The United Kingdom served its Article 501 notice today, giving two years’ notice to leave the European Union. Managers of offshore funds, as well as everyone else here in the UK, now have more clarity on the Brexit timetable, with the UK scheduled to be out of the EU in March 2019. Much has been uncertain since the UK’s referendum in June last year, and that’s not likely to end until the final exit terms are agreed, but it’s clear that the effects of Brexit will be felt beyond the UK and Europe. Brexit negotiations are expected to be intense and politically complex (especially with French and German elections later in 2017 and Scotland’s demand for a further independence referendum before Brexit finally takes effect), with the UK’s stated aim, in its Article 50 notice, of agreeing a “deep and special partnership, taking in both economic and security co-operation” between the UK and EU post Brexit.
So what impact will Brexit have on offshore funds?
Adding to our success at The Lawyer and HFM Awards, Harneys was privileged to win twice at the inaugural Africa Global Funds Awards held recently in Cape Town. The Africa Global Funds Awards were created specifically to honour and generate both industry and public recognition for fund service providers focused on Africa and are the only international awards of their kind.
We were successful both in the Best Offshore Law Firm and Best Offshore Law Firm – Client Service categories, effectively giving us a clean sweep of the awards designated to offshore law firms against some well regarded and formidable competitors. Given that I head up our Africa Practice and for the last 5 years have had a strong focus on the funds industry in Africa, these wins saved me from some awkward internal conversations and allowed me to breathe a long sigh of relief.
It was a packed room at The Lawyer Awards last week – all 1250 of us anxiously hoping our firm would be crowned winner – and with few categories so fiercely contested as Offshore Law Firm of the Year, we were definitely on the edge of our seat.
The Lawyer kept us entertained while we waited, though. With hours of comedy from Dara Ó Briain, a rocking band and a beautiful River Thames fireworks display, it was a glittering celebration of a year of hard work and success across the legal industry – and judging from the crowd still packed on the dancefloor at 2am, a night that many didn’t want to end.
Last month I joined several of my Cayman colleagues in the bright lights of New York for the Funds Finance Association’s snappily named 6th Annual Global Funds Finance Symposium. And yes – we did remember to pack our thermals!
In this guest post, Brian Sapadin, Executive Director of GlobeTax, discusses the benefits of tax reclamation and the opportunities presented by the new Cayman LLC draft legislation.
With the highly anticipated Cayman LLC law finally being published in draft, once unobtainable foreign tax reclaim entitlements are expected shortly to be in play for eligible investors whose Cayman fund undertakes a conversion to the new structure (or, in the case of a new launch, initially structures as a Cayman LLC). Most U.S. tax-exempts invest through offshore feeders, traditionally a Cayman limited company (Cayman LTD), to avoid Unrelated Business Income Tax (UBIT) which can be assessed to U.S. resident tax-exempt investors for gains made on leverage, including traditional margin or shorting strategies. Unfortunately, investors in such vehicles do not have access to double taxation treaty benefits, since the Cayman vehicle serves as a corporate blocker and Cayman itself is not party to bilateral tax treaties.
In a Cayman LLC — a transparent “look-through” vehicle — U.S. tax-exempts (and the fund manager) should soon be able to reap the benefits of tax treaties, for eligible markets other than the U.S., while still being shielded from UBIT.
One of the questions we receive regularly from our clients (existing and potential) is whether they can set up an LLC in Cayman. “Hi, my name is Jim and I’d like an LLC please”. This is a natural question for clients in North America as LLCs seem to be the preferred vehicle of choice for almost any purpose and so why should there be any other choice? For example, the vast majority of funds set up in the United States are LLCs, incorporated in Delaware, and every client is familiar with them and how they work.
We often find that the overlay of having the straight company concept in Cayman leads to some confusion. Cayman does not currently have the LLC concept and sticks to the regime of a company based on English Law. “We have them, why don’t you?” is what we typically hear. Traditionally, our long legacy as a British colony (you can imagine how a Scotsman writing this may grumble) has caused us to follow English Law (yes, Scottish Law is better, Donoghue –v– Stevenson, anyone, anyone…?).
