PUERTO RICO Trends and Developments Contributed by: Ivan G Marrero and Antonio J Pietrantoni, Pietrantoni Mendez & Alvarez LLC
General Overview Puerto Rico’s private equity landscape has evolved into a sophisticated financial ecosystem leveraging the territory’s unique status as a US jurisdiction to cre - ate a hybrid legal and regulatory environment highly attractive for private equity investors. While subject to US federal laws, including anti-money launder - ing, securities and antitrust regulations, Puerto Rico maintains the authority and fiscal autonomy to enact local laws and tax incentives, thereby providing inves - tors with the reliability of the US legal framework and federal court system while also delivering substantial tax advantages, expedited regulatory approvals and sector-specific benefits tailored to local economic needs. As it stands, Puerto Rico generally provides a highly attractive structure for private equity investors to deploy their capital with limited personal liability, and without double taxation, while also enjoying sig - nificant Puerto Rico tax incentives. Puerto Rico’s private equity market has evolved through two landmark pieces of legislation: the Private Equity Funds Act, enacted in 2014, and the Puerto Rico Incentives Code, enacted in 2019. As a result of these laws, the private equity industry in Puerto Rico has grown significantly over the past decade. Both laws are part of the Puerto Rico government’s efforts to improve access to capital for entrepreneurs and businesses in different activity or development stages, including, for example, start-up companies as well as businesses pursuing growth capital or other strategic transactions. Through several tax incentives and other benefits that are available for eligible private equity funds, including their managers and investors, these laws are intended to promote economic development in Puerto Rico. Today, private equity funds, private credit funds and other alternative investment vehicles play an impor - tant role in Puerto Rico’s economic landscape and have shaped many private business acquisitions, as well as commercial lending activities. According to statistics published by the Office of the Commission - er of Financial Institutions of Puerto Rico ( Oficina del Comisionado de Instituciones Financieras de Puerto Rico OCIF), a Puerto Rico government instrumentality that, along with its US federal counterparts, regulates Puerto Rico’s banking and financial services industry,
there are approximately 34 private funds organised under the Private Equity Funds Act and 131 private funds organised under the Puerto Rico Incentives Code. Series LLC Many private funds in Puerto Rico have opted to be organised as limited liability companies (LLCs), each with one or more separate portfolios known as “series” (hence the term “Series LLC”) having its own assets, liabilities, members or managers, and the trend towards their use is continuing. Under Puerto Rico law, a Series LLC generally consists of several portfolios segregated into separate series, which may be protected if certain legal formalities are met, includ - ing the following: • the Series LLC operating agreement must provide for the creation of separate series; • records must be maintained for each series to account for the assets associated with such series separately from the other assets of the LLC, or any other series thereof; and • notice of the limitation on liabilities of a series must be set forth in the certificate of formation of the Series LLC. Each series is effectively treated as if it were a sepa - rate entity under a single fund. This means that the debts, liabilities, obligations and expenses of a sin - gle series are generally not enforceable against any other series of the same fund, or against the whole fund. Although there are certain tax, bankruptcy and other legal risks inherent to this structure, each sepa - rate series can generally hold its own assets, have its own members or managers, and pursue its own business or investment objectives, while also being legally insulated from liability to or claims by creditors or other claimants pursuing the assets of – or assert - ing claims against – any other series. In other words, a Series LLC allows its sponsors to ring-fence assets and liabilities per project, fund or asset class. This is highly attractive for private funds, where distinct port - folio companies or investments present different risk exposures or profiles. Further, a separate series is not required to have its own taxpayer identification num - ber (known as the “employer identification number” or EIN). However, if it obtains its own EIN, the series will
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