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18 November 2013
It is estimated that more than 15,120 Latin Americans have an individual worth exceeding $30m (£19m), with their combined wealth amounting to at least $2.3tr.
Brazil hosts some 31 per cent of the region’s high-net-worth individuals (HNWIs). These people in Latin America, like their counterparts elsewhere, are interested in taking steps to protect and enhance their wealth. The Cayman Islands family fund is a popular and attractive vehicle for Latin American HNWIs, providing a sophisticated alternative to the once-favoured portfolio holding company.
Family funds are used by HNWIs to aggregate diverse investment portfolios and pool family investments in a single vehicle. This consolidation provides cost benefits, through lower fees charged to the fund as an institutional investor; access to products and services that are restricted to institutional investors; and access to investments with high subscription thresholds.
Family funds provide the flexibility, transparency and operational control desired by Latin American HNWIs, as well as the formal structure - and uniform guidelines for entry and exit - that is absent from looser arrangements. Investors have the comfort of receiving regular, independent asset value reports from service providers who may be held accountable.
Cayman is generally preferred as a domicile for investment funds as it has a sound regulatory environment, is tax-neutral and stable, and boasts modern offerings from quality service providers. In addition, Latin American HNWIs find Cayman especially appealing as a domicile for their family funds for a number of reasons.
Cayman’s industry leaders recognise the importance of Latin America and have welcomed economic cooperation within the region. The Cayman Islands Monetary Authority (Cima), which regulates Cayman funds, maintains good relationships with Latin American regulators. Additionally, Cayman’s service providers have customised their offerings for Latin American investors by employing professionals fluent in Portuguese and Spanish who can provide the personal service desired by Latin American HNWIs.
Cayman family funds may be structured as companies, partnerships or trusts, each of which provides protection for Latin American HNWIs by limiting investor exposure to fund liabilities. This is not the case in Brazil, for example, where funds are condominiums with collective ownership of assets and unlimited liability applicable to investors.
Latin American HNWIs find Cayman family funds attractive as they may be registered with Cima, a recognised regulator with full International Organisation of Securities Commissions membership. Registration by Cima gives substance to a family fund when dealing with counterparties and Latin American tax authorities.
Cayman family funds are flexible vehicles that are not restricted with respect to asset type, asset concentration or the strategy that may be employed. Additionally, Cayman family funds may be structured as segregated portfolio companies so family members may have individual segregated portfolios, managers and custodians, and statutory segregation of assets and liabilities of the various portfolios.
This flexibility is often not available with funds domiciled in Latin America and other regions. In Brazil, for example, funds have restrictions as to type and concentration of assets held as well as strategy, depending on the category of fund.
A Cayman family fund facilitates tax-efficient overseas and round-trip investment and is more advantageous as an investment vehicle than traditional overseas holding companies. To illustrate this, redemptions of equity interests in a Cayman fund are subject to 15 per cent tax in Brazil on the capital gain rather than the 27.5 per cent tax chargeable on overseas dividend payments. Where family funds are used to reinvest in Brazil in preference to local funds, HNWIs are able to avoid unpopular ’come-quotas’ or ’share-eating’ regimes and thus defer taxation on the capital gain until redemption.
Violent crime and kidnapping are still concerns for many Latin American HNWIs, so confidentiality is important. In Cayman, investors are afforded privacy as fund details and reports are not available publicly. By comparison, in Brazil such confidentiality is not available, with fund information and positions, which may reveal investors’ identities, routinely published.
Powers to nationalise private assets exist and have been exercised recently in some Latin American countries. Cayman has no such state powers, so holding assets in a Cayman family fund provides comfort to Latin American HNWIs.
Use of Cayman family funds also facilitates efficient succession planning. Forced heirship rules, applicable in many Latin American countries, limit the discretion of individuals to dispose of their assets freely. By holding their assets in a Cayman family fund, HNWIs in Latin America may be protected from the effects of forced heirship rules.
Cayman’s welcoming environment, jurisdictional pedigree and quality product offerings have proven attractive to Latin American HNWIs. Subject to considerations of domicile of origin and other personal circumstances, the Cayman family fund could be an ideal complementary or alternative vehicle for structuring investments and protecting the wealth of Latin American HNWIs.
Janet Francis is a partner and Graeme Jenkins is a senior associate at Smeets Law (Cayman)