2016: what a year for the Americas. From our offices in Cayman, Sao Paulo, Montevideo and Vancouver, we witnessed a wave of fundamental – at times dramatic and turbulent – change in key markets in the Americas. From impeachment of a sitting president in Brazil, to the election of a centre-right president in Argentina to the ‘glad its over’ election in the US which ushered in centre-right control of two branches of government, 2016 brought fundamental political change across the region. Meanwhile, long-anticipated amnesty programmes in both Argentina and Brazil paved the way for large amounts of assets to be brought back into the formal economy, and away from the increasingly frigid landscapes of undeclared assets. Both programmes succeeded, perhaps even beyond expectation, as investors and common citizens embraced the welcome opportunity to regularise their positions, thus adjusting to a world where transparency and information exchange are the rule. For a jurisdiction like Cayman, this is all potentially good news. Let me explain why.
Let’s start with a bit of background to the modern Cayman funds market: the growth of the Cayman funds market has historically been driven primarily by demand from the US, and secondarily from other regions, from Europe to Asia to Latin America. The Cayman fund product has been, and continues to be, the dominant funds vehicle in all of these markets (See the 2015 Investment Statistical Digest for Cayman). Since the financial crisis of 2008-2010, new fund growth from the US has slowed down, for reasons well known and debated, while at the same time, demand from certain other regions of the world, particularly Asia and Latin America, has grown. Take two of the four BRICs, Brazil and China. According to Capgemini’s 2016 World Wealth Report, in 2015 the Asia Pacific region surpassed North America “for the first time to become the region with the largest amount of both HNWI population and wealth”. A look at the same report’s view of Latin America, and in particular Brazil, shows a fascinating picture: the explosion of wealth value immediately after 2009 (if one looked at a report from say, 2000, or before, one would see an even more impressive growth of wealth) and the subsequent reduction in values since 2012, collapsing to a low in 2015. This picture mirrors perfectly the turmoil which led to the fall of the standing Brazilian president in the summer of 2015: severe economic contraction and falling wealth values.
So how does this all translate into demand for Cayman fund structures? Relatively straight forward: during boom times of wealth accretion, UHNWs will generate large amounts of investable wealth. Local emerging markets often lack the variety of investment classes in which to store such large sums of wealth, thus funds will flow to where they can be properly deployed. A Cayman fund is the perfect vehicle for the channelling of such assets, say from Reais in Brazil to the Dollars in the US. The same dynamic can be seen in Asia and other regions. At the end of the day, the growth in fund structuring reflected the growth in wealth, and in the case of Brazil, it reflected both the increase in wealth in the earlier years, and even more, the collapse of the local economy and devaluation of the currency in 2014-15.
Enter 2017. And these are the trends we see: In North America, the promises of deregulation and turbo charged economic growth provide two potential sources of new growth in funds: lower establishment costs and increasing available wealth. In Latin America, 2017 brings a potential combination of similarly positive trends: economic revival in key markets such as Brazil and Argentina, combined with liberalisation of foreign exchange (for example in Argentina), together with the wave of declared and now ‘clean’ funds that can be properly structured and invested. Combine all of that with the ever present desire to keep wealth in safe shores, and Cayman’s enduring appeal as the right location for a fund structure, and one can hope that 2017 will prove to be an even better year for Cayman funds.
Marco Martins heads up the Americas Group at Harneys, encompassing North and South America, and is also Managing Partner of Harneys’ Cayman office. He speaks fluent Spanish, Portuguese and Italian and is recognised for his approachable and accessible trusted and expert counsel. Contact Marco by email or read more about him on Harneys’ website.