Cayman Considerations For Fund Secondary Transactions

A Booming Secondaries Market

The global private equity secondaries market has seen sustained growth, with 2025 marking another year of record fundraising and transaction volume. In the United States, GP-led continuation vehicles now account for a significant portion of secondary deal flow as managers seek liquidity solutions and investors rebalance portfolios in a slower exit environment. The Cayman Islands, as the preeminent jurisdiction for offshore investment funds, continues to feature prominently in these transactions. Cayman-specific legal and regulatory considerations should be carefully assessed in any secondary or continuation transaction involving a Cayman Islands domiciled fund.

Cayman Island Fund Structures and Transfer Mechanics

Cayman funds are most commonly established as exempted limited partnerships ("ELPs") or exempted companies. Each structure has its own transfer requirements and consent mechanics.

For ELPs, the limited partnership agreement ("LPA") governs the ability of a limited partner to transfer its interest. Most LPAs require the general partner's prior written consent and restrict transfers that could cause the fund to breach investor qualification, regulatory or tax criteria. Pre-emption rights, notice requirements and lock-up provisions should also be reviewed at the outset.

For exempted companies, the constitutional documents usually require board approval prior to registration of a transfer. Following completion, the administrator or registered office must update the statutory register of members.

In GP-led continuation fund transactions, where existing assets are transferred to a new vehicle, the process raises questions around authorisation, valuation and investor alignment. Independent valuation and advisory committee consultation are often advisable to ensure fairness and transparency.

Cayman Islands Regulatory and Compliance Considerations

Funds structured in the Cayman Islands may fall within the scope of the Private Funds Act (as Revised) or the Mutual Funds Act (as Revised), depending on whether they are closed-ended or open-ended in nature. Both regimes are overseen by the Cayman Islands Monetary Authority (CIMA) and impose ongoing obligations relating to registration, audit, valuation, and asset safekeeping.

Where a secondary transfer involves a regulated fund, the administrator must carry out refreshed anti-money laundering and know-your-client checks on the incoming investor prior to completion. FATCA and CRS reporting obligations should be also revisited to ensure new investor information is accurately reflected.

For master-feeder structures, particular attention should be paid to how transfers are implemented across the structure. If a transfer occurs at the feeder level, corresponding updates may be required to the master fund's register of members or partnership interests. Coordinated communication between administrators at each level is essential to maintain accurate investor records and regulatory compliance.

Changes in investor composition may also trigger updates to beneficial ownership registers, especially where a new investor's holding constitutes a significant change in control. Although secondary transfers themselves rarely impact economic substance requirements, managers conducting core income-generating activities in the Cayman Islands should ensure they remain compliant.

Transaction Documentation and Execution

Secondary transfers are typically effected by a deed of transfer or assignment, executed by the seller, buyer, and the general partner or company. Although US counsel may typically draft the bulk of these documents in a secondaries transaction, any transfer documentation should be reviewed by Cayman Islands counsel to ensure that they are compliant with a funds governance documentation.

In GP-led continuation transactions, transparency is critical. Advisory committee approval and independent valuations are commonly used to mitigate potential conflicts where the general partner is negotiating on both sides of the transaction or is entitled to new fees and carried interest in the continuation vehicle.

Tax

The Cayman Islands remains a tax-neutral jurisdiction. There are no income, capital gains, or withholding taxes on secondary transfers, and stamp duty is generally nominal. However, participants should consider the tax implications in their home jurisdictions and those of underlying portfolio companies.

For investors rolling into continuation vehicles, it is important to determine whether participation constitutes a continuation of the original investment or a disposal for tax purposes, as this distinction may affect the timing and recognition of gains.

Governance and Fiduciary Duties

Directors and general partners of Cayman funds owe fiduciary duties to act in good faith and in the best interests of the fund as a whole. These duties are especially relevant in secondary and continuation transactions, where conflicts may arise between existing and incoming investors.

Best practice includes transparent communication with investors, clear documentation of valuation methodologies, and, where applicable, the use of independent valuation advisers. Maintaining contemporaneous records of decision-making and obtaining advisory committee approval where appropriate can help demonstrate that fiduciary obligations have been met.

Practical Recommendations for Secondaries involving Cayman Island Funds

Before a secondaries transaction involving a Cayman Islands fund is undertaken, parties should:

1. Engage Cayman Counsel to review the fund's governing documents early to confirm transfer restrictions and consent requirements.
2. Confirm registration and ongoing compliance under the Private Funds Act or Mutual Funds Act.
3. Conduct refreshed AML / KYC checks and update FATCA and CRS information for incoming investors.
4. Obtain independent valuations and advisory committee approval where potential conflicts exist.
5. Seek onshore tax advice to assess cross-border implications.
6. Ensure accurate post-closing updates to statutory registers and beneficial ownership filings.

Conclusion

The Cayman Islands continues to offer a flexible and efficient platform for global fund secondary transactions. While its tax-neutral regime and straightforward transfer procedures make it an attractive jurisdiction, successful execution requires careful attention to fund documentation, regulatory obligations and fiduciary standards. With early planning and experienced Cayman counsel, both investor-led and GP-led secondary transactions can be implemented seamlessly while maintaining compliance and protecting investor confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.