Wednesday, March 20, 2013

What Happens on Grand Cayman Has to Happen on Grand Cayman

What Happens on Grand Cayman Has to Happen on Grand Cayman

The office buildings in Georgetown are home to thousands of investment funds set up by money managers to shield their investors from tax authorities.  You might be wondering what happens in those offices.  It turns out that legal filings and a post office address aren’t sufficient to create a legitimate offshore fund in Grand Cayman.  In order to gain protection from the Cayman authorities and fend off potential attacks from foreign tax authorities, the fund has to conduct operations and be governed in Grand Cayman or some other offshore jurisdiction.   Of course, an investment fund doesn’t conduct a whole lot of operations.  Rather it consists of a series of cash payments and dispersals.  For example it invests in companies or properties, pays fees, received proceeds from sales, and distributes dividends. 

PE Objectives (2005)

Two things happen in Grand Cayman when I visit.  The fund’s managers meet for several hours to approve the purchase and sale of investments.  While their colleagues participate via conference call from London, New York, or other locales, the investment decisions are taken in Georgetown.  My presence isn’t required while the managers are meeting, so I usually have time for an early morning swim.

Having “operated” in Grand Cayman via the investment meeting, the fund needs to check the governance box by convening the directors.   In my situation, the governance entity is called the Management Oversight Committee.  We were nominated by the manager and appointed by the investors.  Our group consists of three people, two from the US and one from the UK.  I only have to fly from Raleigh to attend, but one of my colleagues treks all the way from England for this meeting.

What do we do besides drinking too much coffee and eating fresh fruit and pastries?  No meeting is complete without first approving the last set of minutes, which must be based on notes taken by someone attending our meeting in Georgetown.  With the minutes out of the way, we’re sometimes asked to approve certain actions by the fund.  If investors want to transfer their interest, we have to approve.  So if a couple divorced, or some endowment or charity changed its legal structure, we bless the technical changes in their fund documents.  If the fund needs to extend its life because it hasn’t yet liquidated all its investments, we get to vote.  As you can see, these aren’t huge decisions.

With the formalities out of the way, it’s time to listen to management presentations and ask questions.  We always want to hear about the level of protection and cost of the insurance plan that covers us as directors.  Once we know that we’re covered, we review the manager’s business plan, the assets in the fund, and the financials.  In the early days, these discussions took four or five hours.  Now that the fund is being liquidated, our meeting is done in about two hours.  The meeting could be completed in far less time, but I’ve always got questions, and the answers always breed more questions.  I always figured that if I’m going to spend 24-hours in Grand Cayman I must as well put the managers through their paces.  Every now and again we unearth some issue that requires the management to alter their plans.  However, most of this exercise simply confirms that the managers have a firm grasp of the fund and the underlying investments.

At some point, the conference room becomes silent, and all the attendees simultaneously reach for their mobile devices to check their availability for the next meeting in a year’s time.  The cab arrives.  We dash for the airport, and sit in the departure lounge with the managers, lawyers, accountants, and board members from other funds.  It’s easy to spot us, we’re the ones with briefcases and pale complexions.

I’m off to our meeting.

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