An exempted limited partnership (ELP) established under the Cayman Islands Exempted Limited Partnership Law (2018 Revision) (the ELP Law) is the most commonly used structure in the Cayman Islands for forming private equity funds (PE funds). An ELP does not have a separate legal personality. An ELP must consist of the following:
- one or more persons called general partners who shall, in the event that the assets of the ELP are inadequate, be liable for all debts and obligations of the ELP; and
- one or more persons called limited partners who shall not be liable for the debts and obligations of the ELP except as provided in the partnership agreement and to the extent specified in the ELP Law.
Investors in an ELP are issued partnership interests and join the ELP as limited partners. Generally speaking, a limited partner’s liability in an ELP is limited to the extent of the limited partner’s partnership interests (but this limited liability status can be lost in instances where the limited partner takes part in the conduct of the business of the ELP). The general partner of the ELP is responsible for the management and conduct of the business of the ELP.
The general partner of a PE fund is usually a company or another ELP established specifically as part of the overall PE fund structure. At least one general partner of the ELP must, if a company, be registered (either as a foreign company or a Cayman Islands incorporated company) under the Companies Law (2018 Revision) of the Cayman Islands (the Companies Law) or, if a partnership, be registered (either as a foreign partnership or an ELP) under the ELP Law.
A PE fund can also be established as a company using a Cayman Islands exempted company incorporated with limited liability, which has a separate legal personality distinct from its shareholders. The exempted company is established with share capital and shares are issued to investors in consideration of investment proceeds. Each investor’s or shareholder’s liability is limited to the amounts unpaid on its shares, if any, or to such amount as the shareholders may respectively undertake by the memorandum of association to contribute to the assets of the company in the event of it being wound up.
A PE fund can also be established as a limited liability company using a Cayman Islands limited liability company (LLC). The LLC is designed to be substantially similar to the form of a Delaware limited liability company and has a separate legal personality, distinct from its members. The LLC is established without a share capital and otherwise resembles an ELP in having its members’ liability limited by reference to the amounts of capital they have agreed to contribute or as otherwise stated in the operating agreement of the LLC (the LLC agreement).
The 2 Ways
One major tax planning strategy for funds is to use carried interest from a fund to the general partners for performance fees paid to fund managers. A newer tax strategy many funds are using is to enter the reinsurance business with a company based in Bermuda. These two methods allow funds to reduce their tax liabilities substantially. In this article, we look at how both strategies work, along with how funds are compensated.
Most funds are managed under the two and twenty compensation structure or some other variation. This structure normally comprises of a management fee and a performance fee. These fees depend on and can vary between funds.
The fund manager charges a flat 2% fee management fee based on the value of the total amount of assets in the fund. These management fees cover the operating costs for the fund including trading costs.
The performance fee is a percentage of the profits realized under the fund’s management. The most common performance fee is 20% of profits. This number may be higher or lower depending on the individual fund. Many funds also utilize high-water marks to ensure the manager is not paid for subpar performance.
1. Carried Interest
Many funds are structured to take advantage of carried interest. Under this structure, a fund is treated as a partnership. The founders and fund managers are considered general partners, while the investors are referred to as limited partners. The founders also own the management company that runs the fund. The managers earn the 20% performance fee of the carried interest as the general partner of the fund.
Fund managers are compensated with this carried interest. The income they receive from the fund is taxed as a return on investment as opposed to a salary or compensation for services rendered. The incentive fee is taxed at the long-term capital gains rate of 23.8%—20% on net capital gains and another 3.8% for the net income tax on investments—as opposed to ordinary income tax rates, where the top rate is 37%. This represents significant tax savings for fund managers.
This business arrangement has its critics, who say that the structure is a loophole that allows funds to avoid paying taxes. The Trump administration’s Tax Cuts and Jobs Act made some changes to the carried interest rule. Under the law, funds must hold assets for more than three years for gains to be considered long-term. Any gains held for less than three years are considered to be short-term, and are taxed at a rate of 40.8%. But this change rarely applies to most funds, which generally hold assets for more than five years.
