Exploring a Cayman Fund? 5 key considerations for Australian fund managers. (Part 1 - Planning)

The Cayman Islands can be an attractive base for globally managed wholesale funds particularly due to its tax neutral status, flexible structuring options and mature financial services market.  A Cayman structure may also provide access to capital for investors familiar with Cayman vehicles.

Of course, Cayman legal advice is crucial in establishing these kinds of vehicles.  However, there are also a number of vital considerations for Australian fund managers to ensure compliance with Australian obligations.  We have outlined 5 key considerations for Australian fund managers over this 2 part series.

This part details some preliminary planning considerations when considering a Cayman vehicle. 

1. Onshore / offshore structure

   In short:  Many structures may be investor and tax driven.  Evaluate the best structures up front and understand the implications on the relevant relationships in the structure as these will flow through all your documentation. 

   For Australian fund managers there may be a temptation to copy paste their existing structures overseas to provide access to new capital.  However, there are some structural quirks including, but not limited to, the below which should be considered at the outset.

   • Contractual arrangements:  A Cayman fund set up as an exempted company with limited liability (which is the focus of this article) (Cayman Fund) is different to a unit trust because it is a company with legal personality that can enter into contractual relationships rather than a trustee acting in its capacity as trustee of a trust.  The Cayman Fund is more akin to a CCIV (corporate collective investment vehicle) in this way.  This also means that shares are distributed from the Cayman Fund rather than units.  These structural differences can necessitate changes to the terminology in the suite of offer documents.

   • Formation cost: Establishing and maintaining a fund in Australia is significantly more expensive than doing so for a Cayman Fund.  This is largely due to the stricter regulatory requirements in the Australian fund management industry, which lead to higher ancillary costs, including incorporation, advisory, administration, custodian, and depository fees.

   • Fund structure:  Investors may have certain restrictions such as the requirements or a preference to invest in a feeder fund, parallel fund or directly into an operational distributing fund.  These factors may impact preliminary structing. 

     For example, parallel funds operate alongside main funds and serve as specialised investment vehicles.  They are designed to help certain entities, such as investors with specific regulatory needs, maintain tax benefits, meet regulatory requirements, and manage risk profiles, particularly when direct investment into the main fund might not be tax-efficient or feasible.  The main fund and parallel fund are established as separate legal entities, operating in different jurisdictions, yet they are part of the same global asset pool as the main fund.  The parallel fund structures broaden investor reach by, for example, offering investments through both onshore locations like Australia and offshore jurisdictions such as the Cayman Islands, thereby attracting a wider range of investors by addressing their specific tax and regulatory needs.

   • Share structure:  The capital makeup of the Cayman Fund should also be considered.  Cayman Funds can have a mix of management shares (voting, non-distributing shares) and participating shares (non-voting, distributing shares) along with flexibility for other classes.  Consider how these shares should be held and who should have voting power or the benefit of distributions in respect of the Cayman Fund.

   • Governance:  As a company, directors must sit on the board of the Cayman Fund.  To ensure separation with the investment manager, these should be separate people.  The roles, responsibilities and decision making of the Cayman Fund and the investment manager should be clearly distinguished and specified in the suite of offer documents. 

   To reinforce this separation, it is advisable to implement governance practices, such as, regular board meetings, independent audits, and compliance checks.  Doing so not only enhances the credibility of the Cayman Fund but also provides investors with confidence that their interests are being represented and safeguarded.

2. Service providers

   In short:  Consider practical challenges of transacting overseas, if relevant authorisations and licenses are held and if Australian requirements can still be satisfied.

   A key question for Australian fund managers is what service providers will be engaged.  Should these be Australian service providers?  Are they best placed overseas?  What Australian obligations apply?  If you are engaging local service providers for overseas it is important to consider threshold matters such as:

   • are appropriate Australian authorisations and licenses held (where necessary);

   • are the regulations set by the Cayman Islands Monetary Authority (CIMA), which oversee all financial services in the jurisdiction's banking, investment, and insurance industries, upheld;

   • if you are a market maker, broker-dealer, securities arranger, securities advisor, and securities manager, is the Security Investment Business Act (SIBA) that effectively governs the rules for persons engaged in securities investment business in or from the Cayman Islands, complied with;

   • time zones and whether certain services can be delivered at the relevant time in a different jurisdiction; and

   • are the indemnities proposed under the agreement suitable and are these fit for purpose given the Australian compliance obligations.