When starting a fund in the Cayman Islands, it can be all too easy to lose sight of the bigger picture. Christine Godfray and Paul Nathan look at how you can hit the ground running, and ensure that your fund is best positioned to make a splash.
As an independent asset manager your skills and experience lie with asset allocation/security selection and investor relations, and a mutual fund structure can provide you with a means to pool multiple investors within a single vehicle, leading to economies of scale which bring benefits to both you and your investors.
These include reduced operational costs, asset diversification, audited performance published on an international pricing service and greater efficiency in your operational processes. As you take the first steps to setting up your offshore fund, here are a few issues to consider.
One of the most common mistakes investment managers make is to create a fund which is perfect for their current clients and the existing market environment. We have seen only too clearly the impact of market changes over the last five years and the difficulties that some funds have experienced, especially those that were created with insufficient operational flexibility.
Part of the fund set-up process is to explore different scenarios that may play out in the future and decide how best to structure a new fund so that it can continue to meet investor expectations in terms of investment strategy and liquidity options over the anticipated life of the fund.
Many investment managers introduce restrictions on what the fund may or may not invest. It can make sense to ensure that, for example, illiquid securities do not amount to more than, for example, 10 percent of a liquid fund. However, any limitation may become an onerous restriction rather than a protectionist measure if markets change, so unless such restrictions are driven by investor wishes it is often best to try to avoid them. There are no limits or restrictions relating to investment strategy imposed by law on a Cayman Islands fund.
Where to go?
When considering the jurisdiction in which to launch your fund there are a number of criteria which will be vital to the success of your fund. The Cayman Islands offers many of these, such as political stability, a supply of experienced and globally recognised service providers, and an established legal framework within which to operate your fund. The jurisdiction’s regulatory flexibility is also a major asset.
In addition, the Registrar of Companies and the Cayman Islands Monetary Authority, through which funds are incorporated and regulated, respectively, both provide a straightforward and timely registration process. In practice the speed at which a fund is created and launched is driven more by your own timetable than the response time of the regulators and/or service providers.
Further, under present legislation there are no income, corporation, capital gains or other taxes in effect in the Cayman Islands which would be applicable to your fund. The fund may apply to the governor-in-cabinet of the Cayman Islands for an undertaking that in the event of any change to the taxation legislation, for a period of 20 years (or 50 years in the case of a partnership) from the date of the grant of the undertaking, the fund will not be chargeable to tax in the Cayman Islands on its income or its capital gains arising in the Cayman Islands.
The more simple the fund structure and strategy, the wider the pool of administrators able to service your fund. Choosing your service provider is a very personal experience and involves forming a relationship which will be supportive through both the launch process and thereafter. The speed of response to those early questions will help you determine how you will be treated once the fund has launched.
There will be times when circumstances outside of your control require very personalised or time-sensitive assistance beyond the routine administration services. At such critical times you will not want to ‘take a number’ or be passed to another department which is not familiar with you or your fund, but instead you should expect constructive suggestions directly from your day-to-day contacts and innovative solutions to any more unusual issues that arise. Further, the administrator needs to understand your product and make sure that its own processes and controls are designed to minimise the risk of operational errors in your fund.
Product is everything
The structure of your fund itself is very important. Do you want your fund created as a trust, a partnership, or a company? In the case of a company, which is by far the most common structure for mutual funds, who do you want to sit on the board of directors? Is the investment strategy better suited to an open or closed ended fund vehicle?
How often do you need to have the fund valued? Is this criterion important to potential investors? Does the frequency of pricing underlying investments match the valuation frequency of your fund? How often do you want to allow investors to subscribe for shares/interests? How frequently do you want them to be able to redeem their shares/interests? Bearing in mind that the more frequently the fund permits investor transactions, the more frequently the fund will need to be valued, which in turn will have an impact on the administration fees charged.
Do you want to pay for unutilised valuation frequency or instead allow for ad hoc valuations which give investors the option to redeem at regular intervals without the associated cost burden to all investors of a fixed schedule of valuations?
What about voting rights? Do you want to hold the voting rights in relation to some or all matters, or will investors also hold voting shares/interests? Will the fund have an indefinite life or, as is more often the case with private equity funds, will it have a set period in which to operate? Will such a period be capable of extension and, if so, by whom? What exit plan is envisaged for investors?
What costs are involved?
Typically, the administrator will be compensated based on a set percentage of the net asset value of the assets held by the fund. The administrator may wish to impose a minimum annual fee to ensure adequate compensation while the fund is growing. You may wish to impose a cap on administration fees so that as assets held by the fund grow the administrator is not earning higher fees which are not commensurate with the level of work undertaken. Realistic discussions regarding the potential size of the fund will help both parties negotiate these fees prior to launch.
It will be natural for you to compare the costs of administering your fund between different service providers. However, make sure that the package of services is comparable. Some administrators charge separately for services which traditionally have fallen under the administration fee. Examples include registered office services, secretarial services, preparation of financial statements for audit purposes, reporting and amendments to fund contracts.
It will be important to make sure that any additional costs, which can be substantial when charged separately from the basic administration fee, are discussed up front and, if necessary, properly disclosed.
Some of the key costs to consider when setting up a fund include, but are not limited to, the set-up fee charged by an administrator or lawyer to prepare the fund’s offering prospectus and service contracts, as well as to incorporate the fund vehicle and pay initial statutory expenses; mutual fund registration fees; directors’ fees; annual audit fees; and the fees of transfer agents, registered office and secretarial fees, if not provided as part of the administration fee.
Getting the chemistry right
Choosing your administrator should be like choosing your future spouse. Make sure that you spend time getting to know each other and make sure the chemistry works. Problems with resolving issues at an early stage in the relationship do not bode well for the future. Keep an open line of communication and be sure that both parties are ready to commit to the launch deadline.
Discuss expectations of the roles to be played by each party and be up front with discussions regarding the basis for any changes in fees. Taking the time to understand each other’s needs and having in-built flexibility within the fund structure and service agreements to handle unexpected issues which may arise, will help to ensure a smooth and mutually beneficial relationship.
New fund business and client support is provided by Christine Godfray and Paul Nathan.
Christine Godfray is CEO of Swiss & Global Fund Administration (Cayman) Ltd. and can be contacted at firstname.lastname@example.org
Paul Nathan is a director of Swiss & Global Fund Administration (Cayman) Ltd. and can be contacted at email@example.com
Christine Godfray holds the position of CEO of Swiss & Global Fund Administration (Cayman) Ltd. She was employed by Julius Baer Bank and Trust Company Ltd. in the Cayman Islands from 1993 and previously worked for Coopers & Lybrand in Jersey, Channel Islands as an auditor from 1986. She is a resident of the Cayman Islands and a member of the Institute of Chartered Accountants in England and Wales.
Paul Nathan is a director of Swiss & Global Fund Administration (Cayman) Ltd. with responsibilities for new business and client support. He was employed by Bank Julius Baer in New York from 1982 and currently provides consultancy services. He has a BA from Claremont McKenna College and an MBA from New York University.
Swiss & Global Fund Administration (Cayman) Ltd was formed in October 2009 to undertake the fund administration functions previously provided by the Julius Baer Group in the Cayman Islands since 1974, and is staffed and managed by the same individuals. Swiss & Global Fund Administration (Cayman) Ltd is a wholly owned subsidiary of GAM Holding Ltd, a company listed on the SIX Swiss Exchange.