By Bailey McCann, Opalesque New York:
Cayman regulators are considering changes to the LLC laws there, and that could lead to an increase in the number of governance committees, according to delegates at the recent Opalesque Cayman Roundtable. Updates to the LLC laws follow an earlier update to the Exempt Limited Partnership law. Both signal that the Cayman regulators are trying to remain competitive as other jurisdictions change their expectations of financial regulation.
“My view is that the LLC law is appealing because it gives managers flexibility and the ability to bypass the issuance of shares and the concept of share premium. Investors can have their capital account which is the structure they are accustomed to in Delaware structures; so on that level, it is very appealing. From my understanding it also gives flexibility to establish a management committee or a group of managing members who can oversee the fund entity, in the same manner as a Board or an advisory committee,” said Leanne Golding, Senior Vice President, at The Harbour Trust Co.
The change in Cayman law also has implications for funds as they work through the requirements of the Volcker Rule. Jason Allison, a Partner at Cayman law firm walkers explains it this way – “What we have seen even for Delaware LLCs is that the Cayman Islands-based independent directors often control those vehicles. This trend evolved principally so that some of our clients could navigate the Volcker Rule, so independent boards based in Cayman are already controlling those Delaware LLC entities. I expect that this trend, which is already in place, will translate very easily over to the Cayman LLC Statute when that becomes available early in 2016.”
Institutional investors are also having an impact on how funds are structured and are expecting a greater role for advisors and boards.
“In some instances we have seen investors that will only work with a particular manager if the manager agrees to change their fund to fit into the investor’s chosen structure, which includes a specific set of service providers,” says Karen Watson, Global Head of Fund Operations, MaplesFS. “We now have a number of platforms that are driven by the institutional investor who selects both the manager and the service providers. That is an interesting paradigm shift and shows the control and level of involvement that certain large investors now want and are afforded.”
Peter Huber, Global Head of Fiduciary Services, MaplesFS added that there is an additional push on the fiduciary side as well – “There are a number of allocators who, when they are ready to make an investment into a new fund, will make it a condition that a person from a shop like ours which is similarly institutional in nature, sits on the board of that fund vehicle. Larger investors are driving a lot more of the decision-making in the entire service provider landscape, including board composition,” he said.
The push for more advisory roles isn’t new. Harbour Trust’s Golding says she first started having conversations with managers and LPs about adding advisory boards five years ago. “At first, we got a fair amount of pushback from managers and counsel thinking that it was unnecessary and that all parties were comfortable with the industry-standard structure, so there was no need to insert the advisory board. There were some investment managers who bought into the idea early on, but the majority did not. Eventually, it was the investors who started to drive this shift, because they began to insist on an advisory board or governance committee as a condition of their investment,” she notes. These advisory boards are often there to make key governance decisions like suspending the fund, changing a service provider, or changing the investment objective on a very material level. The board would then have final approval.
“Once an investor says they want this oversight in the structure, we find that everything else falls into place and the managers agree that it is the right way to go,” Golding says.
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