Q&A with Jude Scott, Chief Executive Officer (CEO) of Cayman Finance…
How would you assess the current health of Cayman’s funds industry?
Cayman continues to be a top jurisdiction for formation of Alternative Investment fund products, with the world’s top managers using Cayman Islands vehicles in their structures. All of us will be well aware of Cayman’s strength in hedge funds, with the Cayman Islands being home to over 10,000 registered hedge funds. Cayman’s fund offering also includes a significant number of Alternative Investment funds outside of the traditional hedge fund, including many thousand private equity, venture capital and real estate funds. In fact, many estimates would put the size of Cayman’s PE fund industry as comparable to that of its more well-known hedge fund industry. This is a story we would like to tell more.
The Cayman market reflects many of the themes industry participants are seeing onshore, particularly in the US investment funds market. Investors have consistently ranked performance as the most significant factor in selecting new funds, as well as the most significant driver for reducing allocations. The indicators are that investors are allocating capital to fewer managers and as more traditional asset managers continue to migrate into private funds. We have seen increasing consolidation amongst investment managers and predict this will continue along with competition for capital and pressure on fees.
Where are the main growth areas in terms of fund registrations?
We still see the Cayman Islands as the primary offshore jurisdiction for private fund managers in North America, the UK and parts of Asia, including Japan.
We continue to see a demand for credit funds although we have seen an increase in real estate funds, particularly those with underlying assets in Asia. As the global markets continue developments and enhancements in the AI and fintech space, we expect continued interest by managers and funds in this area with a growing interest in cryptocurrency offerings.
We also observe an increased popularity with Cayman Islands segregated portfolio companies (SPCs), liked for their flexibility, speed to market and the cost efficiencies for managers with multiple portfolios. The majority of SPCs tend to be regulated by the Cayman Islands Monetary Authority (CIMA) unless meeting the criteria for exemption from registration with CIMA.
The Cayman LLC vehicle was introduced just over a year ago. How well has this been received among fund managers and why was it important that Cayman introduced such a product?
We now routinely see Cayman Islands exempted limited partnerships formed with Cayman LLCs as their general partner, or with general partners in existing fund structures being replaced by, or converted into, Cayman LLCs. Managers may be seeking to either move their fund structures entirely to Cayman by swapping out existing Delaware LLC general partners, or to replace Cayman exempted company general partners with LLCs that offer greater flexibility with regards to governance structures, fiduciary duties and the allocation of carried interest amongst individual managers.
That the Cayman LLC has quickly become a recognised and established vehicle utilised frequently by managers only confirms the significance of the introduction of this product that delivers greater choice for fund structuring, and further complements the existing stable of legal vehicles available in the Cayman Islands for international transactions, including exempted limited companies, exempted limited partnerships and exempted unit trusts.
Cayman Islands LLCs have been available for only a relatively short while, however we anticipate that there will already be approximately 1,000 Cayman Islands LLCs registered by the end of Q1 2018.
The main Cayman Islands vehicles available for structuring funds remain the exempted company (eg for open-ended alternative investment funds), the exempted limited partnership (e.g. for closed-ended alternative investment funds) and the trust (e.g. the unit trust is often the preferred investment vehicle for certain Asian investors). These vehicles are as popular as ever, but the Cayman Islands Government responded to requests, particularly from the investment funds industry, to offer an additional structuring solution – the Cayman Islands LLC.
In most cases, it is the more general corporate and commercial applications that resonate with the funds industry, such as the use of LLCs as joint venture companies, for management holding vehicles, carried interest distribution vehicles or as general partner entities.
What initiatives are you pushing to further enhance Cayman’s reputation in the market?
A key area for continued innovation by Cayman is financial technology. Fintech will disrupt the full range of financial services, including the institutional investor sector that Cayman plays such a leading role in. However, the disruption won’t just be to the marketplace but to the existing regulatory regime as well. Cayman intends to establish itself as a jurisdiction that is adjusting its business, legal and regulatory practices to match the changes fintech will ultimately produce, which will position us as a leader in the new marketplace.
Our specific focus is ‘smart fintech regulation’. This approach will allow new technology to be successfully utilised within the financial services industry, including for alternative investment funds. In particular Cayman is focused on the development of a certified digital identity platform, which can improve business efficiency and quality, streamline costs and support effective regulation.
The Cayman Islands was not included on the EU’s list of non-cooperative tax jurisdictions at the end of last year. Could you comment on this?
Cayman Finance and the Cayman Islands Government worked hard together to address concerns the European Union raised during the process if considering non-cooperative jurisdictions last year. I think the outcome reflects that Cayman is at the forefront of regulatory and tax compliance and information exchange.
The Cayman Islands meets or exceeds the highest global financial standards, sharing the same OECD rating as many EU Member States. We were an early adopter of international best practices and standards for transparency and cross-border cooperation and the more EU officials learned about that the more they came to regard Cayman as a cooperative jurisdiction.
There is more work to be done but I am confident we will be able to address any areas that require further clarification.
Where will you be focusing your efforts in 2018?
Over the last year we have been looking at the fintech industry and specific aspects of fintech that fit synergistically with the overall Cayman business model.
In 2018, our industry, Government and Regulator will continue to work closely together to evolve a Legislative and Regulatory approach to leverage the benefits of cryptocurrencies, blockchain and similar technologies in an environment that contains the trusted elements of sound regulation most suited to these new technologies.
We will also continue to press ahead with our formal launch last year of reinsurance as a new industry sector.
While still in the early stages, the reinsurance entities established to date have already become a significant portion of all insurance related assets under management in the jurisdiction. Cayman has seen firms such as Greenlight Re, Knighthead, OxbridgeRe and more either open on island or grow their businesses. We will be focused on supporting growth in this key sector in 2018.