NCE: IPO Lock-ups, Private Funds and Real Estate Funds

Introduction

On 1 March 2024, Hong Kong relaunched the New Capital Investment Entrant Scheme (NCE), setting the investment threshold at HK$30 million. Applicants must place their funds into permissible financial assets and the designated investment portfolio within six months of approval, and the way those assets are allocated directly shapes liquidity, compliance risk and potential returns across the seven-year period for which they must be held. Alongside conventional stocks and bonds, three routes are drawing increasing attention from high-net-worth individuals: lock-up arrangements for Hong Kong initial public offerings (IPOs), private funds and real estate funds. Working from the twin frameworks of immigration law and financial regulation, this article analyses the statutory conditions, structural design and risk management of each route in turn, so that intending applicants can grasp the essentials of planning.

The statutory investment framework of NCE and how permissible assets are defined

NCE applicants must commit no less than HK$27 million to “permissible financial assets”, plus a further HK$2 million to the “Capital Investment Entrant Scheme Investment Portfolio”. The categories of permissible financial asset are published by the Immigration Department as a list, the legal basis of which is set out in the Rules of the New Capital Investment Entrant Scheme (the “Scheme Rules”). Under the List of permissible financial assets under the New Capital Investment Entrant Scheme, qualifying assets span seven categories: shares listed on the Stock Exchange, debt securities, certificates of deposit, subordinated debt, qualifying collective investment schemes, interests in limited partnership funds (LPFs), and transitional arrangements for moving assets out of non-residential real estate into financial assets.

The crux lies in the recognition conditions attaching to category 5, “qualifying collective investment schemes”, and category 6, “interests in limited partnership funds”. Unit trusts and mutual funds authorised by the Securities and Futures Commission (SFC), along with Hong Kong–registered open-ended fund companies (OFCs), fall within category 5. Category 6 LPF interests, by contrast, must be managed by a corporation licensed by the SFC for Type 9 regulated activity, and the fund’s assets must be invested principally in permissible financial assets as defined in rule 5.1 of the Scheme Rules. In other words, not every private fund automatically qualifies as an eligible investment vehicle; it must clear a dual screen covering both licensed management and the direction of its underlying investments.

The form in which assets are held is likewise tightly regulated. According to question 12 of the Immigration Department’s frequently asked questions, an applicant must hold the assets under absolute beneficial ownership, with title free of any mortgage, lien or other encumbrance. Joint accounts or holdings through a nominee will not be accepted. This requirement runs through every structural configuration involving IPO lock-up shares, private fund interests and real estate funds, and forms the baseline of compliance.

Hong Kong IPO lock-ups: beneficial ownership and compliance mechanics

Where an applicant participates in an international placing or a cornerstone investment through a private bank or brokerage, the shares allotted become category 1 permissible financial assets once dealings commence on the Stock Exchange. Even where those shares carry a post-listing lock-up (commonly six months), the absolute beneficial ownership requirement under rule 6.2 of the Scheme Rules is normally met so long as the applicant can demonstrate legal and beneficial title and the shares have not been pledged to a third party. Because a lock-up arrangement is a contractual restriction between issuer and shareholder rather than a security interest granted over the asset itself, it does not in substance create an encumbrance on title.

At the operational level, two deadlines matter. First, under rule 3.1, the applicant must complete the investment in permissible financial assets within six months of the Director of Immigration granting “approval in principle”; subscription for, and allotment of, IPO shares must be concluded within that window. Second, if, after allotment, the market value falls so that total assets drop below HK$30 million, the Scheme Rules do not require the applicant to make good the shortfall immediately, provided nothing has been sold; however, on each occasion during the seven-year holding period that asset evidence is submitted to the Immigration Department, the value of the portfolio must stand on a sound footing. Applicants should retain placing confirmations, bank statements and records of their holdings in the Central Clearing and Settlement System (CCASS), so that they are available for inspection by the Department.

On the risk side, holdings cannot be reduced during the IPO lock-up period, so liquidity is nil when prices fall sharply. Where, as with certain new listings in 2023 and 2024, shares fell more than 30% below their offer price after debut, locked-in investors were unable to sell to limit their losses. In addition, a number of large IPO issuers are headquartered on the Chinese mainland, and variable interest entity (VIE) structures or shifts in sector regulation may trigger a repricing of valuations; such external factors must be factored into asset allocation decisions. When taking up cornerstone allocations, it is therefore prudent to seek professional advice from institutions holding Type 6 (advising on corporate finance) and Type 9 licences, ensuring that the issuer’s shareholding structure and attribution of assets will continue to withstand compliance scrutiny over the coming seven years.

Private fund options: recognition thresholds for limited partnership funds (LPFs) and collective investment schemes

Since the Hong Kong Limited Partnership Fund Ordinance (Cap. 637) came into effect in 2020, the LPF has become the mainstream vehicle for private funds and has been brought into category 6 of the NCE list of permissible financial assets. An applicant subscribing for LPF interests as a partner must satisfy three conditions: first, the fund must be operated by a manager holding an SFC Type 9 licence; second, the fund’s underlying assets must consist mainly of permissible assets listed in Schedule 2 to the Scheme Rules, such as Stock Exchange–listed shares, investment-grade bonds or cash; third, the applicant’s ownership of the interest must be free of any charge or restriction on transfer, in line with the principle of beneficial ownership.

