1.1 General Overview of Jurisdiction
Over the last 40 years, the Cayman Islands has matured into one of the world's largest international financial centres, providing institutionally focused services to a global client base. The Cayman Islands' competitive strength in financial services lies in its ability to provide an effective, cost-efficient and tax-neutral platform for international capital flows in an environment of legal, political and economic stability. The blend of flexibility and certainty of legal structures, compliance with international regulatory standards and a well-regarded corporate governance regime ensures Cayman remains at the front and centre as the choice for investment funds, managers and investors.
Respected Legal System and Political Stability
The Cayman Islands is a British Overseas Territory and enjoys the security and stability traditionally associated with its status as such, while remaining responsible for its own internal affairs and government. The Islands have an independent judicial system based on a combination of English common law and local legislation. The court of final appeal is the Judicial Committee of the Privy Council. The government and the private sector work closely to ensure the continued development of the jurisdiction as a place where business can be conducted efficiently and effectively
Client-Centred Structures, Institutions and Advice
Legal structures used for alternative funds offer flexibility to managers and are well understood by sophisticated investors. Such structures allow for the management of entities with numerous investors and multiple layers of debt and equity. The jurisdiction benefits from the availability of a wide range of professional service providers from internationally respected firms and institutions.
Transparency and the Regulatory Regime
Regulation in the Cayman Islands is focused on the management of systemic risk, the prevention of money laundering and the promotion of regulatory and financial transparency. A discussion of the regulatory regime is included later in this chapter.
Tax Neutrality and Transparency
There are no local corporation, capital gains, income, profits, withholding or inheritance taxes attaching to vehicles established in the Cayman Islands, nor to investors in such vehicles. Taxation may be imposed on investors or investments by jurisdictions outside of the Cayman Islands.
2.1 Types of Alternative Funds
Both open-ended funds and closed-ended funds are commonly established in the Cayman Islands.
The Cayman Islands is historically the primary jurisdiction for the establishment of hedge funds, which are subject to the registration regime provided under the long-established Mutual Funds Act (the MFA). More recently, a regime for the registration and regulation of private funds formed in the Cayman Islands has been introduced: the Private Funds Act (PFA) now sits alongside the MFA and promises to offer the same level of sensible and proportionate oversight and regulation that the jurisdiction has brought to hedge funds for more than two decades.
2.2 Fund Structures
There are four types of vehicle that are commonly used to establish alternative investment funds in the Cayman Islands:
- exempted companies (including segregatedportfolio companies);
- exempted limited partnerships;
- unit trusts; and
- limited liability companies.
These vehicles are used within a range of fund structures, with the most common being standalone funds, master-feeder funds, parallel funds, alternative investment vehicles (AIVs) and umbrella funds. Fund structures in the Cayman Islands are flexible and are typically driven by onshore considerations such as taxation and investor qualification requirements.
While each type of vehicle may be used, the most popular vehicle for open-ended fund structures is the exempted company and the most popular vehicle for closed-ended funds structures is the exempted limited partnership.
These are the simplest structures, being a single vehicle, usually with a single investment strategy. Funds of this nature are often used in startup situations or where the target market does not require further complexity. A standalone fund may itself invest as a "fund of funds" in another fund, but for Cayman Islands purposes will still be a standalone vehicle as it will function on an independent basis, with its investment strategy being to invest in other funds.
A master-feeder fund is usually structured so that the combined assets of two or more "feeder funds" (both Cayman Islands and onshore) are substantially invested in a separate vehicle known as the "master fund" and managed by the same investment manager. The pooling of the assets then allows the master fund to act as the investment vehicle of its feeders. Structurally, this is achieved by investors purchasing shares or interests in the relevant feeder fund and the feeder fund, in turn, purchasing shares or interests for equivalent consideration in the master fund. Although there may be direct investment into the master fund by investors, often the only investors in the master fund are the feeders.
Master-feeder structures provide for certain cost efficiencies whilst allowing for the investment manager to pursue the same investment strategy for both feeder funds. This also allows for different categories of investors to invest through the structure. A Cayman Islands exempted company or partnership is often established as the feeder fund for non-US investors and US tax-exempt investors, and a Delaware limited liability company or partnership is established as the feeder fund for US taxable investors. An investment manager may also opt to set up a master fund as an onshore vehicle and then subsequently wish to admit a non-US or tax-exempt investor via a Cayman Islands feeder fund.
Parallel Funds, Co-investment Funds and AIVs
Parallel structures consist of single investment vehicles that invest alongside each other. These may be used to accommodate the needs of a particular investor and may consist of Cayman Islands and onshore vehicles.
Co-investment funds are generally formed for a specific investment in order to invest alongside other alternative investment funds.
AIVs are often formed alongside main funds in order to facilitate the structuring requirements for specific transactions and/or investors.
Umbrella funds are typically open-ended vehicles that pursue multiple strategies and provide scope for investors to invest in one or more strategies and to switch their investment strategy at particular times. For corporate vehicles, this may be achieved by using separate share classes and entrenching segregation in the constitutional documents of the relevant company (to the extent possible), but segregated portfolio companies provide a corporate vehicle for funds of this nature with multiple segregated portfolios having different strategies, achieving segregation on a statutory basis. Investors in such vehicles can be given the ability to switch between portfolios (typically by redemption or repurchase of shares in one segregated portfolio and a new issuance of shares in another). Unit trusts are also commonly used for umbrella structures, with the terms of the trust documentation setting out the ring-fencing and fund-switching arrangements between separate sub-trusts. Umbrella structures are also used for multi-issuance fund programmes.
To read the full article click here
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.