Private Equity Trends and Developments in the Cayman Islands
We continued to see robust levels of activity throughout 2022 notwithstanding market uncertainty, rising interest rates, a higher than usual inflationary environment, and tightening credit markets. This backdrop had an impact on transaction activity in late 2022 and early 2023 compared to 2021 levels. Nonetheless, there continues to be strong interest in the use of Cayman Islands structures, with sustained levels of entity formations in connection with fund formation and transactional activity.
Sponsors continue to look to the Cayman Islands when structuring and offering private equity products that provide strategies tailored to the current market environment, including infrastructure, credit opportunities, market dislocation and special situations opportunities funds and products with regional or focused investment mandates, including environmental, social and governance (ESG) strategies.
The Cayman Islands continues to be well-positioned to respond to a volatile and challenging global environment and retain its pre-eminent offshore position due to its legislative and regulatory framework, tax-neutral status, flexible structuring options, respected legal system developed from English common law and experienced and responsive service providers coupled with broad market familiarity with Cayman Islands structures.
Regulatory developments
The most notable regulatory development in the Cayman Islands in recent years has been the introduction and implementation of the Private Funds Act, which provided for registration of closed-end collective investment vehicles with the Cayman Islands Monetary Authority (CIMA).
More than 16,000 investment funds are now registered under the Private Funds Act. Cayman Islands regulation is, generally, fund-level focused and there is no requirement for a nonCayman Islands manager of a private fund domiciled in the Cayman Islands to be regulated in the Cayman Islands. Most managers of private funds are not domiciled in the Cayman Islands and are regulated by various onshore regulators such as the US Securities and Exchange Commission, the UK's Financial Conduct Authority, the Hong Kong Securities and Futures Commission, the Monetary Authority of Singapore, or the Japanese Financial Services Agency. A Cayman Islands-registered manager would be subject to oversight by CIMA and be required to have sufficient substance in the Cayman Islands with reference to its business activities.
Within this regulatory framework, sponsors, allocators and investors are able to legislate their own contractual arrangements, which is particularly helpful as strategic investors seek alternatives to traditional co-mingled fund structures and vehicle types.
Alternative structures and the Cayman Islands
The Cayman Islands' offering is well-positioned for alternative structures; ranging from separate accounts and funds of one through to "permanent capital" structures and other strategic transaction structures, such as end-of-life liquidity options, continuation vehicles and GP minority equity stake deals.
While the Cayman Islands is most commonly associated with private equity fund establishment, whether main, feeder/blocker, parallel, alternative investment or co-investment vehicles, there continues to be a strong demand for Cayman Islands structures in transactional contexts, particularly buy-out and secondary transactions, including as management holding vehicles. Cayman Islands vehicles have also been widely adopted to comply with new regulatory and tax developments, such as being a preferred structure to act as a carry and co-invest vehicle for a management company's Indian tax resident principals.
The nature, scope and volume of work being undertaken in the Cayman Islands gives rise to a number of trends and developments which reflect emerging technologies and work practices, a mature funds industry and the multijurisdictional dimension of offshore practice.
Fund structuring
A key reason for the jurisdiction's success is the range of Cayman Islands vehicles that are available to sponsors/managers, enabling them to structure closed-end fund products in a manner that meets the diverse profile of investors domiciled in geographically disparate regions.
The most popular Cayman Islands-domiciled vehicles for structuring investment vehicles are:
- exempted limited partnerships (ELPs);
- exempted companies; and
- limited liability companies (LLCs).
The use of Cayman Islands LLCs, similar to the Delaware variant, introduced in mid-2016, has continued to be popular as a flexible structuring vehicle, with now in excess of 4,900 Cayman Islands LLCs registered.
The Cayman Islands Limited Liability Partnership (LLP), available for registration since November 2020, combines the flexible features of a general partnership but has the benefit of separate legal personality and affords limited liability status to all its partners. This vehicle provides an additional structuring option and may be suitable for general partner, fund of funds or holding partnerships.
The popularity of exempted companies and ELPs generally continues to be unaffected by the introduction of LLCs and LLPs. By way of illustration, there has been consistent year-onyear growth in the number of ELPs in existence.
There are, however, nuanced regional differences in the types of vehicles being used for private equity mandates. By way of example, the preferred investment vehicle for many Japanese investors continues to be the Cayman Islands unit trust.
North American and European markets
In the North American and European markets, most primary, feeder, parallel, alternative investment and co-investment vehicles are typically formed as an exempted limited partnership unless a tax blocker is required.
In onshore-offshore fund structures, the ability to provide symmetry between the offshore fund vehicles and their equivalent onshore counterparts (notably Delaware and Luxembourg limited partnerships) can lead to greater ease and cost efficiency of fund administration, pass-through tax treatment and has helped to better align the rights of investors between the different vehicles in a fund structure.
The exempted company is less regularly employed as a fund vehicle other than with respect to certain types of target investors and with reference to certain assets. Its key feature (being a corporate vehicle with separate legal personality) lends these vehicles to being most commonly used as general partner, manager, blocker or holding vehicles (although one of the exempted company variants, the segregated portfolio company, can be an attractive option for managers targeting certain Middle Easternbased or family office investors).
The LLC has been an appealing alternative for general partner, upper tier, manager and co-investment vehicles. The absence of share capital (and the absence of the need to maintain a share register), combined with the ability to intuitively track and record the capitalisation of an LLC and its distributions, has also led to LLCs being attractive for blocker, aggregator and holding vehicle applications. Because a member is not required to make a contribution but may benefit from profit allocations, the LLC has been adopted for certain employee award and grant schemes.
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Originally Published by Chambers and Partners
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