Under the Tax Cuts and Jobs Act, funds must hold assets for longer than three years or face taxation.
2. Bermuda Reinsurance Business
Many prominent funds use the reinsurance businesses in Bermuda to reduce their tax liabilities. Bermuda does not charge a corporate income tax, so funds set up their own reinsurance companies in Bermuda. Remember, a reinsurance company is a type of insurer that provides protection to insurance companies. They handle risks that are considered to be too large for insurance companies to take on on their own. Therefore, insurance companies can share the risk with reinsurers, and keep less capital on the books to cover any potential losses.
Funds send money to the reinsurance companies in Bermuda. These reinsurers, in turn, invest those funds back into the original investing funds. Any profits from the funds go to the reinsurers in Bermuda, where they owe no corporate income tax. The profits from the fund investments grow without any tax liability. Taxes are only owed once the investors sell their stakes in the reinsurers.
The business in Bermuda must be an insurance business. Any other type of business would likely incur penalties from the Internal Revenue Service (IRS) in the United States for passive foreign investment companies. The IRS defines insurance as an active business. To qualify as an active business, the reinsurance company cannot have a pool of capital much larger than what it needs to back the insurance it sells. Although many reinsurance companies do engage in business, it appears to be fairly minor when compared to the pool of money from the fund used to form the companies.
What is the process for forming a private equity fund vehicle
Being a partnership, the ELP is established first by both the general partner and an initial limited partner (eg, a principal of the PE fund manager) entering into an initial limited partnership agreement. Second, by a section 9 registration statement (section 9 Statement) being filed with the Cayman Islands Registrar of Exempted Limited Partnerships (the Registrar) signed by the general partner of the ELP and containing the following details:
- the name of the ELP;
- the general nature of the business of the ELP;
- the address of the ELP’s registered office in the Cayman Islands (legally required to be in the Cayman Islands);
- the term, if any, for which the ELP is entered into or, if for unlimited duration, a statement to that effect and the date of its commencement;
- the name and address of each general partner; and
- a declaration that the ELP will not undertake business with the public in the Cayman Islands other than so far as may be necessary for the carrying on of the business of that ELP exterior to the Cayman Islands.
There are certain supporting documents that must also be filed in respect of the general partner (for example, in the case of a corporate general partner, Certificate of Incorporation and Certificate of Good Standing).
Upon paying the requisite fee and filing the completed registration documents, the Registrar will issue a Certificate of Registration, which is conclusive evidence that compliance has been made with all the requirements of the ELP Law in respect of formation and registration of the ELP.
A Cayman Islands exempted company is established by completing the following:
- filing an affidavit of the subscriber to its memorandum of association;
- filing its memorandum of association and articles of association with the Cayman Islands Registrar of Companies; and
- payment of the requisite filing fees.
An LLC is established by filing a registration statement (Registration Statement) with the Cayman Islands Registrar of Limited Liability Companies (the LLC Registrar) signed by or on behalf of any person forming the limited liability company and including the following details:
- the name of the LLC;
- the address of the LLC’s registered office in the Cayman Islands (legally required to be in the Cayman Islands);
- the term, if any, for which the LLC is formed or, if for unlimited duration, a statement to that effect; and
- a declaration that the LLC will not undertake business with the public in the Cayman Islands other than so far as may be necessary for the carrying on of the business of that LLC exterior to the Cayman Islands.
The timescale and costs depend on the nature and complexity of the transaction. However, the registration of an ELP or LLC or the incorporation of an exempted company can be done on an express basis within 24 hours. Cayman Islands legal counsel will be able to provide an estimate of legal fees and disbursement costs once they have conducted an overview of the overall PE fund structure. The registration fee payable to the Registrar for an ELP is currently approximately US$1,220. An ELP will be required to file with the Registrar a return on or before 31 January in every year and pay the Registrar a fee, currently approximately US$2,500.
For an exempted company the registration fee will depend on the level of the authorised share capital of the company. An exempted company that falls within the lowest possible band of authorised share capital will have to pay a current incorporation fee of approximately US$732. Similarly, an exempted company must file an annual return in January of each year and pay a fee to the Registrar of Companies, currently approximately US$854 for the lowest band of authorised share capital.
