How to Set Up a Venture Capital, Private Equity Fund in the Cayman Islands

Starting a venture capital (VC), private equity (PE) fund in the Cayman Islands?

 

This guide walks you through the complete process of setting up a venture capital, private equity fund in the Cayman Islands, from choosing the best structure to launching your fund and bringing investors on board.

 

Given the complexities involved—ranging from managing multiple stakeholders to meeting investor expectations and navigating a timely market entry—it’s vital to get everything right from the outset, particularly for those setting up a fund for the first time.

 

Let’s embark on your journey to building a successful VC, PE fund in the Cayman Islands.

 

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Why set up a venture capital, private equity fund in the Cayman Islands?

With over 29,000 registered funds, the Cayman Islands is a leading jurisdiction for establishing venture capital, private equity funds, drawing fund managers and institutional investors from across the globe. The jurisdiction is known for its tax neutrality, flexible legal framework, and investor-friendly environment. These features make it an ideal location for setting up closed-ended venture capital funds. The Cayman Islands’ robust legal system, based on English common law, provides the stability and security that fund managers need when launching new ventures.

 

This guide will walk you through the essential steps to set up a venture capital, private equity fund in the Cayman Islands, focusing on the unique aspects of closed-ended fund structures.

 

Cayman Islands fund structures

Choosing the right legal structure is a crucial step in setting up your VC, PE fund. The Cayman Islands offers several options, each tailored to different types of investors and investment strategies. For venture capital funds, which are typically closed-ended, the following structures are most commonly used:

 

• Exempted Limited Partnership (ELP)
• Exempted Company
• Limited Liability Company (LLC)
• Segregated Portfolio Company (SPC)

 

Exempted Limited Partnership (ELP)

How It Works

The Exempted Limited Partnership (ELP) is the most popular structure for private funds in the Cayman Islands. It allows for a clear distinction between the roles of general partners (GPs) and limited partners (LPs). GPs manage the fund and assume unlimited liability, while LPs are passive investors with liability limited to their investments.

 

Legal Framework

The ELP is governed by the Exempted Limited Partnership Law, which offers significant flexibility in structuring the partnership agreement. This includes terms for capital commitments, profit distribution, and the winding up of the partnership at the end of its life cycle.

 

Suitability
ELPs are particularly well-suited for venture capital funds due to their alignment with the typical structure of such funds—where GPs manage the investments and LPs contribute capital without participating in day-to-day management.

 

Exempted Company

Features and Benefits

The Exempted Company structure is also used for venture capital funds, particularly when a corporate entity is preferred. Although more commonly used for open-ended hedge funds, it can be adapted for closed-ended structures.

 

• Limited Liability: Shareholders’ liability is limited to the amount invested.
• Separate Legal Entity: The company can enter into contracts, own assets, and engage in business activities independently of its shareholders.
• Flexibility: The structure allows for various share classes, catering to different investor needs.

 

Why It’s Used

Some VC, PE funds choose the Exempted Company structure for its simplicity and flexibility, particularly when a corporate governance model is preferred over a partnership.

 

Limited Liability Company (LLC)

Features and Benefits

The Limited Liability Company (LLC) offers a hybrid structure that combines the operational flexibility of a partnership with the limited liability of a corporation. This makes it an attractive option for venture capital, private equity funds, especially those involving U.S. investors.

 

• Flexible management: LLCs allow for customized management structures that can be tailored to the specific needs of the fund.
• Pass-through tax treatment: LLCs can elect to be treated as pass-through entities for U.S. tax purposes, providing tax efficiencies for U.S. investors.
• No share capital: The absence of share capital simplifies the capital structure and allows for flexible profit distribution.

 

Why It’s Used

LLCs are often chosen by U.S. fund managers due to their familiarity and favorable tax treatment. They are also well-suited for funds that require a flexible governance structure.

Segregated Portfolio Company (SPC)

Features and benefits

The Segregated Portfolio Company (SPC) allows for the creation of multiple segregated portfolios within a single legal entity. While more common in open-ended fund structures, SPCs can be used in closed-ended contexts, particularly for funds with multiple investment strategies or tranches.

