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Private credit continues to play an increasingly significant role in global capital markets, as borrowers and investors seek alternatives to traditional bank lending. The asset class has expanded rapidly in recent years, driven by demand for flexible financing solutions and by institutional investors seeking stable, income-generating returns. The Cayman Islands remains a commonly selected domicile for private credit funds, reflecting its established legal framework, tax neutrality and familiarity among global investors and service providers.
As private credit strategies grow in scale and complexity, fund sponsors and managers are increasingly focused on governance, valuation and liquidity considerations associated with managing illiquid credit assets.
Cayman structures for private credit funds
The Cayman Islands' legal framework provides flexibility for fund sponsors to structure private credit vehicles to accommodate a wide range of strategies, investor profiles and operational requirements, without prescriptive restrictions on asset classes or investment techniques.
Exempted limited partnerships remain the most frequently used vehicle for private credit funds, reflecting their contractual flexibility and tax transparency. Exempted companies and limited liability companies are also used in certain circumstances, including for feeder vehicles, co-investment structures or management arrangements. Where appropriate, segregated portfolio companies may be utilised to ring-fence assets and liabilities across distinct credit strategies or portfolios.
Private credit funds established in the Cayman Islands are subject to registration and ongoing supervision by the Cayman Islands Monetary Authority under the Private Funds Act (as Revised). This regulatory framework is familiar to institutional investors, lenders and service providers and supports investor confidence while allowing sponsors flexibility to manage complex and often illiquid portfolios.
Cayman structures are also commonly used in cross-border private credit transactions. Funds frequently participate in lending arrangements governed by New York or English law and may utilise subscription line or net asset value-based financing facilities as part of their capital management strategy.
Valuation and liquidity considerations
Private credit funds typically invest in assets that are not traded on established markets, giving rise to valuation and liquidity considerations.
Valuation methodologies often rely on internal models, assumptions regarding cash flows and credit risk and, in some cases, third-party valuation inputs. The determination of net asset value may therefore involve a degree of judgement, highlighting the importance of clearly documented valuation policies and consistent application by fund managers and boards. Where valuations are used for investor reporting, fee calculations or financing arrangements, increased scrutiny may arise from both investors and regulators.
Liquidity management presents a further consideration. The long-term and illiquid nature of private credit assets often necessitates structural features designed to align investor redemption rights with the underlying investment strategy. These may include lock-up periods, limited redemption windows, notice periods or other liquidity management tools. Careful calibration of these mechanisms is critical to avoiding mismatches between asset realisation timelines and investor expectations.
Governance and oversight
Valuation and liquidity considerations are closely linked to governance and oversight. Boards and fund sponsors are expected to ensure that valuation methodologies are appropriate for the fund's strategy and that liquidity terms are clearly disclosed and consistently applied.
Boards of Cayman private credit funds generally oversee the establishment and ongoing operation of governance policies, including those relating to valuation, liquidity management and conflicts of interest. Given the bespoke nature of many private credit transactions, conflicts may arise in areas such as related-party lending, allocation of investment opportunities across funds or vehicles and fee and expense arrangements. Clear policies and transparent decision-making processes are therefore important components of effective governance.
Where external valuation agents are engaged, boards are typically expected to oversee their appointment and ongoing performance. Regular reporting and review processes assist in ensuring that valuations continue to reflect the underlying risk profile of the portfolio.
Regulatory expectations also inform governance practices. Under the Private Funds Act, registered funds are required to maintain systems of control and oversight that are appropriate to their size, nature and complexity. In practice, this reinforces the expectation that boards and sponsors take an active role in governance matters.
Practical considerations for sponsors
As private credit strategies continue to attract institutional capital, sponsors of Cayman private credit funds should ensure that fund structures, documentation and governance arrangements remain aligned with the nature of the underlying assets and investor expectations.
Early consideration of valuation methodologies, liquidity terms and risk management frameworks can assist in mitigating operational and regulatory issues as funds scale. Offering documents should accurately reflect the illiquid nature of private credit investments, the assumptions underpinning valuation methodologies and the operation of any redemption or liquidity restrictions. Ongoing investor communications are also increasingly important, particularly where market conditions or portfolio performance may affect valuations or cash flow timing.
Sponsors should remain mindful of regulatory obligations under the Private Funds Act and the supervisory approach of the Cayman Islands Monetary Authority, particularly in relation to governance, internal controls and oversight.
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.
