The number of private funds being established in the Cayman Islands has continued to rise. This sector proved to be resilient and flexible as it swiftly adapted to a new regulatory regime and turned the additional oversight into an advantage.
“The growth of private funds is a function of the Cayman Islands’ well-respected legislative and regulatory framework, tax neutral status and local knowledge base,” outlines Richard Gordon, managing director – Cayman, Ocorian. “In addition, the enhanced private funds regulatory regime seems to be having a positive effect. It is providing investors with greater comfort by implementing supervisory oversight and increasing transparency into the operations of these entities, thereby assisting in fuelling their growth.”
Within the context of a fast-moving global regulatory environment, managers are facing increasing investor demands for transparency and information. Access to quality information, report generation and client portals are therefore taking on greater importance.
Consequently, having access to a sophisticated and flexible administration platform which can deal with capital call volumes and valuation challenges is also becoming a priority. Gordon explains: “In view of this, many managers are choosing to either invest heavily in greater IT capability or to outsource their middle office functions entirely and concentrate on their core capability.”
The progress of private funds has been outpacing traditional hedge products for a number of years. This is likely to persist for years to come, given the increasing acceptance of private funds as a recognised asset class.
Kendra Foster notes: “Ocorian has recognised the growing role of private funds for some time. We have been increasingly positioning ourselves to be able to fully meet our clients’ needs throughout the fund life cycle.
“Examples of this are the business affiliation with Ocorian Law, our investment in flexible and sophisticated fund administration platforms, and increased fiduciary capability designed to provide the gold standard in corporate governance.”
As a jurisdiction, the Cayman Islands’ geography, regulatory regime and readily available private funds’ specialists make it uniquely placed among managers looking for a single point of contact.
With approximately 70% of non-US domiciled alternative investment funds managed by US SEC registered advisors domiciled in the Cayman Islands, the jurisdiction is very much at the centre of global private assets trends when it comes to fund formation and growth.
“Managers come to the Cayman Islands looking for a seamless service and a reasonable value proposition, which, ideally, is in their time zone. They also want a flexible and focused regulatory framework that is appropriate for the nature, size, and complexity of the structure,” comments Foster.
Further, the unique advantage of Cayman’s new private funds regulatory regime is the ability to market before registration. This therefore enables managers to gauge investor interest before having to incur regulatory fees and other set-up costs.
Growing need for outsourced administration
The transition from an unregulated to an appropriately balanced regulatory framework has meant significant changes for clients who previously carried out administration in-house or implemented compliance policies using their equivalent home country standards, as opposed to those of the Cayman Islands. Due to the new requirements, firms such as these are now looking to hire dedicated administrators to assist them with these obligations.
“In addition, managers are looking to more actively engage with their trusted Cayman Islands advisors to get direction or assist with the many new queries and obligations,” remarks Foster, “In a number of cases, the increased regulatory oversight led to the number of private funds controllers expanding from one to two. While considering the composition of the boards and committees controlling private funds, it is now more important than ever to ensure such bodies are thoughtfully organised. The need for more guidance is often addressed by engaging non-executive directors resident in the Cayman Islands who can provide key insights in a cost-effective manner.”
Gordon points out, “Ocorian’s response has been multi-faceted; developing solutions organically where possible and making targeted acquisitions where it enhanced the value proposition”. In recent years, Ocorian has formed the aforementioned Ocorian Law to meet the one-stop-shop needs of clients. The firm has also added and made acquisitions to build further fund administration capability and built a client facing AML officers solution. Most recently, Ocorian acquired Newgate Compliance, a UK-based compliance consultancy offering a modern, systemised solution to the traditional compliance function.
When it comes to new regulation, there are no new pieces of major legislation currently on the horizon which would affect private funds directly. However, CIMA has recently released rules and guidance, including but not limited to, guidance on segregation of assets, calculation of asset values and marketing materials.
“We anticipate that further rules and guidance are likely to follow as a result of data and information submitted to and analysed by CIMA,” Foster notes, “In particular, it is likely that corporate governance could become a focus as the jurisdiction looks to raise standards to close the gap with those best practices in effect in the open-ended sector.”
The outlook for the sector remains strong especially since the pandemic caused very little disruption to these trends in the Cayman Islands. “In fact, this time has served to demonstrate the resilience and professionalism of the sector including government, the regulators and the local legal and financial service providers,” Gordon concludes, “The robust technological infrastructure implemented allowed for private fund registrations and initial formation to continue online throughout the pandemic.”
Managing Director – Cayman, Ocorian
Richard is the Managing Director of Ocorian’s Cayman office. He is responsible for the operations and client service teams of the Cayman office which specialise in provision of trustee, director and administration services to Cayman funds, CLO’s, corporate SPV’s and private clients. Richard has over fifteen years’ experience in the funds and capital markets sectors providing corporate governance and administration solutions to a variety of entities and clients around the world.
Managing Partner – Cayman, Ocorian
Kendra is the Managing Partner of the legal arm of Ocorian’s Cayman office and specialises in regulatory, licensing, risk management and information disclosure matters. With over 15 years of experience in the Cayman Islands financial services industry, Kendra is proficient in financial services, investment funds, and general corporate commercial practice areas and also routinely advises on anti-money laundering, counter-terrorism financing, counter-proliferation financing and sanctions.