Guide to Establishing Private Equity, Venture Capital and Real Estate Funds in the Cayman Islands

There’s a reason that the Cayman Islands is one of the world’s biggest and most attractive hubs for offshore financial businesses. Not only does it provide a stable, tax-neutral platform but also offers a sound legislative and judicial system, confidentiality, a leading banking sector and legal and financial professional and support services.

As issues of high taxation, complex financial laws and economic and political instability continue to affect the onshore world, the attractiveness of the Cayman Islands as a location for establishing private equity, venture capital and real estate funds increases.

To help fund managers decide whether the Cayman Islands is the right home for their fund, we’ve outlined some important factors to consider when setting up a private equity or venture capital fund, as well as provided an overview of necessary documentation and relevant regulations.

Key Considerations

1. What Fund Structure Should You Use?

While an open-ended fund permits periodic redemptions by the investors and is a good choice for funds with liquid investment strategies (such as hedge funds), a closed-ended structure is suitable for those that require more time for their investments to mature.
In a closed-ended fund, an investor cannot redeem or exit from the fund until it is wound up. A closed-ended fund also only accepts investors for a set period, such that the number of investors is fixed at the closing of the subscription deadline. Because investors want to know how long their capital will be tied up, a closed-ended fund usually has a finite lifespan.

2. The Limited Partnerships

The most popular Cayman Islands vehicle for Asian private equity, venture capital and real estate funds is the exempted limited partnership. The Exempted Limited Partnership Law (“ELPL”) governs the formation of these kinds of partnerships. To be registered under the ELPL, such partnerships must have a general partner and at least one limited partner. The general partner is typically incorporated as a Cayman Islands exempted company. An exempted limited partnership does not have a separate legal personality and the general partner is responsible for the management of the partnership business. Contracts and other documents with third parties will therefore be entered into by the general partner on behalf of the partnership.

Under the ELPL, there are a number of specific requirements applicable to the exempted limited partnership structure. These include that at least one general partner must have a presence in the Cayman Islands (which can take various forms) and that on the insolvency of the partnership, the general partner is liable for all the partnership’s debts and obligations.

It’s worth noting that, under the ELPL, a limited partner’s role is very different than that of a general partner. A limited partner is a passive investor and must not take part in the conduct of the business of the partnership or it will too risk being liable for the partnership’s debts and obligations. The ELPL’s “safe harbour” provisions, however, enable a limited partner to undertake certain roles or to perform certain actions with respect to the partnership without risking its limited liability status. For example, a limited partner may approve amendments to the partnership agreement serve on, or nominate members to, a board or committee of the general partner, the partnership or the partners or consult with or advise a general partner.

 

To continue reading full articles in PDF format:
Guide to Establishing Private Equity, Venture Capital and Real Estate Funds in the Cayman Islands

 

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