 

• Asset protection: Each portfolio’s assets and liabilities are legally separated from the others.
• Operational efficiency: SPCs provide a streamlined way to manage multiple strategies or investor classes within a single entity.
• Flexibility: New portfolios can be added without creating a new legal entity.

 

Why It’s Used

SPCs are used in venture capital funds that need to segregate assets or strategies for different investor classes or for different stages of investment. This structure provides a high level of asset protection and operational efficiency.

 

Regulatory framework

Key regulatory bodies

The Cayman Islands Monetary Authority (CIMA) is the primary regulatory body overseeing private funds in the jurisdiction. CIMA ensures that funds operate in compliance with local laws and international standards, focusing on investor protection and financial stability.

 

Compliance requirements

Venture capital, private equity funds in the Cayman Islands must adhere to several regulatory requirements, including:

 

• Licensing and registration: Most closed-ended funds are not required to register with CIMA under the Mutual Funds Act. However, depending on the specific circumstances, registration may be necessary under other applicable laws.
• Ongoing obligations: Even if not required to register with CIMA, funds must comply with anti-money laundering (AML) regulations and appoint appropriate service providers.
• Relevant laws: The operations of venture capital funds are governed by laws such as the Exempted Limited Partnership Law and the Companies Act, which outlines the requirements for exempted companies.

 

Steps to set up a venture capital, private equity fund in the Cayman Islands

Step 1: Choose the fund structure

Selecting the appropriate legal structure is foundational to your fund’s success. Consider factors such as your target investors, investment strategy, and the preferred governance model. For most venture capital funds, the Exempted Limited Partnership (ELP) is the preferred structure due to its alignment with the typical fund management model.

 

Step 2: Engage legal and professional advisors

Engage experienced legal advisors early in the process to help navigate Cayman Islands law and ensure compliance with all regulatory requirements. You may also need to appoint auditors, administrators, and other service providers critical to the fund’s operation.

 

List of top 25 service providers in the Cayman Islands.

 

Step 3: Draft and file fund documents

Draft the necessary legal documents, including the limited partnership agreement (for ELPs), offering memorandum, and subscription agreements. These documents should clearly outline the fund’s investment terms, governance structure, and investor rights.

 

Step 4: Register with CIMA (If required)

Depending on the structure and specific details of your fund, registration with CIMA may be necessary. Submit the required documents and fees to CIMA, if applicable, and comply with any other regulatory requirements.

 

Step 5: Open bank accounts

Establish bank and brokerage accounts to manage the fund’s financial transactions and investments. This step is crucial for the operational aspects of the fund.

 

Step 6: Launch the fund

With all preparations in place, you can officially launch your venture capital fund. Begin marketing the fund to potential investors, complete the subscription process, and ensure that all compliance measures are in place.

 

Benefits of  setting up a venture capital, private equity fund in the Cayman Islands

Key advantages

Setting up a venture capital, private equity fund in the Cayman Islands offers several benefits:

 

• Tax neutrality: The Cayman Islands does not impose corporate, income, or capital gains taxes, providing an efficient environment for fund operations.
• Robust legal framework: The legal system, based on English common law, offers a stable and secure environment for fund management.
• Global reputation: The Cayman Islands is widely recognized as a top fund domicile, attracting investors and fund managers from around the world.
• Operational flexibility: The jurisdiction’s regulatory framework allows for significant flexibility in fund structuring and management, making it easier to tailor the fund to specific needs.

Recent developments

The Cayman Islands continues to update its regulatory framework to align with international standards, particularly in areas like AML compliance and transparency. These enhancements ensure that the jurisdiction remains a competitive and secure location for private funds.

Conclusion

The Cayman Islands is an exceptional jurisdiction for setting up a private fund, offering tax neutrality, flexible legal structures, and a robust regulatory environment. By selecting the right fund structure and following the necessary steps, fund managers can effectively leverage the benefits of this leading domicile.

As the Cayman Islands continues to adapt to global regulatory trends, it remains a top choice for venture capital, private equity fund formation. Fund managers seeking a stable and efficient environment will find the Cayman Islands to be an ideal location for their operations.