The Securities and Futures Commission (SFC) today issued a circular to provide guidance on SFC-authorised funds with exposure to private credit and private equity (collectively, private market assets) to enhance their transparency on underlying investments and associated risks (Notes 1 and 2).
Recent market developments have prompted regulators to pay closer attention to private market assets. The SFC has observed that some funds may gain indirect exposure to private market assets through various types of investments for asset allocation and yield enhancement purposes. The SFC also noted that retail investors in Hong Kong may have limited familiarity with private market assets and their associated risks, as some of these indirect exposures involve layered structures and complex financial instruments, which may lack transparency.
Against this backdrop, the SFC sets out in this circular its enhanced disclosure requirements, obligating fund managers to provide a clear, sufficiently completed and balanced picture of the characteristics, nature and risks associated with a fund’s exposures to private market assets.
In addition, the SFC may, where appropriate, subject such funds to enhanced scrutiny and classify them as a complex product with heightened distribution requirements for offering in Hong Kong (Note 3). For existing funds that may have exposure to private market assets, the SFC also expects fund managers to review their funds and update the funds’ offering documents as soon as practicable.
“As markets evolve, it is crucial that fund managers provide investors with clear, meaningful information about SFC-authorised funds to make informed investment decisions,” said Ms Elisa Ng, the SFC’s Executive Director of Investment Products. “The enhanced guidance strengthens Hong Kong’s regulatory framework for retail funds with private market exposure by increasing transparency and introducing appropriate investor safeguards.”
The SFC would like to thank industry participants for responding to its earlier consultations and has duly incorporated their feedback into the guidance published today.
Notes:
- SFC-authorised funds for offering to the public in Hong Kong are subject to the applicable investment restrictions under the Code on Unit Trusts and Mutual Funds, such as a 15% limit of the fund’s net asset value (NAV) for investments in securities and other financial products or instruments that are neither listed, quoted nor dealt in on a market.
- Funds may gain exposure to private market assets via direct investment in bank or non-bank direct lending in the form of loans or equities to unlisted companies; or indirect exposures including through investments in business development companies, collateralised loan obligations or financial derivative instruments. Non-exhaustive examples of indirect exposure are further set out in the circular.
- For example, a fund will be considered as a complex product if its total direct and indirect exposures to private market assets amount to 50% or more of the fund’s NAV. Such funds will be subject to the SFC’s prevailing requirements for sale of complex products, including but not limited to ensuring the suitability of the funds for their investors, irrespective of whether solicitation or recommendation is involved.
