KPMG has just released a new report entitled “Asset Management and Private Equity Outlook,” which looks at the prospects for the asset management and private equity sector, from broad issues such as regulatory developments to key topics such as capital markets, virtual assets and family offices.

Recent growth in the institutional investor segment in the Chinese mainland is providing an opportunity for global asset managers that have experience in this area, according to KPMG.

Despite concerns over China’s slowing economy, KPMG thinks that the Chinese mainland remains a huge economy with evolving investment opportunities.

“The domestic asset management market in China continues to mature, mostly driven by the retail sector. Recent growth in the institutional investor segment in the Chinese mainland is also providing an opportunity for global asset managers that have experience in this area,” Andrew Weir, global chair, asset management, KPMG International said. “Amid the uncertain global environment, a wait-and-see approach has sometimes been adopted, but now firms should also consider the upside opportunity compared to the downside risk of waiting.” 

The environment for an initial public offering in Hong Kong and other markets has a significant impact on the performance of the asset management sector, particularly private equity, the firm continued. 2023 was a quiet year for IPOs in terms of number and funds raised across all major stock markets globally.

KPMG's comments come at what has been a difficult time in Hong Kong and the mainland. Stringent measures to curb the pandemic, Beijing's clampdown on certain sectors and trade disputes with the West have taken the shine off the economic story. Some investment managers expect difficult times ahead from China, the world's second argest economy. After a a tough 2023, conditions in China aren't likely to get better very soon. That's the take from firms such as Close Brothers Asset Management,, BNY Mellon Investment Management, Aegon Asset Management and JP Morgan. See more commentary here. 

Hong Kong and China have taken steps to encourage capital inflows. For example, there have also been a range of incentives specifically aimed at encouraging family offices and high net worth individuals, including a family office tax incentive policy and the Capital Investment Entrant Scheme. These incentives have been widely welcomed by asset managers in Hong Kong and have generated a lot of interest from ultra-high net worth families, especially from the Chinese mainland, KPMG said.

In early February, CPA Australia suggested that Hong Kong should roll out tax incentives to attract companies to establish regional headquarters, boost family office growth, and foster tighter links with Gulf Co-operation Council nations. 

Rates and IPOs
Looking ahead, interest rates may continue to come down this year, the firm said. This will benefit the IPO market by improving liquidity and valuations, although the timing and pace of such rate cuts remains a matter for debate. While 2024 is unlikely to see a major resurgence in IPOs – in Hong Kong or other markets – KPMG is cautiously optimistic that this year could mark the beginning of a longer-term recovery in activity.

Hong Kong’s favourable tax regime is one of the key pillars of its success as a global asset management hub, but the city must ensure that it remains competitive with other locations, the firm said.

The Asian city has taken steps to encourage family offices to set up there. However, KPMG said that fund managers may face obstacles in fulfilling the requirements of some of the other incentives, such as the Tax Concession for Carried Interest. The government is reviewing this incentive and it is expected that changes will be made to the regime.

“Removing the uncertainty around some of the current incentives is the most important step. More clarity about the scope of the incentives available and the conditions that need to be satisfied will also address concerns of global asset managers about domiciling funds and SPVs [special purpose vehicles] in Hong Kong,” Darren Bowdern, head of asset management tax, ASPAC, KPMG China said.

While the external environment remains challenging, the Hong Kong government has continued to make efforts to build a healthier and more stable asset management ecosystem. It has introduced a variety of new regulations such as new rules, guidance and circulars on virtual assets, KPMG continued. The introduction of the licensing regime for virtual assets' trading platforms will move trading virtual assets into a regulated space, which will bring about more stability, certainty and investor protection. With its "proactive" approach to regulation, Hong Kong has established itself as a hub in the virtual assets space, and it is expected that more regulatory developments will follow in 2024, KPMG said.

While 2023 saw a lot of interest from clients who want to learn about the structure and requirements, KPMG expects that more family offices will be established in the year ahead as UHNW individuals put their plans into action.

Hong Kong and mainland China are working to recover from the Covid-19 pandemic. There are competitive challenges: Geopolitical shifts, relating to Hong Kong’s relations with mainland China, have also raised Singapore’s relative standing as a wealth management hub, with its conducive environment for family offices, for example.

A number of groups have urged Hong Kong to sharpen incentives including the Alternative Investment Management Association. In June 2023, Hong Kong's government unveiled its “Network of Family Office Service Providers.” The rollout of the network was one of eight initiatives in the government's Policy Statement on Developing Family Office Businesses in Hong Kong, announced on 24 March 2023.