Snapshot: private fund registration – what have we learnt?

Private equity sponsors, investors, lenders and service providers will be well aware of the Cayman Islands' prominence as a domicile for global private equity funds. For the best part of 20 years, sponsors and their global advisers have been attracted by the Cayman Islands' neutrality, efficiency, quality and flexibility – but also by its predictability.

So when, at the prompting of the European Union, the Cayman Islands announced in early 2020 that all Cayman-domiciled closed-ended funds (including private equity and real estate funds) would be required to register with the Cayman Islands Monetary Authority (CIMA) by August 2020, this seemed like a shake-up.

Now that the dust has settled, what lessons have been learned?

• There are a lot of Cayman funds. Over 12,200 closed-ended entities registered by the August 2020 deadline. These funds are in addition to the more than 11,600 open-ended hedge funds already registered with CIMA.
• The Cayman Islands' client base is heavily institutional. Nine of the top 10 global private equity sponsors have multiple funds in the Cayman Islands – as do 16 of the top 20. Well over 10% of registered fund vehicles are managed by these elite sponsors.
• Elisabeth Kübler-Ross was right: there was initial denial and gloom, occasional aggravation and bargaining, but ultimately acceptance – albeit somewhat grudging in the case of funds past their commitment periods and for those vehicles that had never really considered themselves to be 'funds'. Some clients and investors, especially in Europe, actively welcomed the new level of regulatory oversight.
• The ongoing obligations generally reflect how most funds have been operating anyway. The new legislation formalises requirements around custody, cash monitoring and valuation that at first seemed intrusive but, in practice, have not presented any issue for the great majority of funds. The focus on ensuring clear delegations and cogent policies and procedures was in many cases beneficial and served as an involuntary health check. Investors benefit from enhanced conflict disclosures.

The three unknowns are:

• how the audit process will go in practice, especially for non-mainstream vehicles whose investments and structures are not well suited to delivery of audited financial statements within six months of financial year end;
• how CIMA will exercise and enforce its regulatory powers; and
• how the CIMA deregistration requirements will marry up with the long wind-down periods for private equity funds at end of term.

For this unusual year, it feels fitting to mandate private equity funds to accept a new normal. That so many thousands have done so says something about the resilience of Cayman private equity structures – and perhaps even human nature.

For further information on this topic please contact Nick Rogers at Ogier by telephone (+1 345 949 9876) or email (nick.rogers@ogier.com). The Ogier website can be accessed at www.ogier.com.