Colette Wilkins QC to Head Walkers Asia Litigation Practice

Walkers is pleased to announce that Cayman Islands partner, Colette Wilkins QC, will be relocating to the firm's Hong Kong office to lead its Asia litigation practice from January 2022.

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Walkers Expands Market Leading Professional Services to the BVI

Walkers is pleased to announced that Walkers Professional Services (WPS) is expanding its operations to the British Virgin Islands.

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Walkers Launches Online AML Training Solution in Bermuda

Walkers Professional Services has announced that it has launched an innovative e-Learning Anti-Money Laundering Training platform in Bermuda.

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Walkers London Celebrates 20th Anniversary

Walkers is pleased to announce that its London office is celebrating its 20th anniversary.

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Walkers Tops Market Leading Rankings in Chambers Global Again

Walkers leads the way with 10 "Band 1" practice area rankings (out of a market leading 23 practice areas) and an overall "Band 1" ranking in 'Global Offshore'.

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Events & Webinars

See upcoming virtual events and webinars.

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Walkers is a leading international law firm. We advise on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey.
GlobalMap Oct2019
Diversity

Diverse & Inclusive

At Walkers we are committed to building a diverse and inclusive workplace where everyone can feel comfortable, happy and confident in an inclusive environment.

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Ireland Update: Central Bank of Ireland updates AML/CFT Guidelines for Financial Sector

On 23 June 2021, the Central Bank of Ireland published revised Anti-Money Laundering and Countering the Financing of Terrorism Guidelines for the Financial Sector. The publication of the Updated Guidelines follows the enactment of the Criminal Justice (Money Laundering and Terrorist Financing)(Amendment) Act 2021 as part of the transposition of the 5th Anti-Money Laundering Directive and expands the scope of the Updated Guidelines to also apply to virtual asset service providers. Please click here to view our advisory, which provides a summary of the new information and guidance included by the CBI in the Updated Guidelines.

 

Click to view advisory

Cayman Grand Court Confirms Statutory Mechanism for Approval of Former Liquidators' Fees as Statutory Trustees

Grand Court confirms that Section 48 of the Trusts Act (2021 Revision) provides a statutory gateway for the approval of former liquidators' fees as statutory trustee pursuant to Order 23, rule 5 of the CWR

A recent judgment of the Grand Court of the Cayman Islands (the "Grand Court") has confirmed that section 48 of the Trusts Act (2021 Revision) (the "Trusts Act") provides former liquidators, in their capacity as statutory trustees of the undistributed assets of a dissolved company, with a statutory gateway to seek directions from the Grand Court for the approval of their fees and expenses of administering the trust assets.

In his written ruling in the matters of Re F & C Warrior Fund Limited (Dissolved) and F & C Warrior II Fund Limited (Dissolved) (Cause Numbers FSD 105 of 2021 (ASCJ) and FSD 107 of 2021 (ASCJ)), the Honourable Chief Justice Smellie Q.C. provided welcome guidance on the appropriate procedure to be followed by a former liquidator when seeking the approval of fees and expenses incurred in their capacity as a statutory trustee pursuant to section 153 of the Companies Act (2021 Revision) (the "Companies Act") and Order 23 of the Companies Winding Up Rules, 2018 (as amended) (the "CWR").

  1. The Former JVLs' applications
Prior to the applications, F&C Warrior Fund Limited and F&C Warrior II Fund Limited (the "Companies") had been placed into voluntary liquidation, following which, the Companies' former joint voluntary liquidators (the "Former JVLs") sought to distribute redemption proceeds to the Companies' former investors. At the time of the Companies' dissolutions, a proportion of the Companies' remaining cash assets (the "Outstanding Redemptions") had yet to be distributed to the Companies' former investors, the practical effect of which was that the Outstanding Redemptions were held by the Former JVLs as statutory trustees on behalf of the Companies' former investors pursuant to section 153 of the Companies Act and in accordance with Order 23 of the CWR.

Following the expiry of the 12 month statutory trust period prescribed by Order 23 of the CWR, the Former JVLs issued ex parte originating applications under section 48 of the Trusts Act seeking directions that their fees incurred as statutory trustees of the Outstanding Redemptions be paid out of the Companies' residual cash assets, with the net remaining amounts to vest bona vacantia in the Financial Secretary of the Cayman Islands in accordance with section 153 of the Companies Act and Order 23, rule 6 of the CWR.

