Offshore Funds

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Offshore Funds

Contributors

Philip Graham
Philip Graham
  • Philip Graham

  • Partner
  • British Virgin Islands
Lewis Chong
Lewis Chong
  • Lewis Chong

  • Partner
  • Vancouver
Ian Gobin
Ian Gobin
  • Ian Gobin

  • Partner
  • Cayman Islands
Marc Parrott
Marc Parrott
  • Marc Parrott

  • Partner
  • Hong Kong
Matthew Blakebrough
Matthew Blakebrough
  • Matthew Blakebrough

  • Associate
  • British Virgin Islands
Marco Martins
Marco Martins
  • Marco Martins

  • Partner
  • Cayman Islands
George Weston
George Weston
  • George Weston

  • Counsel
  • British Virgin Islands

Launching your first offshore fund: Cayman or BVI?

As a funds lawyer practicing both Cayman and BVI law, I am often asked by start-up managers and their onshore lawyers which jurisdiction is preferable.

 

Like the photographs here, the two jurisdictions may appear identical at first. After all, Cayman and the BVI are both excellent and highly regarded offshore fund jurisdictions. We have long-standing clients who elected to use one or the other for different and highly sensible reasons at the time of their first launch. But there are differences, and a number of our largest clients actually have fund vehicles in both jurisdictions to maximize the advantages that they each offer.

(And if you are curious which photo is which, read on to the end of this post.)

For a manager looking to establish their first offshore fund vehicle, choosing between jurisdictions will depend on their specific requirements. On that basis, I ask managers the following questions to help identify the best jurisdiction for them:

Are you looking to minimise cost?

In terms of corporate and regulatory costs, Cayman is a significantly more expensive funds jurisdiction than the BVI (for example, the annual cost to keep a typical hedge fund registered in Cayman is just under US$4,300 whereas the annual cost in the BVI is US$1,000). Unlike the BVI, Cayman also requires a local audit sign-off for its funds, which adds that extra layer of administrative costs. For this reason, many fund managers who are starting out with a small amount of AUM prefer to establish their offshore fund in the BVI to keep overheads down whilst they build a track record.

Are you looking to simplify the due diligence process for potential investors as far as possible?

Cayman is the world’s most popular offshore funds jurisdiction. We estimate that Cayman has about 70 per cent of the world’s offshore funds and I think it is fair to say that most institutional investors would not blink twice if a manager told them that their offshore fund vehicle will be established in Cayman. Although the BVI is clearly in second place with about 15 per cent of the world’s offshore funds, managers who opt to establish their funds in the BVI sometimes encounter the additional question from institutional investors of “Why BVI?”. Whilst there may be very reasonable and logical answers, the selection of Cayman removes this query.

Are you looking for the lightest possible regulation for your offshore fund?

The answer to this is not as straight-forward. In Cayman, if you are looking to launch an open-ended fund with 15 or fewer investors, a majority (in number) of whom are able to appoint or remove the directors of the fund, then the fund will not need to be regulated in Cayman. This exemption reduces Cayman overheads quite significantly and is very popular for funds with only one investor or friends-and-family funds.

The BVI does not have an exempt fund as such, but is about to launch two new fund products in 2015 that will provide both a light regulatory touch and maintain the cost-effectiveness of the jurisdiction. We will blog about these separately as soon as they are launched, but in conclusion, both jurisdictions now offer very flexible vehicles for the manager wanting to minimize their regulatory obligations.

Where are your potential investors likely to be based?

Without wanting to make sweeping generalisations (but doing so anyway…), if your intended investor base consists of mainly of institutional investors from the US, South America and/or Western Europe, the Cayman Islands will be a more familiar offshore jurisdiction. On the other hand, if you are looking at an investor base situated in Russia or Asia, they are likely to be more familiar with the BVI business company as an offshore vehicle. However, given strong funds industries in both Cayman and BVI, you will generally find that investors are well aware of both jurisdictions.

Are you looking for significant offshore legal expertise in your chosen jurisdiction?

Well you’ve come to the right place. Harneys has the largest funds practice in the BVI and the fastest growing Cayman global funds practice out there. Whichever jurisdiction you choose, we’re here to help and look forward to hearing from you.

Answer: The clue is the skyline; the BVI (right photo) is a collection of volcanic, mountainous islands whereas Cayman (left photo) is as flat as a pancake!

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