HedgeNews Africa sits down with Patrick Colegrave of international offshore law firm Harney Westwood & Riegels to discuss the offshore landscape for South African hedge fund managers.

Harneys is a leading international offshore law firm that has been operating for more than 50 years, providing the world's top law firms, financial institutions and corporations with legal services relating to the British Virgin Islands, Cayman Islands, Cyprus and Anguilla law. Through its association with BLC Chambers, a leading Mauritian law firm, it is also able to advise on Mauritius law. Harneys has offices in Montevideo, the Cayman Islands, the BVI, London, Cyprus and Hong Kong and representative presences in Sao Paulo, Bucharest and Harare. It is one of the world's leading offshore investment funds practices, with 24 lawyers spread across its offices specialising primarily in hedge funds and private equity.

What is the extent of your practice in Africa?

Harneys was the first international offshore law firm to establish a presence in mainland Africa and also the first to establish a dedicated Africa Group consisting of experts across our offices and practice areas with hands-on experience of Africa-related transactions. The leading jurisdiction for hedge fund domicile is the Cayman Islands, with the British Virgin Islands (BVI) also being very popular, and we are able to pass the benefits of our knowledge and experience in these jurisdictions on to our clients.

We are also able to offer hedge fund managers in South Africa an on-the-ground capability that is unique to Harneys. We act for a number of the leading hedge fund managers in South Africa involved in international fundraisings, giving us an important insight into the South African market.

Why should South African hedge fund managers be thinking about offshore jurisdictions when it comes to an international fundraising?

It is highly unlikely that international hedge fund investors would be comfortable investing in South Africa through a South African-domiciled hedge fund. The primary driver for this is economic — why invest through a vehicle that is not tax neutral where a tax-neutral vehicle may be used? However, regulatory issues may also come into play (especially with the European Union given the onset of the Alternative Investment Fund Managers Directive, or AIFMD). Unfamiliarity with South Africa and South African law and regulation might also play a part.

Post 2008, operational due diligence has taken on increasing importance for international hedge fund investors who are more likely to get comfortable investing through a vehicle and a jurisdiction that is familiar to them than one which is not. There may, of course, be exceptions but I would be surprised if these were not few and far between.

What offshore jurisdictions would you recommend and why?

There are a number of issues to consider for choice of domicile of a hedge fund. These include tax and regulatory issues, as well as who the target investors are and where they are located. The Cayman Islands globally is the leading jurisdiction for investment fund domicile with approximately 10,932 funds registered with the Cayman Islands Monetary Authority, the vast majority of these being what one might consider hedge funds. To put this in perspective, this is more than three times as many registered funds than the Cayman's nearest offshore competitor.

The BVI is also a leading jurisdiction for investment fund domicile with approximately 2,303 funds registered with the BVI Financial Services Commission, again the vast majority of these being what one might consider hedge funds.

Both jurisdictions are aimed primarily at sophisticated/high-net worth and institutional investors and are widely recognised and accepted by such investors globally.

Jurisdictional reputation and familiarity are critical factors in a successful international fundraising.

In addition, fund establishment in Cayman and the BVI is a relatively simple and quick process and regulation is appropriate and balanced and has kept pace with the changing regulatory environment for hedge fund investment elsewhere, notably in the US with the Foreign Account Tax Compliance Act (FATCA) and in the EU with AIFMD.

Other jurisdictional advantages include complete tax neutrality for the hedge fund, a large community of highly qualified specialist service providers, complete flexibility as far as strategy is concerned, stable political and economic environments (both are British Overseas Dependent Territories), financial regulators with substantial experience in dealing with hedge funds, a sophisticated and highly developed legal system following English common law and a well developed body of jurisprudence in relation to hedge funds.

Provided therefore that there is no specific investor requirement for any particular jurisdiction, nor any prohibitive tax or regulatory requirements, and that the target investor base is sophisticated/high-net worth and/or institutional investors, the Cayman Islands or the BVI would be the jurisdictions of choice for a hedge fund intended for an international fundraising.

What is the timing, and what are the costs involved in setting up a hedge fund in either jurisdiction?

In the Cayman Islands, timing considerations are typically driven by issues associated with the engagement of service providers, the opening of bank accounts and prime brokerage accounts and the production of the offering document.