  1. Ruling of the Grand Court
In delivering his ruling, the Honourable Chief Justice accepted that Order 23, rule 5 of the CWR provides that a former liquidator is entitled to be paid a reasonable fee for advertising, administering claims and preparing their accounts pursuant to section 153 of the Companies Act and in accordance with Order 23 of the CWR and that the basis and amount of that fee must be fixed by the Grand Court.

In addition, the Honourable Chief Justice accepted the submission that section 48 of the Trusts Act provided the Former JVLs, in their capacity as statutory trustees of the Outstanding Redemptions, with a statutory gateway to seek an order for directions that their fees be capped in accordance with Order 23, rule 5 of the CWR.

Having regard to the above principles, the Honourable Chief Justice was satisfied that the Former JVLs' fees and expenses of administering the Outstanding Redemptions as statutory trustees had been reasonably and proportionately incurred and that the Former JVLs' times costs referable to the management and distribution of the Outstanding Redemptions were therefore recoverable as against the trust assets.

  1. Benefit of the ruling to former liquidators
From a practical perspective, the principal advantage of issuing an application under section 48 of the Trusts Act is that a filing fee of CI$200 will be payable by a former liquidator, as opposed to the CI$5,000 filing fee payable in respect of an originating application filed in the Financial Services Division of the Grand Court. Furthermore, the Honourable Chief Justice confirmed the suitability of applications of this nature to be disposed of "on the papers" on the basis that they fall squarely within the provisions of Order 85, rule 8(1) of the Grand Court Rules (1995 Revision) (as revised), thereby avoiding the cost of a formal hearing before the Grand Court.

The Chief Justice's ruling provides welcome clarification to insolvency practitioners tasked with administering undistributed assets following the dissolution of a Cayman Islands entity and confirms the availability of an efficient and economical mechanism by which a former liquidator may seek directions for the approval of their fees reasonably incurred in administering such trust assets.

Peter Kendall and Blake Egelton of Walkers acted on behalf of the Former JVLs, Simon Conway and Jess Shakespeare of PWC Corporate Finance & Recovery (Cayman) Limited.

Fundamentals 2021 Keynote Address

Scott O'Neil, former CEO of Harris Blitzer Sports & Entertainment, shared during our 2021 Walkers Fundamentals Virtual Seminar his leadership experience and how having a mind-set of 'lead from the front' and 'be where your feet are' can lead to success in any industry.

Walkers Fundamentals White Paper 2021 – Closed-Ended Funds Part 1

It has been another twelve months in which the extraordinary has become the norm, the unthinkable the mundane. Lockdowns have oscillated between full, partial and non-existent. Offices, restaurants and borders across the globe have creaked open and slammed shut as the pandemic has continued to shape the way we live our lives. And yet, throughout it all, lock-up funds have continued to be raised: investors were wooed over Zoom, side letters were negotiated at kitchen tables and the universe of participants and stakeholders in the closed-ended funds industry repeatedly showed themselves to be nimble and flexible enough to keep the wheels turning.

As the dust starts to settle on this moment in history, the question becomes this: has there been a fundamental shift in the manner in which closed-ended funds are raised and operated? Are we seeing a paradigm shift allowing and encouraging new working practices, which foster greater diversity in the industry and thereby allow it to continue to attract and retain the best and the brightest, working practices? While only time will tell, one prediction can be safely made: we have at least another year or two of the unprecedented to come.

Private Funds Act

This has been the first full year since the enactment of the Private Funds Act (the “PFA”) in the Cayman Islands, which has seen Cayman closed-ended funds subject to a registration regime for the first time. Newly launched private funds are required to provide certain registration information to the Cayman Islands Monetary Authority (“CIMA”) and are also required to comply with ongoing obligations with respect to operational matters, such as audit, safekeeping of assets, valuations and cash monitoring, which obligations largely codify existing best practices familiar to most managers domiciling their funds in the Cayman Islands.

In general, the experience with respect to the registration process has been positive, with Cayman funds continuing to be able to be raised and launched in a timely fashion and the PFA registration process simply folding into the list of requirements in the run up to first closing. Investor sentiment in respect of the new regulatory landscape has also been encouraging, with LPs garnering comfort from the new regime and the additional oversight it provides. In the subscription line financing space, which continues to be extremely active, Cayman borrower and lender side counsel have largely worked through the requirements of the PFA as they pertain to credit facilities. As such, market practice in respect of coverage is now firmly established with respect to such subscription lines, thereby reducing and essentially eliminating any PFA related delays.

In light of the new regime, it has been reassuring to see that fund formation activity in the Cayman Islands has remained extremely robust. Managers with existing Cayman funds have raised successor vehicles, as well as various alternative investment vehicles, parallel and co-investment funds to their existing funds. In addition, we have seen a number of sponsors raising their first ever Cayman funds, with the Asian market being particularly active.