For an LLC, the registration fee payable to the Registrar is currently approximately US$976. An LLC will be required to file with the Registrar a return on or before 31 January in every year and pay the LLC Registrar a fee, currently approximately US$976. At the formation stage for a PE fund the only service providers that it is necessary to engage are a Cayman Islands legal counsel and a registered office service provider. Most law firms have an affiliated management company that can provide registered office services.
There are no material minimum capital requirements prescribed by Cayman Islands law.
If the equity interests of the PE fund are redeemable at the option of the investor it may be required to be registered as a ‘mutual fund’ pursuant to the Mutual Funds Law (2019 Revision) of the Cayman Islands.
There is no requirement under Cayman Islands law for a PE fund (whether structured as an ELP, an exempted company or an LLC) to have a Cayman Islands-based custodian or administrator.
The ELP is required to maintain a registered office in the Cayman Islands.
The general partner of the ELP is responsible for maintaining (or causing to be maintained) a register of security interests granted with respect to a partnership interest or part thereof indicating, among other things, the identity of the grantor and grantee, the partnership interest subject to the security interest and the date notice of the interest was served on the ELP.
The general partner is responsible for maintaining (or causing to be maintained) in the country or territory that the general partner may determine (including outside the Cayman Islands) a register of limited partners which shall contain the name and address of each person who is a limited partner of the ELP, the date on which a person became a limited partner and the date on which a person ceased to be a limited partner, and the register shall be updated within 21 days of the date of any change in the particulars therein. The general partner shall also be responsible for maintaining (or causing to be maintained) at the registered office of the ELP a record of the address at which the register of limited partners is kept.
The general partner is also required to maintain (or cause to be maintained) in any country or territory that the general partner may determine, a record of the amount and date of the capital contributions of each limited partner and the amount and date of any payment representing a return of the whole or any part of the capital contribution of any limited partner; such record shall also be updated within 21 days of the date of any change in the particulars therein.
An exempted company is also required to maintain a registered office in the Cayman Islands, a register of mortgages and charges, a register of directors and officers and a register of members. The latter need not be maintained locally in the Cayman Islands.
An LLC is also required to maintain a registered office in the Cayman Islands, a register of mortgages and charges, register of security interests, a register of managers and a register of members (together with a record of contributions and distributions). The register of members and record of contributions need not be maintained locally in the Cayman Islands.
Access to information
The register of limited partners (and address of where it is maintained) of an ELP is not open to public inspection, but instead is required to be open for inspection during all usual business hours by all partners or by any other person with the consent of the general partner. The record of contributions is only open to inspection by a person with the consent of the general partner. A copy of the section 9 Statement and any amendments made to it is publicly available for inspection upon payment of a fee to the Registrar.
Under the Companies Law, the register of members of an exempted company is not open to public inspection and is a private document. The names of directors and alternate directors contained in the register of directors of an exempted company are open to public inspection upon payment of a fee to the Registrar of Companies in the Cayman Islands. Shareholders of the exempted company are entitled to see their own details in the register of members. An exempted company is required to keep at its registered office a register of mortgages and charges specifically affecting property of the exempted company. The register of mortgages and charges is required to be open to inspection by any creditor or member of the exempted company at all reasonable times. The only publicly available information in respect of an exempted company (other than information relating to its directors and alternate directors’ names) is its name, company number, date of incorporation, registered office, the type of company (eg, exempted, special economic zone, segregated portfolio company) and whether the company is active or has been dissolved or is inactive, which can be accessed via the website of the General Registry of the Cayman Islands.