Assuming the hedge fund to be an unlisted hedge fund for marketing to sophisticated/high-net worth and/or institutional investors (the test is a minimum initial investment by the legal holder of record of the equity interests of the hedge fund of not less than US$100,000 or its foreign currency equivalent), once all necessary documents are in order and have been submitted for registration with the Cayman Islands Monetary Authority (CIMA) the hedge fund may begin trading. Receipt of the registration certificate typically takes one to two weeks (with online confirmation of registration often available shortly after completion of the regulatory filing). However the registration certificate is dated the date that the final submission of documents is made and the registration fees are paid to CIMA.

The vast majority of hedge funds domiciled in the Cayman are structured as Cayman Islands exempted companies (although occasionally a limited partnership or unit-trust structure is used). These are companies incorporated with limited liability, the objects of which are carried mainly outside of the Cayman Islands. Incorporation of an exempted company can be done in 24 hours on payment of an additional express fee. Typically, one should allow between four and six weeks from beginning the process to launch.

Documents to be submitted to CIMA include:

  • a copy of the offering document;
  • a regulatory filing form MF1 (signed by a director);
  • a consent letter from the auditor addressed to CIMA;
  • a consent letter from the administrator addressed to CIMA;
  • a cheque made out to CIMA for the regulatory filing fees
  • and a director's affidavit authorising Cayman Islands legal counsel to make the filing with CIMA on behalf of the hedge fund.

There is no requirement for resident or independent directors (although the market is increasingly moving towards the use of independent directors) and no requirement for resident service providers (other than a local audit sign-off requirement by a Cayman Islands resident auditor (all the major fund audit firms have offices in the Cayman Islands)).

For a typical standalone corporate hedge fund, government fees and disbursements for establishment will be in the region of US$8,623 (including the optional but recommended tax exemption certificate). Registered office fees will depend on service provider but can be expected to be in the region of US$1,900 per annum, and legal fees for establishment will be a matter for negotiation but can be expected to start at around US$30,000 for a vanilla standalone structure.

Many of the timing considerations applicable to establishing a hedge fund in the Cayman Islands will be equally applicable to the BVI, including the registration process, although there is no electronic filing and approval for fund registrations. Government fees and disbursements for establishment are cheaper, at about US$3,250. Registered office/registered agent fees will depend on service provider but can be expected to be in the region of US$1,350 per annum and, like the Cayman Islands, legal fees for establishment, whilst being a matter for negotiation, can be expected to start at around US$30,000 for a vanilla standalone structure.

There have been a number of recent changes on the regulatory front globally, most notably FATCA and AIFMD. How are the Cayman Islands and the BVI dealing with them?

Unsurprisingly as leading hedge fund jurisdictions, both the Cayman Islands and the BVI have been very proactive in dealing with FATCA and AIFMD. They are both in the process of concluding Model 1 Intergovernmental Agreements with the US Treasury Department (with Cayman having signed the same), the upshot of which will be to allow hedge funds domiciled in the Cayman Islands and the BVI to disclose and report required information on any US investors to their home regulators as opposed to the US Securities and Exchange Commission (SEC).

As far as the AIFMD is concerned, both Cayman and the BVI have negotiated cooperation agreements with the European Securities Markets Authority which, when executed with the individual EU member states, will allow hedge funds domiciled in Cayman and the BVI to take advantage of the national private placement rules of these EU member states (subject to the AIFMD private placement overlay) to at least 2018.

This places Cayman and the BVI at a significant advantage to jurisdictions that have not negotiated a cooperation agreement with the European Securities Markets Authority, where hedge funds domiciled in such jurisdictions will not be able to take advantage of existing private-placement rules, potentially cutting off access by such hedge funds to EU-domiciled investors. As of May 30, 2013, no cooperation agreement has been agreed with any South African regulator.

Briefly, what advice would you have for South African hedge fund managers thinking of an international fundraising?

There are a number of factors to take into consideration when choosing the domicile of a hedge fund established for the purposes of an international fundraising. Careful consideration should be given to this in the structuring phase to make sure that the right domicile is chosen for the particular set of circumstances applicable to the proposed hedge fund. Make sure that you engage the right service providers for the job. Service providers recognised by the market and fund counsel with a proven track record who know what terms are generally accepted by the market can only increase your chances of a successful international fundraising in what is, at the moment, a very competitive and tough fundraising environment.

Previously published in HedgeNews Africa

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