

Based in Singapore, Otto Von Domingo leads commercial activities in Asia for Vistra across its fund solutions business, focusing on private equity and real estate.

David Harris, a commercial director at Vistra based in Australia, has over 20 years of experience working with private debt and private equity funds.

Hoan Nguyen, Vistra’s director of private equity and real estate, is also based in Singapore. Hoan has nearly two decades of experience as an industry specialist advising managers, investors, and other participants in the asset and wealth management space.

What factors should fund managers keep in mind about regulatory compliance in the APAC region? 

Otto: Regulations in the APAC region differ from one jurisdiction to another. These regulations are not only complex but subject to frequent changes. Fund managers must have a deep understanding of the regulatory landscape in each country where they operate or rely on third-party experts who can guide them.

Engaging local experts who are well-versed in the specific regulations and compliance requirements of each jurisdiction can help ensure managers stay compliant and avoid potential legal pitfalls. 

Also, keeping updated on regulatory changes and being proactive in adapting to these changes is essential for smooth and compliant operations across the diverse APAC markets.

Hoan: Those are excellent points about complexity and diversity. It’s important to remember that Southeast Asia comprises 11 countries, over 1,000 languages, various minority groups, and spans roughly 4,000 miles. The region is highly fragmented due to wide differences in economic development and regulatory and legal landscapes, not to mention cultural differences.

Managers typically focus on jurisdictions that directly impact their investors, usually where the manager and their “regulated activities” are based. Among its peers in Southeast Asia, investors can consider Singapore as the most developed, accessible and familiar jurisdiction.

However, emerging markets like Indonesia, Malaysia and Vietnam, are increasingly important for the asset management industry and are rapidly developing their regulatory frameworks. Managers should focus on their primary regulatory environment while staying updated on their inbound investment markets to ensure compliance with foreign investment restrictions. They also, of course, need to keep abreast of their portfolio companies’ governance frameworks and practices and tax planning considerations upon market entry and exit.

What are some important fund administration considerations in Asia that routinely surprise fund managers from other regions?

Otto: As we’ve mentioned, Asia is incredibly diverse, so a single fund management approach does not fit all. For example, when setting up a fund, there are numerous options available (for both onshore and offshore) that cater to different investor types and preferences, tax situations, and other factors.

And this is just the beginning. Fund managers must also consider anti-money laundering [AML] and know your customer [KYC] regulations of a fund’s domicile, as each jurisdiction has its own unique requirements.

Accounting, statutory reporting, and audit considerations — particularly with different local and international GAAP [generally accepted accounting principles] requirements — can be technically challenging. This is especially true in markets that are less transparent and have poor reporting standards. We’ve seen this in Pan Asian funds where they make cross-border investments using local SPVs [special-purpose vehicles].

Transferring funds can be extremely difficult, especially now with the presence of capital controls and currency regulations in most Asian countries. There is increased scrutiny and monitoring of money flows in both directions, as some countries are taking a more protectionist stance and view fund transfers as a potential national security risk.

Local tax compliance can be challenging as well, especially with frequent changes in regulations. It’s crucial to have a third-party expert to help navigate these complexities.

One significant trend we are noticing is the choice of jurisdiction for operating a fund management business. For example, obtaining a licence in Singapore now takes over six months, compared to two to three months just a year or so ago. This is due to the increased demand to set up operations in Singapore to take advantage of various tax incentives, as well as increased scrutiny and tighter regulations.

Hoan: In Southeast Asia, managers often face unexpected challenges when navigating the complexity of dealing with over 10 markets within Southeast Asia. Each market boasts its own distinct set of laws, regulations and cost drivers. This complexity translates into significant investments in time and costs, particularly in terms of professional fees, to ensure compliance for inbound private investments via onshore SPVs as well as offshore fund structures. 

Another surprising aspect for fund managers, especially those raising funds within Southeast Asia, is the cultural diversity and levels of sophistication among investors across the various countries. To effectively address this, fund managers must ensure that their investor services teams and service providers are not only technically qualified but also sensitive to these differences in investors.

Lastly, managing tax risks in over 10 jurisdictions for the fund’s domicile is highly complex and should be addressed early with the help of qualified advisers.

How significant is it for fund managers to interact with local experts and have a grasp of cultural nuances in Asian markets?

Otto: Interacting with local experts and understanding cultural nuances in Asian markets is incredibly significant for fund managers. Collaborating with trusted advisors who know the local scene helps fund managers navigate complexities effectively, making fund operations smoother. Effective collaboration reduces uncertainty by providing insights into market dynamics, regulatory intricacies, and investor behaviours specific to each Asian market.

Plus, having a good grasp of cultural nuances improves communication and builds better relationships with stakeholders, boosting trust and credibility. Ultimately, this approach ensures compliance with local laws and regulations, reduces risks and improves the overall success and sustainability of the fund in Asian markets. 

Hoan: Managers should approach this from the perspective of the fund’s own domicile and that of the inbound investment jurisdiction. 

From a fund domicile perspective, Singapore remains the go-to jurisdiction within Southeast Asia, particularly where foreign investors are involved. As a multi-ethnic, cosmopolitan society with a strong base in English common law, cultural nuances may pose a challenge to some managers. However, when compared to other countries within the region, Singapore’s nuances are manageable. 

Managers may encounter more challenges when dealing with less developed inbound investment jurisdictions where legal frameworks are less developed and cultural nuances and social connections are more important.

