Funds spotlight: How to minimise costs when registering private funds

30 July, 2020

Americas Private Clients Private Fund Formation

Ahead of the August deadline to register private funds with the Cayman Islands Monetary Authority (CIMA), Kendra Foster and Tian Peralto Levers of our law division provide tips to minimise costs while complying with the new Private Funds Law.*

*Article originally published in HFM Cayman Islands 2020 Special Report

On 7 February 2020, the Cayman Islands government enacted the Private Funds Law, 2020 and the Private Funds (Savings and Transitional Provisions) Regulations, 2020 (the Regulations, together the PF Law), which was subsequently amended on 7 July 2020. Read our overview of the amendment here.

The PF Law requires that new and existing Cayman Islands’ investment funds that fall within the definition of a private fund register with CIMA by 7 August 2020 using a local service provider to electronically submit the registration and supporting documentation.

Key changes

The PF Law requires private funds to meet ongoing operational requirements resulting in additional operating costs borne ultimately by the investors of each private fund, such as:

Audits: submitting annual audited financial accounts signed off by an approved Cayman Islands auditor;
Valuations: maintaining a procedure for asset valuation to be performed by an independent third party, the manager or operator of the fund, or an administrator, at least once a year;
Safekeeping of assets: if the private fund holds assets that are capable of being placed in custody, appointing a custodian to hold, in segregated accounts, the custodial fund assets and to verify and maintain a record of other fund assets to which the private fund holds title;
Cash management: appointing either an administrator, custodian, independent third party or the manager or operator of the fund to perform cash monitoring; and
Securities identification: maintaining a record of the identification codes of the securities if the private fund regularly trades securities or holds them on a consistent basis.

Below we focus specifically on tips for private funds that wish to minimise operational costs while complying with the PF Law.

Early registration

Each private fund will be required to submit an initial registration application with CIMA and an application fee of approximately USD 366 in addition to annual fees of approximately USD 4,268. However, if registered before 7 August 2020, private funds will not be required to pay the 2020 annual fee, and the first annual fee shall fall on or before 15 January 2021. Any private fund registering on or after 8 August 2020 will be required to pay the annual fee for 2020 in addition to the application fee.

Timing

Even though, after the transitional period, a new private fund may not accept capital contributions from investors until it is registered by CIMA, it may engage in oral or written communications with potential investors and enter into agreements with potential investors who are high-net-worth persons or sophisticated persons prior to the submission of its CIMA registration application. Accordingly, a private fund will be able to liaise with prospective investors to test the waters in advance of registration. If the private fund does not launch (in other words, does not proceed with acceptance of contributions), it can avoid the costs of registering and subsequently deregistering with CIMA.

Internal assignment

A number of the new operational requirements may be undertaken by the operator or manager of the private fund. For example, valuations may be carried out by the manager or operator of the fund, provided the valuation function is independent of the management function or that potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.

In relation to cash monitoring, the manager or operator of the private fund may also be appointed provided such an appointment meets the requirements of being independent of the management function or that potential conflicts of interest are properly identified, managed, monitored and disclosed to investors. Should the cash-monitoring function be performed by the manager or operator of the private fund, the entity’s auditor will be required to confirm that the function was carried on throughout the year when signing off the entity’s audited financial statements.

Bundling services

In relation to operational matters that the private fund managers or controllers cannot assume, the private fund will need to engage independent service providers. It may be the case that the fund’s current service providers, such as corporate service providers, AML service providers or AEOI service providers, can assist. This often enables the private fund to avail itself of bundling packages offered by such service providers with reduced fees.

Research

Not all third-party service providers that provide the same service will charge the same level of fees. We highly recommend creating a shortlist of candidates and obtaining pricing for their services. We strongly suggest that private funds reach out to their service providers, who will be able to assist them with shortlisting providers of other related services, as they often collaborate to lower fees. It is also crucial to ensure that the service providers engaged have in-depth experience in the private equity arena as doing so will lead to more tailored fee quotes.

Early engagement

Engaging with service providers early in the process of establishing a new private fund may be a useful cost-saving exercise. Attorneys can provide direct guidance on structures, which would support the provision of lower fee quotes. Also, auditor fee quotes are often provided based on certain factors, such as asset types, related party transactions, complexity of the structure and the proposed financial year end.

It is also essential to consider the scope of services required. In relation to an existing entity, consider whether the private fund requires the auditor to prepare audited financial statements from the date of inception of the entity. Alternatively, consider whether the entity may be willing to accept a modified audit opinion on the basis that the audit will only cover the current audit period and the periods going forward.

Next steps

Our legal team can assist with any classification and registration requirements. To ensure your investment fund is compliant with the new legislation, contact our law team at [email protected].