Under the Limited Liability Companies Law (2018 Revision) (the LLC Law), the register of members of an LLC is not open to public inspection and is a private document. The names of managers contained on the register of managers is open to public inspection upon payment of a fee to the Registrar of Companies in the Cayman Islands. Those persons expressly given a right to inspect the LLC agreement or otherwise as permitted by the manager of the LLC, will have the ability to inspect the register of members. Unless otherwise provided in the LLC agreement, each member has the right to inspect from time to time true and full information regarding the state of the business and financial condition of the LLC. An LLC is required to keep at its registered office a register of mortgages and charges specifically affecting property of the LLC. The register of mortgages and charges is required to be open to inspection by any creditor or member of the LLC at all reasonable times. The only publicly available information in respect of an LLC (other than information relating to its managers’ names) is its name, registration number, date of registration, registered office and whether the LLC is active or has been struck off. This information can be accessed via the website of the General Registry of the Cayman Islands.
Limited liability for third-party investors
As mentioned above, the limited liability of the limited partners of an ELP (who would be the third-party investors in a PE fund) may be lost if the relevant limited partner takes part in the management or operation of the ELP. The following is a non-exhaustive list of activities that a limited partner can undertake without risking loss of its limited liability status:
- holding an office or interest in, or having a contractual relationship with, a general partner of the ELP, or being a contractor for or an agent or employee of the ELP or of a general partner of the ELP or acting as a director, officer or shareholder of a corporate general partner;
- consulting and advising a general partner or consenting or withholding consent to any action proposed, in the manner contemplated by the partnership agreement, with respect to the business of the ELP;
- investigating, reviewing, approving or being advised as to the accounts or business affairs of the ELP or exercising any right conferred by the ELP Law;
- acting as surety or guarantor for the ELP either generally or in respect of specific obligations;
- approving or disapproving an amendment to the partnership agreement;
- calling, requesting, attending or participating in any meeting of the partners of the ELP;
- taking any action that results in the winding up or the dissolution of the ELP;
- taking any action required or permitted in the partnership agreement or by law to bring, pursue, settle or terminate any action or proceedings brought in circumstances where the general partner(s) has authority to do so but refuse, without good cause, to institute such proceedings;
- appointing a person to serve on a board or committee of the ELP, a general partner or a limited partner or removing such person;
- serving on any board or committee of the exempted limited partnership, a general partner, the limited partners or the partners, or by appointing, electing or otherwise participating in the choice of a representative or any other person to serve on any board or committee, or by acting as a member of any board or committee either directly or by or through any representative or other person, including giving advice or consenting, or refusing to consent, to any action proposed by the general partner on behalf of the ELP and exercising any powers or authorities or performing any obligations as a member of that board or committee in the manner contemplated by the partnership agreement;
- serving on the board of directors or a committee of, consulting with or advising or being an officer, director, shareholder, partner, member, manager, trustee, agent or employee of, or by being a fiduciary or contractor for, any person in which the ELP has an interest or any person providing management, consultation, custody or other services or other products for, to or on behalf of, or otherwise having a business or other relationship with, the ELP or a general partner of the ELP; and
- voting as a limited partner on certain matters in relation to the ELP, for example its dissolution and winding up; the purchase, sale or transfer of assets; the incurrence or renewal of indebtedness; change in the nature of business; the admission, removal or withdrawal of a general or limited partner; or transactions in which one or more general partners have an actual or potential conflict of interest with one or more limited partners.
If a limited partner loses its limited liability status, it will be liable in the event of the insolvency of the ELP for all debts and obligations of the ELP incurred during the period that the limited partner participated in the conduct of the business of the ELP as though the limited partner was, for such period, a general partner of the ELP, provided that the limited partner shall be rendered liable only to a person who transacts business with the ELP during such period with actual knowledge of such participation and who then reasonably believed the relevant limited partner to be a general partner of the ELP.
In addition, if a limited partner receives a payment representing a return of any part of his or her contribution or is released from any outstanding obligation in respect of his or her commitment and at the time that the payment was made or the release effected the ELP is insolvent including where the payment or release causes the insolvency or the limited partner has actual knowledge of the insolvency of the exempted limited partnership, then for a period of six months commencing on the date of that payment or release but not thereafter, the limited partner shall be liable to the ELP for the amount of the payment or the due performance of the released obligation in respect of his or her commitment in each case to the extent that the repayment or performance of the released obligation is necessary to discharge a debt or obligation of the ELP incurred during the period that the contribution or commitment represented an asset of the ELP.
