The Hong Kong IPO market has regained significant momentum during 2025 following a cold spell of activities since the Covid-19 pandemic. According to the latest securities market analysis by Hong Kong Exchanges and Clearing Limited (HKEX), there has been an increase of 50% of new listings in the first ten months of 2025 compared to the same period last year with funds raised through IPOs up to end of October 2025 being HK$216 billion (compared to HK$70 billion for the same period last year) – see HKEX Market Highlights.
Capitalising on favourable market sentiment, fund managers have been actively setting up IPO funds and pre-IPO funds, the first being seeking to acquire interest in targets at its initial public offering and the latter focusing typically on late-stage private funding rounds before the target goes public. Whilst the new IPO and/or pre-IPO drive has created attractive market opportunities for fund managers, the inherent characteristics of such underlying investments also raises significant structuring and operational challenges.
Handling Liquidity Mismatches
In structuring an investment fund with an IPO and/or pre-IPO focus, fund managers must evaluate multiple factors, with the liquidity mismatch risk being a key structural challenge. Whilst investors typically expect fast turnarounds on investments and liquidity, pre-IPO investments may be subject to lock-up – imposed either by HKEX listing rules or contractual requirements from banks and underwriters, during which time investments becomes illiquid. Fund managers will need to align their allocation pipeline and lock-up schedules with the liquidity profile of the pre-IPO fund to ensure redemption requests from investors can be satisfied. This is also a key regulatory focus under the Fund Manager Code of Conduct of the Securities and Futures Commission to which Hong Kong type 9 (asset management) licensed managers are required to comply with. To mitigate such risks, fund managers should incorporate liquidity management tools and derivative strategies to address scenarios such as substantial redemptions.
Allocation Struggles
With the IPO market in full speed, fund managers may also struggle to obtain desired allocations for highly sought-after company listings. In this case, fund managers may need to consider arrangements where actual IPO allocations fall short of expectation, as well as the treatment of any unused capital or subscription proceeds in investment funds resulting from insufficient investment opportunities. Regulators would be concerned about ensuring fair treatment of fund investors (and potentially other clients of the fund manager) in the event of any returns of unused capital or subscription proceeds.
Regulatory disclosure requirements
In the modern regulatory environment, there is an increasing demand on the transparency of beneficial owners of IPO applicants. Fund managers would need to determine whether disclosure requirements apply on fund investors under listing rules and the Securities and Futures Ordinance. In designing the structure of an IPO fund or pre-IPO fund, the domicile and form of vehicle adopted (e.g. corporate structure, unit trust or partnership structure) may affect the interpretation of disclosure requirements.
How can Deacons help?
With numerous considerations required, it would be prudent for fund managers to iron out regulatory and operational issues at the outset before kick starting the set-up of IPO funds and pre-IPO funds.
Deacons has a strong regulatory and financial services practice with experience in assisting clients in setting up IPO and pre-IPO private investment funds and to advise on any regulatory and compliance issues. Please reach out to our team for further information as to how we might help.
