October 18, 2019

Europe, the U.S. … or the Cayman Islands? Tackling the World’s Fund Barriers

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By Selma Lee Arch

In the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, U.S. private equity firms have been subjected to a variety of additional regulation, from Form PF to Securities and Exchange Commission registration. These firms have beefed-up their compliance and legal teams following the entry into force of these new regulations.

Nevertheless, private equity firms seeking to grow overseas still have favorable opportunities for establishing new funds in , as well as the , even with the latter looking to enhance private equity regulation.

In response to findings in an assessment by the Caribbean Financial Action Task Force (CFATF) indicating needed areas of improvement in the Caymans’ anti-money-laundering (AML) and counter-financing of terrorism (CFT) framework, the government of the Cayman Islands considered 11 bills to amend financial laws and disclosures. They include:

  • The Limited Liability Companies (Amendment) Bill of 2019, which would require the names of directors and all other basic information about limited liability companies (LLCs) to be publicly disclosed, and punish those LLCs that fail to maintain up-to-date information.
  • The Limited Liability Partnership (Amendment) Bill of 2019, which would require all basic details about a limited liability partnership (LLP) to be readily available at the LLP’s registered office, and also subject LLPs that don’t maintain up-to-date information about beneficial ownership to penalties.

Both of these bills were among those passed by the Cayman Islands Legislative Assembly on July 26, 2019.

Furthermore, the Cayman Islands’ Ministry of Commerce proposed—and the Legislative Assembly passed—changes to the British Overseas Territory’s Trade and Business Licensing Law, which mandate that the licensing board consider a license applicant’s compliance with AML and CFT regulations prior to granting, renewing, or revoking a license.

The proposals for additional Cayman Islands financial services and investment regulations are not designed to punish or drive away private equity and other foreign investments from the U.S. and other countries. They are in line with global efforts to enhance AML and CFT infrastructure.

Tara Rivers, Cayman Islands Minister of Financial Services and Home Affairs, said in an official statement: “The government is committed to addressing the recommendations outlined in the CFATF fourth round mutual evaluation report to further cement our standing as a responsible and responsive jurisdiction in the global fight against money laundering and terrorist financing.”

The spirit of strengthened Cayman Islands legislation is what private equity firms should consider when evaluating the Caymans as a domicile for new funds. The Cayman government remains friendly to new investment, and the territory’s adherence to British law, common use of English in everyday affairs and in business, and proximity to the U.S. will continue to make the Cayman Islands a favorable destination for private equity fund registration and growth.

The European Connection

Certain European nations such as are also receptive to foreign private equity firms establishing and registering new funds on their soil. The Grand Duchy of is a member of the European Union and is politically and economically stable. It is already home to a number of private equity structures and is a European hub for private equity firms in the U.S. and around the world.

Since the 1990s, Luxembourg has enabled private equity firms to structure SOPARFI (société de participation financière) investment vehicles, which allow them to make international acquisitions through the Grand Duchy. Today, estimates Luxembourg is host to more than 25,000 SOPARFIs. These investment vehicles can be structured in three different legal forms, all of which are subject to limited disclosure.

In the 2000s, Luxembourg introduced two regulated investment vehicles for the benefit of private equity firms—the SICAR (société d’investissement en capital à risque, or investment company in risk capital) and SIF (fonds d’investissement specialisé, or specialized investment fund). SICARs enable private equity and venture capital firms to make direct or indirect investments in assets they plan to strengthen and exit, and are not subject to risk-spreading rules. SIFs, meanwhile, require a minimum 30% investment diversification in exchange for flexible regulations and tax neutrality.

Luxembourg was also among the first nations to implement the Alternative Investment Fund Managers Directive (AIFMD) framework, which permits EU-domiciled alternative investment funds to be distributed in any other EU member states without requiring further authorization or registration criteria to be met. If the AIFMD creates a trusted brand for private equity funds comparable to the UCITS designation for their traditional counterparts, then this framework may make private equity funds more accessible and attractive around the world. More recently, in 2016, Luxembourg introduced an innovative and cost efficient fund vehicle, the Reserved Alternative Investment Fund (RAIF), which combines the flexibility of the SIF and the SICAR while conforming to the AIFMD – thus offering the best of all worlds.

In addition, another EU member state, Ireland, beckons for U.S. private equity firms. Many private equity managers and funds in London are expected to relocate to either Luxembourg or Dublin following Brexit, according to Thomson Reuters, and based on Mergermarket data, private equity may account for up to one-quarter of M&A financing in M&A this year. Dublin, like the Cayman Islands, offers political stability, widespread fluency in English, as well as closer proximity to the U.S. than other domiciles.

Private equity firms in the U.S. seeking to grow and invest overseas still have some very attractive and welcoming options. With the help of compliance and legal partners, private equity firms can successfully navigate the regulations in these alternative jurisdictions.

Selma Lee Arch is Managing Director and Country Delivery Director for the Cayman Islands at IQ-EQ, a leading investor services group supporting fund managers, global companies, family offices and private clients operating worldwide, including top private equity firms.

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