Unlike the ELP, an exempted company is regarded as having separate legal personality and being an entity distinct from its shareholders. The limited liability status of shareholders of an exempted company will generally be respected. Similarly to a number of other jurisdictions, including under English law, there may be certain circumstances where a Cayman Islands court might disregard the fundamental principle that a company is a separate legal person from its shareholders and that their respective assets and liabilities are distinct. Such unusual circumstances may include where the company is considered by the courts to be used as a tool for fraud or other criminality or when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he or she deliberately evades or whose enforcement he or she deliberately frustrates by interposing a company under his or her control.
An LLC is also regarded as having separate legal personality and being an entity distinct from its members. The limited liability status of members of an LLC will generally be respected. Similarly to a number of other jurisdictions, including under English law, there may be certain circumstances where a Cayman Islands court might disregard the fundamental principle that an LLC is a separate legal person from its members and that their respective assets and liabilities are distinct, although this has never been tested in relation to an LLC. Such unusual circumstances may include where the LLC is considered by the courts to be used as a tool for fraud or other criminality or when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he or she deliberately evades or whose enforcement he or she deliberately frustrates by interposing an LLC under his or her control.
Fund manager’s fiduciary duties
The general partner of the ELP is responsible under the ELP Law for the management of an ELP. In the context of a PE fund, a substantial part of this responsibility is delegated pursuant to the terms of an investment management agreement to the PE fund’s investment manager. It is usually the general partner (unless otherwise delegated) that enters into contracts, deeds, instruments or other documents on behalf of the ELP. In conducting the business of the ELP, the general partner has a fiduciary duty under section 19(1) of the ELP Law to act at all times in good faith and, subject to the express terms of the partnership agreement to the contrary, in the interests of the ELP. The duty to act in the interests of the ELP can therefore be modified by the terms of the partnership agreement provided always that the general partner acts in good faith. Even where the general partner has delegated certain of its responsibilities to the PE fund’s investment manager, it remains subject to this duty and therefore must retain supervisory oversight of the responsibilities delegated to the PE fund’s investment manager.
The duties owed by the PE fund’s investment manager will be set out in the investment management agreement between the investment manager and the ELP and may be modified in the manner set forth in the investment management agreement.
In the context of a PE fund that is structured as an exempted company, the management of the entity is vested in the directors. The duties and liabilities of directors of such company will be governed by the Companies Law as supplemented by Cayman Islands case law and English common law insofar as English common law has not been amended by statutory provisions in the Cayman Islands. English case law is considered as persuasive in the courts of the Cayman Islands to the extent that there is no Cayman Islands case law to the contrary. A substantial proportion of the duties and responsibilities of directors of the PE fund (structured as an exempted company) are normally delegated to the investment manager of the PE fund under the terms of the investment management agreement.
Directors of an exempted company owe a number of fiduciary duties to the company. The fiduciary duties include the following:
- the duty to act in accordance with the constitution of the company (that is, the memorandum of association and articles of association);
- the duty to act in good faith in the best interests of the company; and
- the duty to act for a proper purpose.
The directors of an exempted company are also subject to the common law duty to undertake their functions as directors with due care, diligence and skill.
The constitutional documents of a Cayman Islands PE fund will usually contain indemnification provisions in favour of the general partner in the context of an ELP, or directors in the context of an exempted company and their respective affiliates for all liabilities, loss, damage, cost or expense, in the absence or fraud, wilful neglect or negligence (or other behaviour, such as dishonesty or gross negligence).
In the context of an exempted company, under the Companies Law, directors could also face criminal sanctions for criminal offences, including the following:
- fraud committed in the 12-month period prior to a winding up of the PE fund;
- misconduct in the course of a winding up of the PE fund; and
- making material omissions in statements relating to the company’s affairs in the course of a winding up.
