The legislators of the Cayman Islands have been very busy recently, and 2009 saw an overhaul of the existing insolvency legislation, significant changes to the law on Exempted Limited Partnerships and the introduction of a new statutory regime for the merger and consolidation of companies.
The Cayman Islands' relationship with private equity survived the financial turbulence of 2008, but that doesn't mean everything is business as usual. While their focus on investment funds is intact, Cayman law firms have been forced to trade their efforts in fund formation for the restructuring of existing financial structures....
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The Cayman Islands' relationship with private equity survived the financial turbulence of 2008, but that doesn't mean everything is business as usual. While their focus on investment funds is intact, Cayman law firms have been forced to trade their efforts in fund formation for the restructuring of existing financial structures. "I think it is fair to say 2008 has seen a significant change. The sort of plain-vanilla fund formation activity has dropped quite significantly," says one partner.
Weighed by the accumulation of illiquid assets, lawyers note several methods in reforming clients' funds. The so-called synthetic side pocket has become commonplace in recent months, popular for allowing fund managers to temporarily parse out toxic assets in order to preserve the value of healthy shares and the overall fund. The side pocket technique also allows the fund to retain ownership over its illiquid assets in the event of higher revaluation.
The second method is outright restructuring. Despite being conditional upon shareholder approval, transferring portions of an existing fund to a newly-created one has offered some relief to Cayman fund managers and their returns. Payment-in-kind processes gained a similar lustre in 2008 with the promise of deferred payments until market recovery. Increasingly, this has also led to the voluntary liquidation of some investment funds.
Fortunately for Cayman lawyers, the restructuring work that has dominated their schedules demands as much or more attention as their sidelined fund-formation practices. Lawyers describe the process as creating new advisory roles for firms, as fund managers try to revive their businesses.
Similar market conditions exist for private trust practices throughout the Caymans. An amendment to the Banks and Trust Companies Law, enacted in September 2008, further streamlined the licensing of private trust companies here. The revision follows a similar legislative trend exhibited by regional jurisdictions like the British Virgin Islands, which amended its own private trust laws in 2007. "I think it was a change that has definitely made us more competitive against our obvious competitors in the region," says one lawyer. The growing presence of emerging Latin American institutions has also helped fuel the fight for market share not only between firms, but between Caribbean jurisdictions as well.
Widespread market uncertainty throughout 2008 forced many Cayman firms to retreat from aggressive expansion initiatives. Though redundancies remain few in number, personnel increases throughout the legal community are very limited in the last year. For now, sustainability will have to be good enough.
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