KPMG China has released a new report this week – Asset Management and Private Equity 2023 Outlook – which assesses the outlook for the asset management and private equity sector, including regulatory developments in key areas such as ESG and prospects for the crypto space.

The end to quarantine and easing of other Covid restrictions in Hong Kong and the Chinese mainland have been a promising start to 2023, buoying the investment management sector, a new report by KPMG China says. 

Assuming that the path to full reopening continues, the momentum will carry the asset management sector into a much brighter year ahead, the report said. Private equity in particular will benefit from the reopening of the border.

Bonn Liu, head of asset management, ASPAC, KPMG China, said: “Hong Kong’s asset managers are getting ready to seize the opportunities across the region as activity in the sector revives now that restrictions have largely been dropped.”

The asset management sector is looking forward to returning to normality this year, enabling fund managers to make the most of the growing opportunities, the firm continued. 

Vivian Chui, head of securities and asset management, Hong Kong, KPMG China, added: “The removal of most of the remaining Covid restrictions is fantastic news for the sector, it means that Hong Kong can really get back to business in 2023.”

However, there are also challenges and competition. Although Hong Kong has a number of incentives aimed at developing the asset management sector, KPMG China said it would like to see a government task force set up to assess these initiatives to ensure that the jurisdiction remains competitive and can seize the opportunities ahead. 

Hong Kong must refine and promote its range of industry incentives as it faces increasingly fierce competition as an asset management hub.

The private equity market for dollar funds in the Chinese Mainland slowed in 2022, but this is likely to change in the year ahead as fund managers seek to make use of the dry powder that has amassed.

Darren Bowdern, head of alternative investments, Hong Kong, KPMG China, said: “We expect that the amount of dry powder in the system will help to boost activity in the asset management sector in 2023 as GPs deploy that capital in key markets throughout Asia.”

The period of mainland China's and Hong Kong's stringent anti-Covid policies has been tough on the domestic economy and associated business sectors. Recent data shows that among private equity funds and venture capital funds, certain measures of fundraising fell last year, although on other metrics, the PE/VC sectors held up relatively well. 

Other findings
Other highlights of the report include: 

Tax
A range of tax incentives show support for the asset management sector, but they need more refinement before they can fulfil their potential. Hong Kong needs to update its funds' exemption rules, so that fund managers have the certainty they need to continue to domicile their funds and investment platforms in the city. Such measures will be needed if Hong Kong is to remain competitive on tax and continue to serve as Asia’s leading asset management hub, the firm said.

Regulatory developments
Liquidity risk management for open-ended funds is a priority for local and global regulators as they seek to enhance the stability and transparency of markets.

ESG
Regulatory scrutiny, investor demand and global trends are pushing ESG up the agenda, giving asset managers the opportunity to differentiate themselves. ESG continues to grow in importance for the asset management sector in Hong Kong with the new regulations from the Securities and Futures Commission on climate-related risk, while sustainability-related investment generally becomes more mainstream, the firm continued.

Family offices
Hong Kong’s family office incentive, expected to be launched in April, is a welcome development that will attract more investment to the city and give more tax certainty for investors, the firm said. However, Hong Kong faces competition for the family office market from other jurisdictions.

Private equity
A rebound in private equity is expected in 2023 as China’s Covid restrictions ease and dry powder needs to be deployed.

Virtual assets
Hong Kong’s standing as a virtual assets hub will be enhanced as recent turmoil in the sector encourages investors to seek well-regulated regimes, the firm added. Going forward, the regulator will need to find ways to protect the city’s broad base of investors while also allowing enough flexibility for sophisticated investors to be more adventurous.