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OCTOBER 2013
Legal Focus
91 Private Funds
This month we take a look at the world of Private Funds and the issues that surround them. To this end we speak to Rolf Lindsay and Ben Benson from Walkers in the Cayman Islands. Here they discuss with us the challenges that arise and how they can be navigated, the legal implications private funds bring and the legislative changes that have affected the sector.
What challenges and complexities arise around Private Funds, and how do you navigate them?
With no direct taxation, the Cayman Islands provides an efficient platform for the conduct of international business, whereby investors from around the globe are able to pool resources to invest without returns on that investment being subject to an additional layer of taxation beyond that imposed by the investor’s home jurisdiction and the jurisdictions where trading profits are made. The ability to raise capital efficiently in a tax neutral environment, and the benefits to investors and the jurisdictions in which they deploy their capital are significant and vital at a time when the need for efficient means of raising international capital has rarely been more acute. In the context of private funds, this results in significant investment in onshore markets (such as the United States and Europe) by foreign investors bringing the potential to enhance corporate revenues, shareholder returns and ultimately the domestic tax base. Essential
to meeting the challenges and
complexities of international fund raising, the Cayman Islands offers developed and widely- understood structures operating under a common law system based on English law and statutory regimes that are investment-focused and highly responsive to changes in the global marketplace.
What are the key legal implications that need to be considered when dealing with Private Funds in your country?
The principal piece of Cayman Islands legislation applicable to investment funds is the Mutual Funds Law which seeks only to regulate open ended funds (where the investment is redeemable or repurchasable at the option of an investor). Private equity or closed ended funds (which do not permit investors voluntarily to withdraw) are not currently subject to regulation or supervision in the Cayman Islands. Having determined the broad nature of the fund, it is if then important to choose the most appropriate form of vehicle(s) for the fund structure. In certain instances a corporate entity will be best suited, whilst other structures will call for the employment of limited partnerships or unit trusts.
Whatever the case, the law and regulation governing the formation and management of investment vehicles has evolved, and continues to evolve, to afford the contracting the parties the flexibility to structure such entities, however complex, in a manner that best suits their commercial needs.
The structure in place, it then falls to Cayman and onshore counsel to ensure that practices and procedures are introduced to ensure that the fund complies with the exacting standards of applicable corporate governance,
regulation, know- your-client and anti-money laundering rules.
Have there been any legislative changes that have affected your work recently?
Financial services legislation and the regulatory framework continue to evolve in the Cayman Islands as the jurisdiction responds to developments in the market and the implementation of new global regulations.
By way of example, we are currently anticipating the updating of our Exempted Limited Partnership Law that anticipates trends in fund structuring and more closely mirror the law and practice in Delaware, with the aim of continuing to provide a cutting edge environment and consistency of approach with our counterparts in Delaware for structuring and forming private equity funds. The changes, which are much anticipated by private equity practitioners and their advisors, follow extensive consultation both within and outside the Islands and illustrate the ability of the jurisdiction to respond swiftly to an evolving world.
Elsewhere, increased international regulatory
requirements, driven by the response to the global financial crisis from governments in the US and in Europe, have dominated discussions in recent years. At the same time, the industry is facing the implementation of the EU's Alternative Investment Fund Managers Directive, the imposition of the Volcker Rule - which places restrictions on the proprietary trading activities of banks - and FATCA legislation. Overall the picture is one of significantly
Ben Benson Partner – cayman Islands t: +1 345 814 4552 E: ben.benson@walkersglobal.com
higher compliance costs, which has raised barriers of entry for new managers to a large degree, as well as placing extreme demands on managers' time. There has been a notable trend among our clients to increase the size of their internal compliance teams and hire their own heads of compliance.
The private funds industry has always managed to adapt and reinvent itself in response to changing economic conditions. Meeting the challenges of the new regulatory landscape will make for a stronger
industry more focussed on the
management of systemic risk. The practical effects of regulation, such as the spin-out of managers from former proprietary trading desks at banks as a result of the Volcker Rule, present new opportunities in an environment where competition for the allocation of funds is fierce, particularly among new managers entering the market.
In the Cayman Islands, the Cayman Islands Monetary Authority (CIMA) is currently involved in a review of corporate governance in the investment funds sector and Walkers has been closely involved in an industry-wide consultation exercise.
In
addition to extending the current Statement of Guidance, the relatively broad proposals also include the potential regulation of directors. LM
contact:
Rolf Lindsay Partner – cayman Islands t: +1 345 914 6307 E: rolf.lindsay@walkersglobal.com