Subject to any express provision of the LLC agreement to the contrary, a manager of an LLC owes no duty (fiduciary or otherwise) other than a duty to act in good faith in respect of the rights, authorities or obligations of the manager. The good faith duty can be expanded or restricted, but not eliminated, by the express provisions of the LLC agreement. A member does not owe any duty (fiduciary or otherwise) to the LLC or to a member in exercising any rights or authorities, or performing any obligations, in respect of the LLC. In particular, the LLC Law provides that where a member is exercising any vote, consent or approval right, it may do so in its own best interests even though it may not be in the best interests of the LLC or any other member. The LLC Law also expressly provides that any person serving on any board or committee of the LLC may, if expressly permitted to do so by the LLC agreement, act in a manner which the person believes to be in the best interests of a particular member (even though it may not be in the best interests of all the members or the LLC).
The Cayman Islands Monetary Authority (CIMA) has issued a Statement of Guidance for Regulated Mutual Funds (the Statement), in which it sets out CIMA’s expectations regarding the corporate governance regime of regulated mutual funds. In essence, CIMA expects the oversight, direction and management of a regulated mutual fund to be conducted in a fit and proper manner. Accordingly, the purpose of the Statement is to provide the governing body of a regulated mutual fund (Governing Body) and its operators (Operators) with guidance on the minimum expectations for the sound and prudent governance of the regulated mutual fund.
The Statement provides guidance for the Governing Body on matters such as: monitoring of a fund’s compliance with applicable laws, regulations and rules; oversight and supervision of the service providers to the funds; frequency of Governing Body meetings and service provider representation at such meetings; reporting by the investment manager and service providers; and identification and recording of conflicts of interest. The Statement also provides a non-exhaustive list of duties that CIMA considers applicable to an Operator, for example: ensuring it has capacity to apply its mind to oversee and supervise each regulated fund of which it is an operator; and ensuring the roles and responsibilities of all service providers are clearly defined, understood and are being adequately performed.
Gross negligence (as opposed to ‘negligence’) is not a fully recognised legal term under Cayman Islands law. However, gross negligence is often referred to in the constitutional document or agreements of a PE fund, but is usually defined either by reference to the laws of a jurisdiction that recognises gross negligence (eg, the state of Delaware in the United States) or is specifically defined in the relevant document.
Other special issues or requirements
Most of the special issues or requirements particular to PE funds structured as limited partnerships are governed by the terms of the partnership agreement. Typically, the partnership agreement will contain provisions stating the following:
- a limited partner may only transfer its partnership interests subject to the express terms of such agreement;
- the general partner may appoint or remove the investment manager of the PE fund; and
- advisory committees may be created (which are internal bodies that consent to, or approve of, certain actions by the general partner), the members of which can include limited partners. Limited partners who are members of these committees should read the terms of these advisory committees carefully to ensure that actions taken via an advisory committee are not deemed to be managing the affairs of the ELP and thereby risk losing their limited liability status.
Any limited partnership established under the laws of a jurisdiction other than the Cayman Islands may (provided that the laws of the foreign jurisdiction where it is organised permit or do not prohibit such a transfer), at any time upon effecting such amendments to the partnership agreement as shall be necessary to comply with the ELP Law and upon filing the required documents, be registered under the ELP Law, transfer by continuation to the Cayman Islands and, with effect from the date of the Certificate of Registration issued by the Registrar, would then be governed as an ELP in accordance with the ELP Law.
Where a limited partnership migrates to the Cayman Islands, the ELP and the partnership interests of its partners and their rights and liabilities, as against any person who is not a partner, shall cease to be governed by the laws of the jurisdiction from which it has migrated, with effect from the date indicated on the Certificate of Registration issued by the Registrar. However, any act or omission occurring before such date shall continue to be governed by such law or the laws of such other jurisdiction, provided always that such registration of the migrated limited partnership in the Cayman Islands as an ELP shall not operate to do any of the following:
- create a new legal entity;
- affect the property previously acquired by or on behalf of the ELP;
- affect any act or thing done prior to such registration or the rights, powers, authorities, functions or obligations of the ELP, any partner or any other person prior thereto; or
- render defective any legal proceedings by or against the ELP or any partner or any other person, and any legal proceedings that could have been continued or commenced by or against the ELP or any partner or any other person before its registration hereunder may, notwithstanding such registration, be continued or commenced after such registration and in respect of which such law or the laws of such other jurisdiction shall be of application.