However. It is not often that Cayman lawyers receive brand new playthings from the Cayman government, however this past Christmas, we had reason to break out the bubbly. Legislation was published for consultation which will introduce the concept of LLCs into Cayman Law. We’re not sure yet as to when the legislation will be passed and brought into force, so we will have a new plaything, we’re just not able to play with it… yet. We are though tooling up so that we can get going with this concept once it is actually released. Read more about this on our website.
So, what difference will it make?
In this guest post Thalius Hecksher, Global Director at Trident Fund Services, discusses the drivers behind the trend for bigger funds and fewer start-ups, and why Cayman remains the largest and most popular offshore fund domicile.
When it comes to the Cayman Islands, blue skies, beautiful beaches, scuba diving, and snorkeling are the norm, and have been for decades. But when it comes to offshore fund administration there are some interesting changes afoot in Cayman. In a pronounced sea change Cayman start-up funds are getting bigger, while on the flip side, small start-ups, while not quite an endangered species, are certainly rarer. With regulatory costs creeping up in recent years, partly as a result of the implementation of new initiatives such as FATCA, it looks like this trend is here to stay.
So I was sitting at a presentation in Rio de Janeiro (tough life, I know) recently. The topic was regulation in offshore funds and I had finished my remarks on how awesome the Cayman Islands are and why everyone should set up funds there. I’ll be honest and say that I was now looking forward to that evening’s caipirinhas by the pool.
I had talked about FATCA and AIFMD as part of my section of the presentation. However the next session had many more acronyms, including OECD CRS. This acronym stuck out as a sore thumb mainly as it is the next reporting requirement to be implemented in the Cayman Islands and the British Virgin Islands.
So, your fund is up and running, your portfolio performance is in the upper quartile for your asset group, you’re attracting more and more interest. Your own marketing (or your newly appointed marketing team) is beginning to gain traction and you are now at the stage where you are bringing in more investors. In fact, you have a closing in just over two weeks which will significantly bump up your asset under management figure. Is it time to break out the next bottle of Cristal (or whatever your preferred choice is – Highland Park single malt is always a popular choice of your average Cayman attorney and we’re always happy to help celebrate your success)?
Whilst you’re basking in the slight glow of your success, you stop and think. Wait. Is there a Cayman regulatory issue I have to deal with? Wasn’t there a magical number set out in the offering memorandum that I have to think about?
Why we are celebrating Cayman’s new “opt-in” regime for funds
For those of us sitting on the Western side of the Atlantic Ocean, Europe tends to seem quite far away, somewhat off in the distance and (depending on whether you have to connect through certain airports on the East Coast) sometimes difficult to access.
However, some of you may actually be interested in providing access to your Cayman products for investors based in the European Union. After the financial crisis in 2008, the EU decided to introduce the Alternative Investment Fund Managers Directive (AIFMD). As is typical of EU legislation, this is a very dry piece of drafting but the effect is that Cayman funds have to meet certain regulatory requirements before EU investors are able to gain access to them.
Lending to Funds — Subscription Finance Part II
Part one of this topic covered what subscription finance is, (loans to a fund secured on the undrawn capital commitments of its investors), and how it can benefit funds and their investors (increased liquidity, returns and simplicity). This final instalment covers (briefly) the mechanics of this type of financing.
How does it work?
The subscription finance facility would work the same way as a standard loan facility. As security for the subscription finance facility, the lender will be granted a power of attorney from the fund’s general partner (the GP) to step into its shoes and make the capital call to the investors, and/or an assignment of the right to make the capital call and to receive the proceeds of the capital calls. Finally, there will be a charge over the bank account into which the capital commitments are paid into.
Lending to Funds – an introduction to subscription finance
“Neither a borrower nor a lender be” wrote Shakespeare and in the aftermath of the credit crunch and the global slowdown, it seems that many banks are reacquainting themselves with the words of the Bard. And when they do lend, they are increasingly looking for more security, “safer” borrowers and higher fees.
On the face of it, a newly launched fund might not have the track record or the assets to persuade commercial lenders to lend monies to it. But these funds do have assets which they can make available to lenders – the uncalled capital commitments of their investors.