The Private Family Fund (the “Family Fund”) is a popular and attractive vehicle for High Net Worth Individuals (“HNWIs”) who seek to customise their investment portfolios by using a formal investment vehicle. The particular benefits which may be enjoyed by HNWIs will depend on:

  • the domicile of the HNWI;
  • the local laws in the HNWI’s domicile; and
  • the preferred investment strategy and goals of the HNWI.

Cayman, as the leading domicile for offshore investment funds, is most often preferred as a jurisdiction for domiciling Family Funds.

Advantages of Establishing a Family Fund

Whilst HNWIs may have the ability to manage their investment portfolios and that of their families by   using informal arrangements in multiple locations, many are now opting to establish Family Funds.  Following are some of the reasons why HNWIs have found it advantageous to establish Family Funds.

Consolidation of Assets held by a Single HNWI

Family Funds allow a single HNWI to aggregate his or her diverse investment portfolios (which may be located in several jurisdictions) into a single vehicle with one custodian. By using a Family Fund, HNWIs will have at their disposal, information in a single location regarding the type and value of their entire portfolio.

Consolidation of Assets by multiple HNWIs within a family

By means of a Family Fund, HNWIs from the same family may pool their investments into a single vehicle. Such consolidation will result in savings through lower fees made possible by consolidation, access to investments with high subscription thresholds or investments which are limited to institutional investors and access to a wider range of services, products and investments due to the Family Fund’s status as an institutional investor.

Structure and Formality

Many HNWI’s pool the investments of their family members using loose arrangements which, with the passage of time and growth of the portfolios, have not been found to be ideal. Looser arrangements place family assets at risk and prudence has dictated that more formal structures be established. The Family Fund provides formality, uniform guidelines, independent reporting, access to experienced service providers and distance from the investment process and the individual investors. By means of a Family Fund, individual family members will have access to regular reports on not just the family’s investments but that of each individual family member. Such reports will be prepared by service providers who may be held accountable. A more formal structure will also provide clear guidelines as to entry and exit from the Family Fund and will have the advantage of regulatory oversight by authorities in the fund’s domicile.

Transparency and Control

HNWIs, like many other investors have been concerned about the lack of transparency that is characteristic of non-bespoke structures. By use of Family Funds, HNWIs will have the desired access to information regarding portfolio composition and strategy. HNWIs may also have control over the fund’s investment strategy, borrowing policies and risk tolerance.

Succession Planning and Wealth Retention

A Family Fund may facilitate the smooth and efficient division or transfer of assets either during the lifetime of a HNWI or on death. Assets may be allocated by merely transferring Family Fund shares, interests or units (as the case may be) to transferees or beneficiaries, there being no necessity to liquidate those assets to effect an allocation. The imprudent disposal of family assets will be limited as transferees or beneficiaries who wish to redeem their shares, interests or units in a Family Fund must do so by means of the orderly guidelines for exit contained in the fund’s constitutional documents.

Liquidity

Investors in Family Funds will have the ability to borrow against the fund’s assets without disturbing the fund’s entire holdings.

Cayman – The Preferred Domicile for Family Funds

Cayman is generally preferred as a domicile for Family Funds as it has a sound regulatory environment, is tax neutral[1] stable and boasts modern investment products offered by quality service providers. Additionally, Cayman’s common law legal system provides comfort, certainty and protection for investors.   Cayman is also appealing as a domicile for Family Funds for reasons which are largely dependent on the features of the HNWIs domicile of origin.

Cayman’s Business Friendly Environment 

Cayman provides a business friendly, politically stable environment to HNWIs of all nationalities and language groups. In fact, Cayman’s service providers are known to quickly adapt to global shifts and demands. For example, many Cayman service providers provide dedicated language desks manned by professionals who are fluent in the language of their clients.

Availability of Diverse and Flexible Structures

Cayman Family Funds may be structured as companies, partnerships or trusts, each of which provides protection for HNWIs by limiting investor exposure to fund liabilities.  This is especially appealing for HNWIs domiciled in some Latin American jurisdictions such as Brazil where funds are condominiums, with collective ownership of assets and unlimited liability applicable to investors. Cayman Family Funds are also not restricted with respect to asset type, asset concentration or strategy which may be employed. Additionally, Cayman Family Funds may be structured as segregated portfolio companies so that in the event that family members consolidate their holdings, individual investors may have individual segregated portfolios, managers and custodians and benefit from statutory segregation of assets and liabilities of the various segregated portfolios.

Ability to register Family Funds

Many HNWIs have a preference for investment vehicles which are registered with a recognised regulatory body. Cayman’s investment funds regulator, the Cayman Islands Monetary Authority (“CIMA”) so qualifies with its full IOSCO membership and stellar record as a quality regulator. Family Funds can be registered with CIMA and though many such funds will qualify for exemption from registration under applicable law[2], many HNWIs opt for registration as this gives substance to the structures in dealings with counterparties and domestic authorities.

Confidentiality

For HNWIs, it is important that details of their personal wealth and investment choices remain private. Investment through Cayman Family Funds provides great comfort in this regard. Information reported to CIMA by registered Family Funds (such as names of directors) is not made public and financial reporting is limited to annual audited financial statements which are also kept confidential.

Tax Mitigation

Depending on the domicile of origin of the HNWI, a Family Fund may facilitate tax efficient overseas and round-trip investment and may also be more advantageous as an investment vehicle than traditional overseas holding companies. For example, redemptions of equity interests in a Cayman Family Fund are subject to 15% tax in Brazil on the capital gain rather than 27.5% tax chargeable on overseas dividend payments.  Where Family Funds are used to reinvest in Brazil in preference to local Brazilian funds, HNWIs are able to avoid the unpopular “come-quotas“/”share-eating” regime and defer taxation on the capital gain until redemption. 

Asset protection HNWIs who are resident in some Latin American countries fear forced nationalisation of private property and state powers to freeze assets of individuals who are directors of, or connected to, insolvent companies. One way in which investors may guard against such appropriation is by placing assets in a Cayman Family Fund.


[1] There are no direct taxes in Cayman.

[2] Mutual Funds Law (2015 Revision) of the Cayman Islands (the “Mutual Funds Law”)


This note has been provided as a general guide only and should not be relied upon as a substitute for specific legal advice. Advice which is specific to your circumstances should always be obtained.  If you would like further information on any aspect of this note or on any other Cayman Islands legal issue please contact us at:

Janet Francis
Corporate & Commercial Practice Group
D. +1 345 815 2807
Janet.Francis@francisgreylaw.com

FrancisGrey
Suite 2206, Cassia Court
72 Market Street, Camana Bay
P.O. Box 32302
Grand Cayman KY1-1209
Cayman Islands
T. +1 345. 815. 2800
F. +1 345. 947. 4728
www.francisgreylaw.com