How important is it for private market fund managers in Australia to engage local experts and understand operational nuances when investing in local real estate?

David: The role of private market fund managers in Australia and their interaction with local experts and understanding of the operational nuances of the Australian private capital markets, particularly in real estate, cannot be overstated.

Australia’s real estate market is unique and influenced by its regulatory environment, economic conditions, and cultural factors. Local experts offer invaluable insights into these. This local knowledge is essential for making informed investment decisions and for navigating the complexities of the market efficiently.

Real estate investments are highly localised across all real asset strategies (commercial, infrastructure, natural resources, debt, etc.). The performance of such investments and investment strategies can vary significantly from one region to another within Australia. Local experts have on-the-ground experience and knowledge of specific areas, which helps in identifying high-yield investments and avoiding potential pitfalls. Their expertise can lead to better site selection, more accurate property valuations, favourable credit terms, and more effective risk management strategies.

Understanding the operational nuances of the Australian market is essential for compliance and legal considerations. Australia has its own set of property laws, tax implications, and regulatory requirements that differ from other countries. A nuanced grasp of these aspects ensures that fund managers can adhere to local regulations, optimise tax benefits, and avoid legal complications that could arise from non-compliance.

Investing in Australian real estate often involves the use of a managed investment trust [MIT] structure. This structure offers substantial tax advantages, particularly for foreign investors, by allowing for concessional withholding tax rates on distributions, which can enhance the overall return on investment. Moreover, MITs are subject to a stable and transparent regulatory regime, providing greater certainty and security for investors. Understanding the intricacies of establishing and maintaining an MIT requires specialised knowledge that local experts can provide, ensuring that fund managers can leverage this structure effectively.

Building strong relationships with local stakeholders, such as fund administrators familiar with the asset class, corporate trustee service providers, real estate agents, developers and financial institutions, can provide fund managers with a competitive edge. These relationships often lead to early access to off-market deals, better negotiation positions, and more favourable financing options. On-the-ground experts can facilitate these connections, leveraging networks to benefit the fund managers.

Using a fund administrator familiar with administering MIT structures can also offer significant tax benefits, making it an essential consideration for maximising investment returns.

In what ways do geopolitical factors affect investment opportunities across Asian markets? 

Hoan: I see two major themes emerging. First, there is a notable drop in foreign investments in mainland China, and China has increasingly strained relationships with the US and other Western democracies. This will likely lead to increased investment opportunities in Southeast Asia and give Southeast Asian countries greater access to foreign capital and with it, greater bargaining power when dealing with foreign investors. Previously, Southeast Asian countries were competing for foreign investment with the massive single market of China.

The second theme is demographics. Compared to ageing markets like China, Japan, Korea and Australia, younger Southeast Asia markets, such as Indonesia and Vietnam, require substantial investment in human capital-enabling assets like infrastructure for urbanisation, internet access and data, education and healthcare. However, because these often involve real assets in “sensitive industries,” fund managers should expect some impact from the growing confidence and bargaining power of regional governments. This may result in managers navigating stricter regulations and governmental oversight.

Otto: I agree with Hoan. The ongoing power struggle between the US and China is significantly impacting global investors with exposure to China. This situation is leading to a major shift in investment strategy, portfolio construction and allocation. 

It is also affecting existing portfolios in terms of valuation, exit strategies, refinancing, and FX [foreign exchange] exposure. This impact is particularly noticeable for several China USD funds. However, it is also creating new opportunities in other markets, such as Japan and India.

Which emerging trends in Asia’s financial landscape should fund managers closely monitor? 

Otto: Using artificial intelligence and data is becoming increasingly important in the investment process. There is a growing number of high-net-worth individuals [HNIs] investing in private markets. Real assets and private credit are also experiencing growth because of their ability to buffer inflationary pressure by generating steady cash flow. 

Impact and sustainable investments are on the rise as there is a big push to comply with ESG standards. There’s also a rise in tokenization to create additional value.

Do you have any other tips for first-time fund managers navigating Asian funds?

Hoan: Think of Southeast Asia as your home rather than your hotel. Given the demographic trends in Southeast Asia versus China and other developed Asian markets, as well as the gradual decline in favourability of China for foreign investors, Southeast Asia remains a massive untapped market. However, given the fragmented and diverse nature of the markets, managers need to make significant investments in human capital, knowledge, and social connections within the region. Managers should also aim for the long game. Using China’s last 20 years of breakneck growth as a benchmark for the region is not realistic.

Singapore will remain the key funds jurisdiction for the foreseeable future. However, managers should monitor developing economies that are moving to modernise their financial markets, such as Indonesia, Malaysia, and increasingly, Vietnam.

Otto: Consider creating a niche product, such as investing in ocean waste, to appeal to a specific group of investors with varying risk profiles, including development finance institutions [DFIs], foundations, corporates and family offices.

Another approach is to establish segregated mandates with a select group of strategic investors and make targeted niche investments. This enables the manager to develop a solid track record and build strong relationships with limited partners.

Is there anything else we haven’t addressed that investors and businesses should be aware of?

Otto: There is a significant consolidation trend in the private markets. BlackRock’s acquisition of Global Infrastructure Partners earlier this year is a prime example of large asset managers creating fund platforms that offer various products across different asset classes and strategies, similar to a fund supermarket. 

This approach fosters investor loyalty and reduces operational costs and risks, making it challenging for small and mid-sized funds to compete.