The Most Favorable Jurisdictions For Launching Private Investment Funds

Investors turn to private investment funds (PIF), like private equity funds and hedge funds, in search of investment returns that outpace public market investments like stocks and bonds.

Though smaller than the public market, PIFs are a growing investment sector. Assets under management in PIFs are expected to hit $17.2 trillion by 2025, a roughly 60 percent increase from the $10.8 trillion under management in 2019.

A primary consideration for would-be PIF managers when forming a PIF is the jurisdiction where it will be established. A PIF’s jurisdiction determines which government’s laws and regulations will apply to it. Those laws and regulations dictate, among other things, how the PIF is structured, how it will be taxed, and the disclosures it will be required to make. Thus, a flexible legal environment and efficient partnership structures are key factors that make a jurisdiction an attractive domicile for establishing a PIF.

That’s why Delaware is widely considered to be the most favorable jurisdiction in the U.S. for launching a PIF, and why the Cayman Islands and the British Virgin Islands (BVI) are considered the most favorable non-U.S. jurisdictions for launching a PIF.

In the U.S., Delaware is the go-to jurisdiction for launching PIFs

Delaware is the most popular jurisdiction in the U.S., and second most popular jurisdiction in the world, for PIFs to be established in. The state is well-known for having a strong infrastructure for U.S.-based PIFs, for being a corporate tax haven, and for having a business-friendly legal system for institutional investors.

PIFs in Delaware are generally structured as either a limited partnership (LP) or a limited liability company (LLC) because Delaware law gives partners in LPs and LLCs wide discretion with minimal statutory constraints, and provides favorable tax treatments to LPs and LLCs domiciled in Delaware. Additionally, Delaware’s statutes and case law are well developed in entity governance. Thus, parties are less likely to pursue litigation relating to a Delaware entity’s governance because Delaware statutes and case law often address many of the issues that may arise in litigation.

Outside the U.S., the Cayman Islands and BVI are go-to jurisdictions for launching PIFs

When PIFs are established outside the United States, these “offshore” PIFs are often established in either the Cayman Islands or BVI.

The Cayman Islands have become the most popular offshore jurisdiction for establishing PIFs. The prevailing estimate is that 80 percent of all new offshore fund formations occur in the Cayman Islands. In addition, estimates are that the Cayman Islands are home to roughly 75 percent of global offshore hedge funds, which collectively hold nearly half of all the assets under management by offshore funds.

The Cayman Islands are a welcoming offshore jurisdiction, offering attractive advantages to PIF managers and investors, including political and economic stability and tax neutrality. In addition, the Cayman Islands are viewed as having a well-regarded legal system, which is derived from English common law. It provides a strong, predictable legal framework and foundation for investor protections that ensures PIFs domiciled in the Cayman Islands are structured as internationally accepted investment vehicles.

BVI is another popular jurisdiction for PIFs. It is widely recognized as the second largest offshore jurisdiction for hedge funds, with roughly one quarter of all offshore hedge funds domiciled in the BVI.

BVI’s legal system, like the Cayman Islands’ system, is derived from English common law, but BVI offers more flexibility to PIFs than the Cayman Islands, including a business-friendly corporate statute (through the BVI Business Companies Act 2004). BVI has no income tax, corporation tax, capital gains tax, or wealth tax. PIFs maintained in BVI are comparatively inexpensive compared to other offshore jurisdictions such as the Cayman Islands. And, unlike the Cayman Islands, BVI does not have an annual filing requirement.

For PIFs domiciled in BVI, there is no minimum subscription threshold, no “professional” or “sophistication” tests for investors, and no requirement for local auditor sign-off. BVI also has its Commercial Court, which is a specialized body created to deal efficiently with company and high value commercial disputes, and which has a positive reputation for delivering high-quality judgments within a relatively quick timeframe. Because BVI has a bit more of a flexible fund formation scheme, some investors choose to form their PIFs there instead of the Cayman Islands.

Location, location, location

When choosing to create a PIF, investors need to balance several factors, the most important of which is where the PIF will be domiciled. Investors should turn to trusted legal counsel when evaluating their options. Legal counsel who are also registered investment advisers, like many of the attorneys at KN Legal,*, can go beyond advising clients about launching and managing PIFs and actually help them do so by acting as fund managers.

* KN Legal does not have offices in Delaware, Cayman Islands, or the British Virgin Islands.