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Investment fund structuring for startups

The Cayman Islands is a humble group of islands known for its island resorts, hotels, and scuba diving amenities. Beyond that, it also an offshore financial haven for large businesses, with its inhabitants having the highest standard of living in the Caribbean. It doesn’t stop there either. It is also an excellent place to begin for investment fund structuring for start-ups.

Opportunities in the Cayman islands abound in the form of private equity capital.  There’s real estate, venture capital, infrastructure, health, tech, energy, commodities and many more.

There is a wide variety of choices for a startup manager. The aim in investment is a proven track record and momentum to reel in key institutional investors worldwide. There are important variables to note – the location of the manager, nature of the initial investors, capital which should be available at launch date. Another focal point is the manager’s direction and expectations in marketing and capital raising are all focal points in the startup.

Where to Begin: Structure and Momentum in Startups

Due to the recent post-financial crisis, constraints in compliance requirements have been popping up everywhere. The basic requirements nowadays include an initial capital at launch at a minimum of $10 million. This amount is set to appeal to investors and provide them more promise of a return.

Europe and Asia-based Managers

Managers in Europe and Asia have the benefit of a lower cost base and lighter regulations. Another perk is that assets under management worth $10 million are sufficient for startup requirements.

US-based managers

For managers that are more comfortable with domestic investment, they can focus on US non-taxable or tax exempt funds such as Delaware limited partnerships.

Managed Accounts

In the case that capital is not sufficient at launch, managers have options available. Consideration can be given for operating on a managed account bases or joining a fund platform to garner capital from a broader pool of investors.

Operating under the managed account option means that you service a single investor. This means that there can be less control for the manager and more involvement from the sole investor. This type of option generally uses an investment vehicle for the sake of achieving limited liability.

Cayman entities structured as such are not recognized or regulated as a collective investment fund. The option is actually more cost effective and is also a good way to build and develop a relationship with a high net-worth investor.

Fund Platforms

Fund platforms can be used if there are no investors available or the capital could not reach minimum requirements. These platforms provide a framework from existing fund structures in cost-effective conditions. Platforms are a great way to collaborate with other fund managers in the same wavelength. The Cayman segregated portfolio company is one such platform. It is a pretty good place to start, with members consisting of leading international administrators and service providers.

When considering this alternative, it is recommended that managers review the terms to ensure compatibility with the company product and objectives. An appropriate exit should also be formulated to prepare for independence once manageable.

Taking It A Step Further

Closely-held funds

Closely held hedge funds in the Cayman islands may be restructured as registered hedge funds. Transitions are less difficult thanks to the initial nature of constitutional and offering documents. There will be costs for regulation and the need for auditors this time around, but costs can be countered by the expansion of investor base and increase in capital.

US-based startups

For US startup managers who have created a track record appealing to US non-taxable or exempt investors, as well as foreign investors, they can add a vehicle through the Cayman Islands. Feeder funds can be integrated to attract investors while the main fund will be used to pool assets. This is a well-accepted and established strategy in the industry.

Managed accounts

A managed account can be restructured once an agreement is made in lieu of its size and ability. The advantage for the initial investor will be expansion due to exposure to a wider pool of investors. The investor will also be able to make a controlled exit without affecting the value of the fund. Another bonus us a greater scale of operations and greater capital for more advanced strategies.

Fund Platforms

Significant size and independence can lead to an acceptable departure in the case of platform fund structures. Options for an in-built exit can be prepared beforehand, or will be initiated in due time. This can be done by transferring assets to a new private equity or registered fund vehicle.

It is important to ensure that agreed terms and conditions with investors are implemented properly before the exit. This would include factors such as improvement in access to reporting, special clauses, and other provisions.

A Cayman entity can be assigned for management in order to reduce local regulations and taxes. This will also net advantages like local employee hiring, familiarity with local entities, and stability of an infrastructure outside home jurisdiction.

Expanded Reach

By the time a startup reaches $100 million, it opens the doors to move to more highly regulated markets. The company should expect an increase in prospective investor base as well as improved marketability to present investors. At this point, the entity can enlist on an internationally recognized stock exchange – this will promote greater transparency and regulation presences.

Those who had mainly operated Cayman or US funds can now reach jurisdictions in Europe on a parallel basis along with minimum regulatory requirements. The UCITS fund product can be utilized as a parallel vehicle in situations where high regulations and ease of distribution are strongly expected. Businesses may consider to voluntarily sign up to European regulation standards through the EU connected fund regime.

Redomiciliation of the fund to Europe increases its marketability. There will be also a reduced need to run parallel funds in Europe and the Cayman islands. Redomiciliation can be achieved in Ireland through a statutory de-registration system.

A successful and extremely marketable fund will create momentum to move on to build more fund structures. Reputation will be reflected there and will allow the manager more favorable terms. Terms may be adjustable per stage to new investors. Examples are increases in management and performance fees, decreased liquidity terms in hedge funds. For private equity funds, variables like preferred returns, catch up provisions, and clawbacks can be adjusted.

Conclusion

The Cayman Islands is a great place for both startups and entities alike. There are countless advantages for investors and managers due to flexibility in structures as well as tax neutrality, market recognition, political stability and quality service providers.

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