Answer ... The statute that specifically governs private equity funds is the Private Funds Law, introduced in February 2020. The Cayman Islands initiative to introduce the Private Funds Law arose from an ongoing dialogue that the European Union has been conducting with many jurisdictions to ensure they meet EU requirements in respect of good governance. As noted in the Briefing Note from the Ministry of Financial Services and Home Affairs when the law was introduced, by implementing a simple fund registration regime, this law provides “additional surety and transparency for investors and managers of Cayman Islands investment funds, while better aligning with best market practices, enhanced anti-money laundering and other key regulatory standards”.
In essence, the Private Funds Law requires that all private funds, as defined:
- undertake a simple registration process (as opposed to a more substantive authorisation procedure);
- appoint a local auditor to prepare and file annual financial statements with the Cayman Islands Monetary Authority (CIMA); and
- comply with straightforward, commercially sensible requirements around valuation, safe-keeping of assets, cash monitoring, and securities identification (which broadly reflect market standards and best practices of existing managers).
The other key set of regulations relevant to private equity in the Cayman Islands is its suite of anti-money laundering (AML) rules, comprising:
- the Proceeds of Crime Law;
the Anti-Money Laundering Regulations; and
- the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands.
Private equity funds and managers in the Cayman Islands must comply with the AML regime.
The AML regime is recognised as reflecting international standards and, through its regular enhancements, is intended to precisely reflect the Financial Action Task Force (FATF) Recommendations, while still providing a sensible and practical risk-based approach.
Outside of this, each entity type has its own governing statute:
- Exempted limited partnerships (ELPs) are governed by the ELP Law; Companies are governed by the Companies Law; and
- Limited liability companies are governed by the Limited Liability Companies Law.
In 2014 the ELP Law underwent a substantive rewrite to better reflect the commercial and legal needs of parties to private equity transactions and fundraises. Some of the private equity-driven amendments that were made under that process, and which make the ELP a more flexible vehicle than many of its peers, included:
- clarifying the rules on fiduciary duties between partners;
- allowing general partners to reduce their fiduciary duties (where expressly agreed with the limited partners); and
- clarifying that agreed-upon default remedies will not be unenforceable as penalties (an issue that plagues various common law jurisdictions).
Answer ... Based on figures from the Securities and Exchange Commission, in the first quarter of 2019 around 68% of private equity funds globally (outside of the United States) were formed using Cayman Islands vehicles.
The reasons for the Cayman Islands’ perennial position as the world’s most popular private equity jurisdiction include the following:
- a strong legal framework, based on English common law;
- a robust judicial system which enshrines the rule of law and in which the English Privy Council is the final court of appeal;
- a sensible statutory regime that is cognisant and facilitative of private equity transactions. As noted above, the ELP Law was rewritten in 2014 specifically to ensure that such vehicles could predictably implement private equity fund transactions adopting the commercial terms that have become global norms;
- a strong, FATF-compliant AML regime; and
- an abundance of professional and experienced service providers. The Cayman Islands – as one of the first offshore financial centres, and certainly the most popular among institutional investors – has nurtured generations of experienced professionals to service the investment funds community. From auditors to administrators and lawyers, highly skilled professionals with experience in efficiently executing Cayman Islands private equity transactions can now be found specialising in private equity transactions not only in the Cayman Islands, but across the globe. This makes execution accessible and efficient.
However, the most important factor in the appeal of the Cayman Islands is investor familiarity and confidence. The Cayman Islands has been a popular investment funds jurisdiction for generations. Through political and legal stability, a strong judiciary, the rule of law, global best practice statutes and regulation (which can be applied predictably, with confidence), and the ability to access abundant professional talent to support transactions, the Cayman Islands has made itself the ‘go-to’ trusted jurisdiction for investors – particularly in the Americas and Asia, and increasingly (through the adoption of EU complaint economic substance rules and the Private Funds Law) in Europe. While other jurisdictions may try to copy the Cayman Islands statute book, such investor confidence cannot be replaced.