Guest contributor: Amber Ramsey – Executive Director, DMS
The Cayman Islands are the world’s fifth largest financial center and the pre-eminent offshore jurisdiction for private equity fund formation.
It has been a natural choice for institutional investors and fund managers, for several reasons:
- Regulatory environment – Its government and its regulator, the Cayman Islands Monetary Authority (CIMA), have worked continuously with international authorities to ensure that the Cayman Islands is trusted as a well-regulated, cooperative and transparent jurisdiction.
- Tax neutral – it works transparently with international tax authorities to counter tax evasion.
- A respected legal system, based on English law, with well-recognised legal concepts at its core.
- A supportive government with a strong philosophy of cooperation and consultation within the industry and a highly-respected court system,
- Funds flexibility with bespoke formation and structuring options. Cayman operates in a straightforward, responsive and timely manner and with a flexibility that imposes no restrictions on strategy, liquidity, leverage or investment restrictions.
- The Cayman Islands’ high-quality service providers make it easy and affordable to launch a Cayman fund.
What type of fund and structure to launch?
Vehicles offered in the Cayman Islands include, Exempted Companies (including Segregated Portfolio Companies), Unit Trusts, Limited Partnerships, and Limited Liability Companies (LLCs). Most private equity funds are established as exempted limited partnerships (ELP) with a closed-ended structure.
In a closed-ended structure, an investor cannot redeem or exit from the fund until is it wound-up and only accepts investors for a fixed period. Most will have a finite lifespan, allowing investors to know how long their capital is committed.
An ELP does not have a separate legal personality, therefore the partnership must have at least one general partner who has a presence in the Cayman Islands who would be liable for all the partnership’s debts and obligations should the entity become insolvent. Contracts and other documents with third parties would therefore be entered into by the general partner on behalf of the partnership.
Fund practicalities typically include:
- A Registered office is a requirement for all Cayman companies. It is not necessary for this to be a physical office and is typically a registered office address administered by a service company. Services generally include keeping the company’s statutory books and records and handling corporate filings and publications.
- Offshore legal counsel is typically engaged to assist with document drafting and to advise on Cayman Islands’ laws and regulations.
- The best practice of an independent board, comprising two non-executive, unaffiliated professional directors sitting alongside a member of the Investment Management team. It is best practice to have at least one resident professional director that is knowledgeable about the local laws governing the companies. The directors would typically serve on the board or committee of the general partner.
- Cayman private equity funds must appoint named individuals to the roles of anti-money compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy money laundering reporting officer; the AMLCO and MLRO may be the same individual. As with independent directors, they are typically resident in the Cayman Islands in terms of industry best practice, but this is not a requirement.
- For FATCA and CRS purposes almost all Cayman private equity funds will be a Reporting Cayman Islands Financial Institution with a requirement to make an annual report to the Cayman Islands Tax Information Exchange Authority (TIA). Most managers engage the fund administrator or another specialist provider to assist with the fund’s FATCA and CRS due diligence and reporting obligations.
- It is industry best practice and an expectation of investors, to engage an independent administrator and auditor, however, this is not a requirement.
- Other expected service providers include Custodian and a Bank. There is no depository requirement in the Cayman Islands.
What regulation and documentation are required?
As a closed-ended private equity fund, the entity will not be considered a mutual fund under the Mutual Funds Law of the Cayman Islands and therefore will not be regulated by CIMA.
The general partner will be exempt from licensing under the Securities Investment Business Law of the Cayman Islands (SIBL), therefore it must not carry on securities investment business unless as a necessary or incidental part of its role as general partner.
Launch documents typically include:
- Memorandum & Articles of Association
- Limited Partnership Agreement
- Private Placement Memorandum
- Share Subscription Agreement
- Director resolutions / board minutes, commonly referred to as “for launch resolutions”.
- Service provider agreements such as Investment Management and/or Advisory, Administration, Prime Broker, Custodian, Registered Office, Director Services, AML Officer Services, FATCA/CRS etc.
- Other organisational documents such as certificate of incorporation and tax exemption certificate
- Section 9 Statement (contains details such as the names of the registered office of the general partner and duration of the partnership)
- Ancillary documents and registers.
Once launched, the fund must comply with ongoing Cayman Islands obligations, such as AML/CFT requirements and annual filings.
While initially this may seem a compliance heavy process, by appointing the right service providers, the launch of a Cayman Islands private equity fund can be a straightforward and stress-free experience.
DMS’ substantial and diverse client base includes the world’s leading investment managers, funds, offshore funds, financial institutions and high-net-worth individuals. DMS leads the industry with the largest team of full-time professionals, all of whom utilize professional governance techniques and industry-leading technology. DMS is a full-service global firm headquartered in the Cayman Islands making it a natural choice for those seeking fund governance solutions as they look to efficiently launch a Cayman Fund.
If you have any questions relating to the foregoing and would like to discuss this further, please contact Amber Ramsey at email@example.com.