Private equity continues to enjoy a buoyant fundraising environment. Investor satisfaction is high, with key allocators maintaining or increasing allocations to private equity.
Driven by strong performance and resulting investor demand, private equity funds continue to meet or exceed their fundraising targets and we are seeing new and bespoke products offered by fund managers, including funds of one, managed accounts and direct and co-investment opportunities.
Over the past few years we have seen an increasing trend in fund managers establishing their main fund vehicle in the Cayman Islands, compared with their earlier vintage funds that were often established in the US, with Cayman domiciled alternative investment vehicles formed on a deal by deal basis to address particular tax and/or regulatory concerns. This change is, no doubt, largely due to the increasingly global nature of private equity, with fund managers often fundraising in global markets and targeting global investment strategies.
In this positive and changing environment, Cayman domiciled entities play a wellestablished and growing role in private equity fund structures. This role is evidenced by the growing number of exempted limited partnership registrations we are seeing (the exempted limited partnership being the overwhelming vehicle of choice for private equity funds in Cayman). The years since the 2008 financial crisis have seen a consistent increase in the number of annual partnership registrations. In 2016 the number of active exempted limited partnerships stood at 19,937, compared with 17,896 in 2015 and 15,455 in 2014.
So, why Cayman? For many years, Cayman has been a popular offshore domicile for private equity funds, in no small part due to the global distribution appeal of Cayman vehicles, their ease of use, speed to market and low cost. Cayman's tax neutral status ensures the fund vehicle itself does not create an additional layer of tax, creating efficiencies in raising funds from a potentially global investor base. Cayman is a well-known and trusted centre of excellence for its established and experienced financial services sector and professional service providers.
However, one of Cayman's key strengths has been its ability to complement robust laws with a pragmatic commercial approach to business. Cayman continues to refine its laws and regulatory framework to ensure it meets the ever-increasing demands of the private equity industry and has proven its ability to respond and adapt to demands from around the world. This ability to respond and adapt is clearly demonstrated by two recent legal developments, the update of the Cayman Islands Exempted Limited Partnership Law (the "ELP Law") and the enactment of the Limited Liability Companies Law ("LLC Law"), as well as by Cayman's ongoing response to global initiatives on transparency.
Through the ELP Law, Cayman has demonstrated a desire and ability to complement the onshore fund structures used by, and familiar to, US fund managers. While founded on Cayman common law principles, which in turn are derived from English law, the ELP Law (first enacted in 1991) was drafted to provide symmetry with the corresponding Delaware statute. The ELP Law has subsequently been amended, but always with a view to dovetailing with the US market. This policy was, and is, simple in design: it is intended, within the context of Cayman law, to enable a manager's offshore fund to operate and be governed consistently with its domestic offering.
Following a detailed consultation, the ELP Law received a comprehensive review and update in 2014. While the new law did not make fundamental alterations to the nature, formation or operation of exempted limited partnerships, it promotes freedom of contract and includes provisions to deal specifically with issues and concerns raised, and suggestions made by, the industry to bring the ELP Law even further into line with the corresponding Delaware statute.
The LLC Law, enacted in 2016, provides for the formation of a new Cayman vehicle: the limited liability company. The limited liability company represents a response from Cayman to requests from the industry for a new vehicle closely aligned with the Delaware limited liability company. We have seen a sharp uptake in use of the limited liability company in private equity structures, particularly as GP governance vehicles, aggregator vehicles (where multiple related funds are investing in the same portfolio investment) and holding companies in portfolio acquisition structures.
Cayman's willingness to revamp the ELP Law, and to establish a new limited liability company vehicle in response to feedback from the industry, demonstrates a flexible, dynamic and responsive jurisdiction, quick to implement change in order to position itself for new and ongoing opportunities and to meet the needs of the market. Cayman remains committed to transparency, and has worked with governments and international authorities over many years to ensure that Cayman is trusted as a well-regulated, cooperative and transparent jurisdiction. Cayman was an early introducer of comprehensive and strict anti-money laundering laws and know your client rules and regulations, which are at least equivalent to those of established OECD member states. The Financial Action Task Force sets the global standard for fighting money laundering and terrorist financing, and Cayman has been assessed as 'highly compliant' with its recommendations and more compliant than many OECD member jurisdictions.
Cayman was an early adopter of legislation to comply with the Foreign Account Tax Compliance Act (FATCA) and the OECD's Common Reporting Standard (CRS), with the result that certain financial account information of investors is exchanged with over 100 other countries to assist with the fight against tax evasion. Furthermore, Cayman has recently implemented a beneficial ownership regime, which requires certain entities that are not affiliated with a regulated manager and are not otherwise exempt to establish beneficial ownership registers so that certain specific information can be made available to the UK's law enforcement agencies upon an appropriate request. As a result of these legislative changes, Cayman is rated by the OECD as "largely compliant" regarding transparency and information exchange - the same rating as given to the US, UK and Germany - giving comfort to investors and managers alike that Cayman is viewed as transparent globally.
Cayman has strategically and thoughtfully developed and maintained a position as the pre-eminent offshore jurisdiction for private equity. As discussed in this article, this success can be attributed in large part to commercial and industry specific laws, transparency and global compliance. Cayman's flexibility to implement change and adapt to new opportunities and challenges looks set to continue with ongoing discussions and consultation on matters as diverse as separate personality for partnerships, a partnership merger regime and conversion of different types of legal entities, to name a few. With its demonstrated ability to meet the evolving needs of the industry, we look forward to seeing the continued growth of Cayman's role in private equity.
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