By Ingrid Pierce – New managers launching their first offshore fund have many questions. Here are some of the answers.
One of the first questions managers have is how long the process will take. Timing to launch of a new offshore fund depends on various factors, including the nature and complexity of the structure, which third parties need to review documents, and whether any special terms are being offered to strategic investors. A plain vanilla fund should take around six weeks, although it can be done more quickly.
One of the most time-consuming matters is negotiating independent service provider agreements, especially where the client does not have an existing relationship. Finding the right administrator with appropriate technology and expertise is critical, and it is important to confirm that the administrator will take on anti-money laundering compliance responsibilities.
All regulated Cayman funds must have an approved auditor sign-off on the financial statements of the fund. For managers with no existing relationship, their domestic or Cayman audit firm will need to undertake their own assessment of the manager and proposed structure before the retainer can be agreed.
Clients frequently establish relationships with a prime broker and custodian at an early stage in the process. Note, however, that bank and brokerage accounts cannot be set up in the name of the fund before it is incorporated and the directors appointed.
The next step is to confirm the fund structure and the vehicles to be put in place. Legal and tax advice should be sought to clarify whether it is necessary or appropriate to establish an exempted limited company, an exempted limited partnership or an exempted unit trust. The choice of structure will be largely driven by the type of investors coming into the fund. As long as the name of the fund is available, the vehicle can usually be established within 24 hours.
Around two-thirds of offshore funds have independent directors, and in most of these cases they are a majority on the board. The Cayman Islands Monetary Authority requires that regulated funds have at least two directors. Many of our clients see the benefits of having directors with diverse backgrounds so that each brings some relevant experience to the table.
Offshore counsel’s role is typically to establish the fund structure, draft the constitutional documents and advise on legal and regulatory issues. Documents will be prepared for launch, including the draft board minutes, and the fund will be registered with the regulator. Once the fund is established, offshore counsel will typically act for and advise the fund.
Managers are under increasing pressure to contain costs when setting up a new fund. Legal costs will vary depending on the complexity of the structure, the number of entities involved and the extent to which the fund documents require bespoke drafting. Director and service provider fees vary widely, so managers should do their homework before committing the fund to a long-term expense.
Each fund is required to have a registered office in the Cayman Islands in addition to paying the annual government and regulatory fees (if CIMA-registered.) Total start-up costs for a stand-alone offshore fund are likely to be around USD100,000, although this may be more or less depending on the number of entities, complexity of the structure, and so forth.
Start-up managers should feel free to contact us on a no-obligation basis to chat through any questions or concerns.
Ingrid Pierce is a partner in Walkers’ Cayman Islands office and head of the Cayman nvestment Funds Group