The Cayman Islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax neutral regime.
Investment funds established in the Cayman Islands fall into two broad categories: open-ended funds and closed-ended funds.
Open-ended funds provide investors with voluntary redemption or repurchase rights and closed-ended funds do not provide investors with those rights. Typically open-ended funds will invest in liquid assets which can be readily realised to fund redemptions (for example, listed, liquid, tradable securities) and closed-ended funds will invest in non-liquid assets requiring time to liquidate/realise value (for example, real estate, unlisted growth companies).
Fund vehicle options
Exempted companies limited by shares are the most common form of entity used for the establishment of open-ended investment funds with an investor's liability being limited to the amount paid or agreed to be paid in respect of their shares. Please see our Guide to Exempted Companies for more details.
Segregated portfolio companies
An exempted company may register as a segregated portfolio company (SPC), which is similar to a segregated cell company in many other jurisdictions.
An SPC may establish any number of segregated portfolios. Assets and liabilities attributed to a particular segregated portfolio are legally separated from the assets and liabilities attributed to any other segregated portfolio. A creditor who is party to a contract involving a particular segregated portfolio will have restricted recourse and will be entitled to make its recovery only against assets attributed and credited to the specific segregated portfolio to which the contract is also attributed.
SPCs can be useful as multi-strategy vehicles and platform vehicles although savings by using multi-strategy SPCs are often not as great as anticipated and SPCs with multiple segregated portfolios do require a greater degree of care to ensure assets are properly segregated, contracts are entered into on behalf of the correct segregated portfolio and inadvertent cross-collateralisation does not occur. Please see our Guide to Segregated Portfolio Companies for more details.
Limited liability companies
Limited liability companies (LLCs) may be incorporated in the Cayman Islands in a form closely aligned to the Delaware LLC. LLCs may be used in investment fund structures where a flexible structure similar to a limited partnership is required, but where the vehicle needs to be established as a body corporate distinct from its members. LLCs are regulated by their LLC agreement and the Limited Liability Companies Law. Please see our Guide to LLCs for more details.
Exempted limited partnerships
While an exempted limited partnership (ELP) is the most common vehicle for closed-ended funds including private equity, venture capital and real estate funds, they are also used for open-ended funds. An ELP has many similarities to its Delaware equivalent vehicle but an ELP is not a separate legal person and for this reason, it is popular with managers and investors in a number of jurisdictions. An ELP is managed by its general partner. Please see our Guide to ELPs for more details.
Cayman Islands unit trusts are established under and governed by the Cayman Islands Trusts Law and, save as modified under that law, generally applicable principles of English trust law. Under a unit trust investors contribute funds to a trustee which holds those funds on trust for the investors and each investor is directly entitled to a pro rata share in the trust's assets, its unit. Unit trusts are constituted under a trust deed that provides the terms on which the trustee holds the trust's assets for unit holders. The use of Cayman Islands unit trusts is particularly popular in Japan.
All of the above entities can be established on an express basis and no governmental or regulatory approvals are required.
Taxation of vehicles
All of the above vehicles are exempted from any Cayman Islands income or gains taxes and can obtain a tax undertaking certificate from the Cayman Islands government guaranteeing no change in their tax status for 20 years or more.
Liability of investors
All of the above vehicles issue equity interests which typically limit investor liability to the amount paid or agreed to be paid in respect of their investment.
Management of entities
An exempted company's or SPC's management rests with its board of directors, a unit trust's with its trustee, an LLC's with its members or a separate manager or managers and an ELP's with its general partner, and these are all referred to as 'operators'. Typically investment management authority is delegated to an investment manager or adviser although the relevant operator will always be required under generally applicable law to maintain oversight of the investment manager's functions. In this regard, the Cayman Islands Monetary Authority (CIMA) has provided guidance as to the best practice for fund governance which should be followed by operators of all funds. See our Guide to Duties and Obligations of a Director of a Cayman Islands Fund for further details.
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