While a number of billion dollar-plus funds have continued to be successfully raised, our survey also shows extremely strong activity in the sub $500 million fund space, including a number of first time managers.

Fund Target Size


This is indicative of the fact that, notwithstanding the new, globally driven regulatory requirements which apply to funds across jurisdictions, the financial services industry in the Cayman Islands, working closely with CIMA, has reacted to the rigorous new standards to create cost effective solutions for anti-money laundering, automatic exchange of information, economic substance and other applicable regulatory requirements. This, in turn, has allowed Cayman to remain the offshore financial centre of choice for both established global fund managers launching multi-billion dollar funds, as well as start-up managers raising funds for the first time.

The Rise of SPACs

If the special purpose acquisition company (“SPAC”) boom began last year, this twelve months has seen it continue and accelerate during the first quarter, before activity fell dramatically at the start of the second quarter. SPACs are blank check companies with no commercial operations which go public with the intention of acquiring a target within a set time period (usually 18 or 24 months).

Cayman has seen a significant share of SPACs, appearing as domicile of choice for around one third of all SPACs globally. The past two years have, in particular, seen a number of fund managers of varying sizes successfully launch SPACs as an alternative way to raise capital, with a growing percentage of such launches being structured as Cayman Islands exempted companies.

After market activity came to a sudden halt in April 2021, there has been a steady resurgence since then as sponsors adjust to increased SEC scrutiny and evolving market terms. While we expect to see further SPACs being raised over the next twelve months by established fund managers, as they have proven themselves to be an efficient mechanism to access and raise capital. We would also however expect to see some pressure on SPAC terms, such as the amount of time available to locate and close a deal, sponsor incentives or size of offering. At the other end of the SPAC lifecycle the competition for business combinations is intense and will only increase as the number of SPACs that were launched at the end of 2020 and the start of 2021 move towards the end of their terms.

Fund Structures

While certain managers have raised closed-ended funds structured as exempted companies or limited liability companies, typically to satisfy specific investor requirements, Cayman Islands exempted limited partnerships (“ELPs”) remain dominant as the main vehicle of choice for Cayman Islands closed-ended funds. Cayman Islands exempted companies remain the most common general partner vehicle, with many managers seeking to keep their entire fund structures in the Cayman Islands. Five years after their introduction, the percentage of Cayman Islands LLCs acting as general partner has stabilised and they remain a niche choice, albeit one with a dedicated following.

ELPs and foreign companies, typically Delaware LLCs, remain popular alternatives. Foreign partnerships, usually Delaware limited partnerships, are also used from time to time.

GP Entity

The requirement for significant sponsor commitment remains a key LP concern, although first time managers are often given some leeway. The nature of the skin in the game varies widely, being either on a percentage or absolute number basis, or indeed a hybrid model where the higher of either requirement is taken. The numbers vary widely, with dollar amounts dependent entirely on fund size and percentage commitments typically around 2% of total capital raised, occasionally trending up to 3%, and even in a few instances as high as 5%.

Twelve months remains the most common fundraising period. However, partnership agreements will often allow for extensions, typically of six months, and usually with LP advisory committee consent.

A Fundamental Shift?

At the outset we contemplated the ‘new normals’, yet in many ways our data suggests a return to some of the older norms for the funds industry: a broad range of fund strategies, familiar fee pressures and funds carefully considering whether independent governance is right for them. The fundamental task remains to deliver risk-adjusted returns as contemplated in the fund’s offering document.

Yet very few managers would say their business runs in the same way it did two or three years ago. They report an increasingly involved investor base with opinions on matters of governance, diversity, ESG factors and the like. For some managers, explaining how returns are delivered is as important as the delivery itself. Add in the continued challenges of attracting and retaining top-tier talent, succession planning as veterans of the Global Financial Crisis contemplate retirement, and the ever-increasing regulatory and compliance burden, the challenges for managers don’t get any easier.

However, for all of the disruption and challenges that the last few years have brought, these are also times of immense and fascinating opportunity, as those shifts that are transitory, and those that are more lasting, reveal themselves. Rising to meet these challenges and take advantage of these opportunities is a task for the whole industry, across all time zones and cultures. The fund terms described in this White Paper represent not only the balance of hundreds of individual negotiations, but the beginning of these shifts into the next stage of the industry.

Walkers Fundamentals White Paper 2021 – Hedge Funds

Welcome to Walkers’ 2021 Fundamentals White Paper Series, in which we discuss certain trends identifiable among the hedge funds and private equity funds that we helped our clients launch over the last 12 months.