In practice, committing HK$27 million or more to a single LPF can already cover the great majority of the permissible asset allocation requirement. Some family offices and private banking platforms establish private funds in the form of segregated accounts, investing in Hong Kong equity and bond portfolios in accordance with the applicant’s instructions, while registering the structure as an LPF to meet the regulatory requirements. Where the manager of such an arrangement does not hold a Type 9 licence, the Immigration Department will not accept the interest as a permissible asset.

The strength of the LPF route lies in its flexibility: the fund may invest in unlisted start-up equity, private debt and even other closed-ended funds, giving it far more breadth than public-market products. The liquidity cost, however, is striking: redemptions are usually confined to quarterly or annual windows, and some vehicles are drawdown funds with lock-up periods stretching beyond five years. Across the seven-year holding period, an applicant who needs to adjust the allocation — perhaps wishing to reduce exposure following a change of migration plans — will encounter obstacles to exit. A further compliance detail worth noting is that LPF interests must be valued independently by a third party, so that when the applicant files asset statements each year, a net asset value report issued by the manager must be ready to hand, and that report must reconcile with the bank statement records.

Real estate fund routes: from listed REITs to private property LPFs

NCE does not permit the direct purchase of residential or non-residential property, but it does open the door fully to real estate–themed collective investment schemes. The most straightforward approach is to buy real estate investment trusts (REITs) authorised by the SFC, such as Link REIT (0823.HK) or Fortune Real Estate Investment Trust (0778.HK); these listed units fall within category 1 permissible assets and are as liquid as shares. Investors may buy at prevailing prices on the open market and switch freely during the holding period, although the proceeds of any sale must be reinvested in other permissible assets within 14 days.

A more finely engineered allocation is the private real estate fund, typically run through an LPF structure and invested in income-producing properties, development projects or distressed assets. According to the SFC’s guidance on collective investment schemes, a fund of this kind that obtains SFC authorisation falls into category 5 permissible collective investment schemes; if it is unauthorised but takes LPF form and is managed by a Type 9 licensee, it may still qualify through the category 6 interests route. The key restriction is that the fund’s underlying properties must not confer direct title on the applicant, so as not to cut across the Scheme Rules.

Real estate funds offer inflation-resistant characteristics and cash-flow distributions, which makes them attractive to applicants who wish to retain a link to physical assets. Property valuations move in longer cycles, however, and the net asset value of a fund can trade at a marked discount when the market turns; during the US dollar rate-hike cycle in 2022, for example, average returns across Hong Kong and Asia-Pacific real estate funds recorded a single-digit percentage decline. Although the scheme does not require capital to be replenished when market values fall, a net asset value that dips below the threshold late in the unbroken seven-year holding period may leave the applicant dependent on other permissible assets, such as cash deposits, to lift the total value of the portfolio — so a buffer should be built in as a practical matter.

Managing the holding period, liquidity risk and a seven-year compliance strategy

Holding permissible assets without interruption for seven years is the most demanding compliance requirement of NCE. Under rule 8.1, whenever an applicant sells any permissible asset, the proceeds must be reinvested in other permissible assets within 14 days, and the Director of Immigration notified in writing. This mechanism applies to every sale and purchase throughout those seven years, so any applicant who locks up a large share of their funds in illiquid instruments must build an additional liquidity reserve as a cushion.

The usual practical approach is to divide the portfolio into “core” and “satellite” components. The core portion, roughly 70% of total assets, goes into IPO lock-up shares, high-quality listed REITs or carefully selected private LPF interests, aiming for medium-to-long-term appreciation and dividend income. The satellite portion is placed in short-maturity certificates of deposit, money market funds or highly liquid Hong Kong equities, ensuring that the funds are always on hand to answer valuation dips and the 14-day reinvestment deadline. Taking 2024 certificate-of-deposit rates of around 3.8% as an illustration, an allocation of HK$8 million to one-year certificates of deposit would generate interest inflows of more than HK$300,000 a year, strengthening the resilience of the portfolio.

It should also be noted that, when choosing private funds or IPO cornerstone investments, the documentation chain should be clarified with the fund issuer or private bank in advance. In the course of vetting, the Immigration Department routinely asks for third-party custody evidence, net asset value reports and legal opinions on beneficial ownership. If the fund manager fails to produce reports that meet the required standard on time, this may trigger the serious consequence of “failure to demonstrate compliance with the investment requirements”, leading to difficulties with extension of stay or even loss of status. Before subscribing, therefore, verify both the manager’s regulatory compliance record and its documentation practices, so as to keep the seven-year holding period running smoothly.

Conclusion

The three routes available under NCE — IPO lock-ups, private funds and real estate funds — each strike their own balance between return potential, liquidity and the strictness of compliance. IPO lock-ups offer a comparatively certain pricing advantage, but liquidity falls to zero during the lock-up period; LPF private funds confer a high degree of investment freedom, yet test one’s timing of exit and valuation documentation; real estate funds tread a line between physical assets and the constraints of the rules. Applicants must recognise that the compliance of a product structure is never settled once and for all: every transaction and every valuation over the seven-year holding period must keep pace with the latest guidance from the Immigration Department and the SFC. Before settling on a structure, it is advisable to consult both Hong Kong–licensed legal advisers and financial institutions, so that the investment arrangement meets the statutory thresholds and can carry the applicant steadily through the entire regulatory cycle of seven years’ residence in Hong Kong.

This article is provided for information only and does not constitute legal advice. Any investment decision should be taken after consulting professional advisers and reading carefully the latest rules published by the Immigration Department and the Securities and Futures Commission.