Giorgio Subiotto is the head of Ogier's Latin American practice. His investment funds practice focuses on the establishment of, and on-going advice to, offshore hedge funds and private equity funds for a range of investment managers and financial institutions. His over fifteen years of experience in the Cayman Islands funds market spans the whole spectrum of fund structures, strategies, and situations. Giorgio also represents institutional investors in their investment in Cayman Islands funds.
What does the current funds industry landscape look like in LatAm?
Regarding the funds industry in LatAm, there are a few countries we see on the investment fund side in one way or another, but the most active (by a large margin) is Brazil. The rationale for the use of Cayman Islands structures by Brazil is essentially twofold: (i) we set up Cayman funds for the Brazilian market to raise international capital to flow into Brazil for investments within the region; and (ii) Cayman funds can be established to attract investment from within Brazil, for investment into international financial markets.
In terms of the outward flows of capital, there is a number of reasons why Brazilian managers are the most common clientele from LatAm for Cayman funds. Brazil has a well-developed investment funds market, and so we see a lot of Brazilian managers that have been able to invest a portion of their assets outside of Brazil using Cayman funds as a mechanism to access international markets and products in a cost-effective manner. Also, it is worth noting that the investment funds market isn't as well-developed in the other LatAm countries, and not to a point where fund managers are able to channel their assets into the international markets in any significant way.
In terms of money flowing into Brazil, the reason it goes to Brazil and less to other countries is a due to a number of factors but possibly the main driver is the basic availability of attractive investments that foreign investors are looking to make investments in. By way of example, Brazil offers quite an active listed market for equities and other securities that foreign investors are keen to access directly, rather than indirectly through American Depositary Receipts (ADRs). In most other LatAm countries, this market is less developed.
Another factor that helps to make Brazil such an attractive target for inward investment through fund structures is the breadth of available private equity opportunities, that other LatAm markets cannot compete with. Of the other LatAm markets, it's also notable by way of comparison that they are smaller in scale than Brazil and tend to have more local liquidity available. Looking at Peru's pension fund sector, as a specific example, they hold much of the liquidity within the local market and so a lot of investment managers will simply target the local pension funds for capital raising, rather than looking to raise funds outside of the country.
For how long have Brazilian managers been choosing Cayman to structure their funds and why?
We've been working with Brazilian and other LatAm managers since the Cayman Islands Mutual Funds Law originally came into force in 1993 and there has always been a strong Brazilian presence in the Cayman Islands in terms of offshore structuring – e.g. Banco do Brasil holds one of the oldest banking licences in the Cayman Islands (in place since the 1970s) and the Cayman Islands Monetary Authority (in its role as regulator of the financial services industry) has had a Memorandum of Understanding in place with its Brazilian counterpart since the late 1990s.
In summary, the Cayman funds industry has a long history of working with the largest Brazilian institutions to set up Cayman Islands investment fund structures; and, more recently, working with smaller independent asset managers who have broken away from some of those larger institutions.
What are the current funds industry trends in Cayman?
In terms of trends, we've seen capital flows moving both ways since around 2008 but most recently, we have seen an increase in capital flows out of Brazil for international investment and we have been kept busy setting up structures more frequently to address this directional flow of money, as opposed to the flows into Brazil for inward investment.
I think that for now this trend is unlikely to slow down a little for two reasons: (i) because Brazil lost its investment-grade credit rating status, which means that a lot of the institutional investors that had to allocate a certain amount of capital to Brazil are no longer required to and, in some circumstances, are unable to do so, and (ii) in light of an increased focus by the Brazilian federal revenue service on certain vehicle structuring for investment funds.
As a result of these efforts by the revenue service, some asset managers are taking a closer look at their existing structures to see exactly if (and how) they might be affected – as it remains to be seen whether the revenue service will attempt to look through to the beneficial owners (i.e. non-Brazilian) or if it will decide to stop at the level of the Cayman investment fund entity, given the favourable tax regime for foreign investors who invest in the Brazilian capital market (e.g. capital gains on certain transactions in the capital markets are tax-free for foreign investors but not for Brazilian investors).
The Brazilian authorities have put together a list of certain types of foreign investors who would no longer qualify for this tax break and it is currently proposed that Cayman would be a part of this list. Therefore, some managers are waiting to see whether the Brazilian revenue service will stop at Cayman and conclude that the investment is being conducted by a foreign investor located in a jurisdiction on that list (that will consequently be subject to dividends and other withholding tax), or whether they will carry on through to the beneficial owners located in the US or elsewhere would benefit from this tax break and therefore not be subject to withholding tax.
These two factors are having an impact on investment fund structuring being used to attract foreign capital for investment into Brazil, but the structuring of investment funds to attract capital for outward flows from Brazil continues to be strong, and I think this will continue to increase as the per capita wealth in Brazil increases and more players look to diversify investments. Up until now, Brazil has been an attractive investment proposition for Brazilians to invest, because interest rates were extremely high and investors could accrue a good return on investment with minimal risk; however, as the interest rates decrease local investors are looking for other ways to make money and are starting to focus more on diversification, including sovereign risk diversification by looking to invest in opportunities outside of Brazil. I think we will see an increasing number of Brazilian fund managers looking to allocate a portion of their assets outside of Brazil in the future, which will give rise to an increased need for Cayman Islands investment fund structuring.
Another significant trend of note is an increased number of instructions for Cayman Islands structuring received from family offices and individuals. These individuals and families structure their investments through funds, firstly because they can achieve immediate deferral benefits, as they won't be taxed until they receive distributions in their own country of residence and secondly, because if they structure their investments through a fund, any distributions that they receive are treated as redemption proceeds and taxed as capital gains, as opposed to income (and thereby taxed at a lower rate in Brazil).
Why are LatAm families choosing Cayman to structure their wealth?
One of the main reasons is the tax-driver just mentioned. Also, if a LatAm family is looking to invest in places such as the USA, the use of a Cayman investment fund is an easy way to address any US state taxes that may arise. Even if you are just planning to open an account in the USA, often LatAm funds will open such an account through a Cayman Islands investment vehicle in order to protect themselves from state taxes, such as inheritance tax. More generally, the preference for Cayman investment fund structures on the part of LatAm investors and managers is derived from decades of successful collaboration between Cayman and the LatAm region, and is a testament to the Cayman funds industry's ability to adapt to meet the changing needs of financial institutions and individuals.