The Cayman Islands has become one of the world’s leading jurisdictions for the establishment of investment funds. As of 2022, there are over 12,995 mutual funds and 15,854 private funds registered in the Cayman Islands. With its tax-neutral regime, stable political environment, flexible regulatory framework and extensive professional services, the Cayman Islands provides an attractive base for investment funds targeting investors worldwide. This article will introduce the three main types of investment funds in the Cayman Islands and key considerations when establishing them.
Exempted companies are the most common corporate structure used for Cayman Islands investment funds
Exempted companies incorporated under the Cayman Islands Companies Act are the most prevalent legal vehicle used to establish Cayman funds. They provide great flexibility for creating customized share classes and rights for different investors. Exempted companies also benefit from unlimited duration, no restriction on shareholder numbers and limited public disclosure requirements. The share capital of an exempted company can be denominated in any currency. Common documents drafted when setting up a Cayman exempted company fund include the Memorandum and Articles of Association, Term Sheet, various board and shareholder resolutions, etc.
Exempted limited partnerships offer flexibility while limiting general partner liability risks
Exempted limited partnerships (ELPs) registered under the Exempted Limited Partnership Act are also a popular investment fund vehicle in the Cayman Islands. They require at least one general partner and one limited partner. The general partner typically controls the management and operation of the ELP while limited partners contribute capital without participating in control or management. A key advantage of the ELP structure is that it limits the liability exposure of limited partners to their capital contributions. The ELP agreement sets out capital commitment, contribution and distribution provisions. ELPs have become a preferred structure for private equity and venture capital funds targeting non-U.S. investors.
LLCs merge the benefits of corporate flexibility and partnership tax treatment
The Cayman Islands Limited Liability Companies Act introduced Cayman LLCs in 2016, which have quickly gained popularity due to their unique hybrid features. Cayman LLCs possess separate legal personality like exempted companies but allow customized limited liability protections for members, similar to limited partnerships. The operating agreement offers maximum flexibility for members to tailor management, voting rights, economic and information rights. LLCs also provide flow-through tax treatment and avoid taxation of the entity itself. Overall, Cayman LLCs merge the benefits of corporate flexibility and partnership tax efficiency, making them suitable for a wide range of investment funds targeting U.S. taxable investors.
The Cayman Islands offers global fund managers great flexibility to establish customized investment funds using exempted companies, exempted limited partnerships or LLCs catering to specific commercial needs and investor profiles.