I OVERVIEW OF RECENT ACTIVITY
Asset management vehicles established in the Cayman Islands can generally be divided into two distinct groups:
- regulated open-ended funds (predominantly hedge funds), for which there is an abundant supply of publicly available statistical information (although it lags behind the market, as is inevitably the case for information compiled by a regulator); and
- other asset management vehicles (including closed-ended and private equity funds), for which the available data is more limited.
A cornerstone to the success of the Cayman Islands' financial services sector is its strong legal and regulatory system, which equally benefits managers and institutional or other sophisticated investors. The jurisdiction is attentive and responsive to developing international trends, continually evolving to ensure it meets the requirements of finance sector participants, including governmental and regulatory authorities. Against this background, there have been a number of noteworthy developments, which are discussed in more detail below.
The Cayman Islands continues to maintain its position as the leading jurisdiction for the registration of funds, with 10,559 funds regulated under the Mutual Funds Law (2015 Revision) (Mutual Funds Law) at the end of 2017 and 10,500 at the end of the first quarter of 2018.2 While the level of exceptional growth experienced in the years preceding the global financial crisis has ended, the industry has largely held its ground since the crisis. The industry's positive outlook is reflected in the Cayman Islands Monetary Authority's (CIMA) statistical digest for 2016, which shows growth in the net asset value of reporting funds up from US$3.575 trillion in 2015 to US$3.592 trillion in 2016.3
It is more difficult to obtain an accurate overview of the state of the Cayman Islands' asset management industry as a whole, which would necessarily include looking at the level of managed account activity and closed-ended fund activity. While single investor vehicles created as part of a managed account structure may involve registration of the relevant vehicle with the Cayman Islands registry, the vehicle will often not be required to register with CIMA because there is only one investor and therefore no pooling of investor funds (a requirement of the statutory definition of a mutual fund). There is also an exception to the need to register with CIMA for funds known as Section 4(4) funds, which are open-ended investment funds that pool the funds of 15 or fewer investors, a majority of whom are given the power to appoint and remove the fund's directors, managers (in the case of a limited liability company (LLC)), general partner or trustee, as applicable.
Closed-ended funds (i.e., funds that do not afford investors the option to withdraw all or part of their investment prior to the winding up of the fund) are not required to be registered or licensed by CIMA, so it is more difficult to gauge their numbers. The most useful indicator of the level of closed-ended fund activity (which generally includes funds investing in illiquid asset classes, such as private equity, real estate or infrastructure projects) is the number of registrations of Cayman Islands exempted limited partnerships (ELPs) and, more recently, LLCs. However, this is only a rough indicator based upon practitioners' experience that the majority of closed-ended fund structures are formed as ELPs. By contrast, CIMA's statistical digests show that only a small fraction of open-ended funds are formed as ELPs, highlighting that they are most prominent in the closed-ended sector. Figures released by the Cayman Islands Registrar of Exempted Limited Partnerships show that at the end of 2017, there were a total of 22,655 ELPs registered in the Cayman Islands. The years since the crisis have generally seen a consistent increase in the number of annual ELP registrations. In 2017, the figure for new ELPs formed stood at 3,872, compared with 3,356 in 2016, 3,377 in 2015 and 2,893 in 2014. At the end of May 2018, the figures for LLCs registered stood at 1,289. The introduction of this vehicle in July 2016 may account for the slight drop in ELP registrations in 2016, as the LLC provides similar flexibility to that which has made the ELP a popular vehicle for closed-ended structures.
ELPs are utilised for a variety of purposes within closed-ended structures. An ELP may well be the primary closed-ended fund vehicle, but often ELPs will also serve other purposes (e.g., ELPs may be used as a feeder into an onshore fund, an alternative investment vehicle, a parallel fund or a co-investment vehicle). Similarly, while still a relatively new vehicle in the Cayman Islands, experience has shown that LLCs are increasingly being used as general partners as well as feeder, blocker and aggregator vehicles in closed-ended fund structures. Changes in the rate of formation of ELPs and LLCs could, therefore, indicate fluctuations in the rate of new fundraising, but are just as likely to point to variations in the level of transactional activity by established closed-ended funds themselves.
1. Jonathan Green and Tim Coak are partners and Luke Stockdale is an associate at Maples and Calder.
2. Figures taken from the Mutual Funds and Mutual Fund Administrators (Annual and Quarterly) in the Investment Fund Statistics and Regulated Entities section of the CIMA website: www.cimoney.com.ky.
3. CIMA: Investments Statistical Digest 2016.
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