One of the early journalistic clichés to emerge in 2020 was the idea of ‘new normals’: changes to work, family life and society that, it was suggested, would remain a part of life long after the pandemic subsided. As an industry founded on a talent for identifying and capitalising on these trends, it should come as no surprise that the investment funds industry has itself undergone some fundamental shifts in the way it operates. 


Strategy: Find Your Niche

Looking first at questions of strategy, the traditional equity, credit and multi-strategy funds continue to represent the majority of our clients’ new launches in 2021. However, looking at the growth of strategies tells a different story: the year saw a return of cryptocurrency and other digital asset funds as valuations in that asset class attracted new inflows, and funds with a specific focus on ESG investments. The significant volume of SPACs also saw clients raising new funds specifically to invest in those opportunities.
HF Strategies


Focus on Fees

In prior years we have reported the slow but steady decline of the traditional 2% headline management fee, and this year was no different: the median management fee was approximately 1.25%, although this year also saw a small resurgence of funds launching with the full 2% fee. These statistics represent a more complex picture: today’s ‘median fund’ often incorporates multiple management fee classes, as well as individually negotiated fee arrangements with significant investors.

 

HF Performance Fees


For several years, we have observed the trend of fewer funds launching with a 20% headline performance fee rate, and the rise of funds subject to a 11-19% rate. This year, managers appear to have resisted this trend: of those funds that charged a performance fee at all, nearly two-thirds had a 20% performance or incentive fee. While we will need to keep this under review in future surveys to see if this represents a more permanent (and positive) shift for managers, it provides some early evidence of the industry’s longstanding response to passive funds: investors are content to pay for genuine outperformance. This finding has been echoed by several onshore counsel who have observed a similar pattern.

Redemption Terms

The wider variety of fund strategies launched this year saw a more diverse array of redemption terms. These figures represent the current state of the balance between managers and investors in the competing priorities of ensuring a stable capital base, and that portfolio liquidity and fund liquidity remain aligned. While these priorities are present on virtually all hedge funds, exactly where the balance is found shifts as new strategies become popular, or the industry transitions through periods of stress.

 

HF Lock Ups


In prior years, we have reported an increasing use of lock-ups, with those lock-ups getting longer in duration. This year, lock-ups remained popular (about 40% of funds we helped to launch used them) but slightly less so than in prior years. As in prior years, lock-ups tend to be implemented as ‘hard’ lock-ups (a complete restriction on redemption) rather than soft (redemptions during the lock-up period are possible, subject to an early redemption fee).

 

HF Gates

The use of gates continues an upward trend we have observed since 2018. This year, over 35% of funds employed some form of gate, and of those funds approximately two-thirds imposed the gate at the level of the investors individually, rather than the fund as a whole.

Governance Matters

Since 2016, the number of funds launching with independent directors on the board had started a gentle decline, with only a modest reversal in 2020. In 2021, the decline resumed at pace. Reasons for this decline were diverse, but included cost sensitivities for start-up managers, and, among the more established institutional managers, internal controls and governance processes that were sufficiently trusted by their investors not to require further independent oversight. Strategy likely played a role too: as a group cryptocurrency funds tend to be less likely to appoint independent directors than the traditional equity or multi-strategy funds.

The selection of an appropriate board continues to be a critical process on which managers should focus, and guiding managers through these processes remains a key part of our role as Cayman counsel.

A Fundamental Shift?

At the outset we contemplated the ‘new normals’, yet in many ways our data suggests a return to some of the older norms for the funds industry: a broad range of fund strategies, familiar fee pressures and funds carefully considering whether independent governance is right for them. The fundamental task remains to deliver risk-adjusted returns as contemplated in the fund’s offering document.

Yet very few managers would say their business runs in the same way it did two or three years ago. They report an increasingly involved investor base with opinions on matters of governance, diversity, ESG factors and the like. For some managers, explaining how returns are delivered is as important as the delivery itself. Add in the continued challenges of attracting and retaining top-tier talent, succession planning as veterans of the Global Financial Crisis contemplate retirement, and the ever-increasing regulatory and compliance burden, the challenges for managers don’t get any easier.

However, for all of the disruption and challenges that the last few years have brought, these are also times of immense and fascinating opportunity, as those shifts that are transitory, and those that are more lasting, reveal themselves. Rising to meet these challenges and take advantage of these opportunities is a task for the whole industry, across all time zones and cultures. The fund terms described in this White Paper represent not only the balance of hundreds of individual negotiations, but the beginning of these shifts into the next stage of the industry.

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