The partnership agreement is typically modified to reflect requirements of the ELP Law.
A qualified transferring foreign company incorporated under the laws of a jurisdiction outside the Cayman Islands may continue by way of transfer into the Cayman Islands, provided that the laws of the foreign jurisdiction where it is incorporated permit or do not prohibit such a transfer. Such transfer by way of continuation does not create a new company or other new legal entity. The transferring foreign company is effectively taken from the foreign jurisdiction and redomiciled in the Cayman Islands as the same legal entity, but now governed by Cayman Islands law rather than the law of the foreign jurisdiction.
A qualified transferring foreign entity formed, registered, incorporated or existing under the laws of a jurisdiction outside the Cayman Islands may continue as an LLC by way of transfer into the Cayman Islands, provided that the laws of the foreign jurisdiction where it is incorporated permit or do not prohibit such a transfer. Such transfer by way of continuation does not create a new company or other new legal entity. The transferring foreign company is effectively taken from the foreign jurisdiction and redomiciled in the Cayman Islands as the same legal entity, but now governed by Cayman Islands law as an LLC rather than the law of the foreign jurisdiction.
Principal regulatory bodies
The principal regulatory body in the Cayman Islands for investment funds and investment managers is CIMA. PE funds are typically structured to be exempt from the application of the Mutual Funds Law and therefore are not required to register with CIMA because the investor’s partnership interests or shares are not redeemable or repurchasable at the investor’s option and therefore do not fall within the Mutual Funds Law definition of ‘equity interests’.
A CIMA-registered PE fund (ie, one where the partnership interests, shares or limited liability company interests) are redeemable at the option of the investor and has more than 15 investors) is required to prepare and submit annual audited financial statements to CIMA. CIMA may require such information or such explanation in respect of the PE fund as it may wish to carry out its duties under the Mutual Funds Law. A CIMA-registered PE fund must give CIMA access to or provide at any reasonable time all records relating to the PE fund. The Mutual Funds Law provides for substantial fines for failure to comply with any such requests by CIMA and CIMA may apply to the court to have the PE fund wound up.
Unless exemptions apply, an investment manager of a PE fund may be required to obtain a licence under the Securities Investment Business Law (2019 Revision) (SIBL) if it is incorporated or registered, or has an established place of business, in the Cayman Islands.
A PE fund may be required to register with CIMA. A PE fund is prohibited from doing business with the public of the Cayman Islands (other than so far as may be necessary for the carrying on of its business outside of the Cayman Islands).
The Cayman Islands’ Director Registration and Licensing Law, 2014 (as amended) requires all directors, whether resident in the Cayman Islands or non-resident, of regulated mutual funds and companies which maintain a registration as an excluded person pursuant to the SIBL to register with CIMA. Persons who hold more than 20 of such directorships will need to be licensed by CIMA and will be subject to enhanced regulatory requirements. Corporate directors, irrespective of directorship numbers held, will also need to be licensed by CIMA. Therefore, all directors of CIMA-registered PE funds and their Cayman Islands management companies (holding the SIBL exemption) will have to be registered with CIMA. A fee is payable upon application for registration or licensing. In addition, each such director will be required to make an annual filing each year with CIMA together with the payment of a fee, and if there are any changes to the information supplied to CIMA on registration or in any subsequent annual filing, the director concerned will be required to inform CIMA within 21 days of the change.
Registration of investment adviser
Investment managers that are vehicles incorporated or registered in the Cayman Islands, or any person or entity incorporated anywhere else in the world but with an established place of business in the Cayman Islands through which securities investment business is carried on, will be governed by the provisions of the SIBL and its licensing requirements.
Fund manager requirements
If the PE fund’s investment manager is registered under the SIBL, the directors of an investment manager which is a company must be registered with CIMA or where the director holds 20 or more directorships of mutual funds or excluded persons, licensed by CIMA. Where the SIBL does not apply to an investment manager, there will be no qualifications or licensing requirements required under Cayman Islands law for the PE fund manager and its principals or directors.