CAYMAN ISLANDS Law and Practice Contributed by: Simon Thomas, Richard Spencer, Alexandra Clynes and Sayak Bhattacharya, Campbells
2.2 Fund Economics Fund principals (initiators, managers, or general partners) can participate in the economics of a venture capital fund through several mecha - nisms. These are designed to align their finan - cial interests with the fund’s performance and incentivise long-term value creation. Typically this will be by way of (i) management fees (ie, an annual fee charged to limited partners (LPs) to cover operational expenses such as salaries, office costs, and travel typically set at 2% of the fund’s assets under management (AUM), following the “2/20 rule” and (ii) carried interest ( “carry” ) which is a share of the fund’s profits earned by general partners after surpassing a predefined hurdle rate (eg, 8%) distributed after portfolio companies exit successfully, typically in later years of the fund’s life (seven to ten years). It is generally set at 20% of profits, although this can vary based on fund size and structure. Fund principals may also invest their own capi - tal alongside LPs in portfolio companies, giving them direct exposure to potential upside. 2023/24 saw the introduction of CIMA’s enhanced corporate governance framework requiring funds to adopt risk-based governance structures, including independent directors for oversight, audit committees for larger funds and clear conflict-of-interest policies (much of which has already been adopted by venture-capital funds). The Beneficial Ownership Transparency Act (as revised), effective July 2024, also saw an expansion of scope to exempted limited part - nerships (albeit funds registered with CIMA are able to avail themselves of an alternate route to compliance and provide a contact name for the reporting of beneficial ownership at the request of the Competent Authority as opposed to main - taining a beneficial ownership register).
backed IPOs and technology (reflecting demand for mature software and enterprise tech com - panies). Industries attracting financing rounds included fintech and blockchain (each receiving early-stage/seed financing). Emerging areas like AI-driven solutions also drew seed funding dur - ing 2024.
2. Venture Capital Funds 2.1 Fund Structure
The typical structure for a venture capital fund is the Cayman Islands-exempted limited partner - ship, which provides flexibility in capital commit - ments and distributions while offering limited lia - bility protection for limited partners. One or more of the partners is a general partner who has legal responsibility for the operation of the partnership and management of its business, together with unlimited liability for the debts of the partner - ship. These are invariably Cayman Islands com - panies or foreign companies registered to do business in the Cayman Islands which have very few assets, to avoid serious financial loss pur - suant to the general partner’s unlimited liability for the debts of the partnership. The remaining partners are limited partners, who are restricted from participating in the management of the partnership’s business, but who have liability for the debts of the partnership limited to the extent of their investment. Various activities may be carried out by limited partners without limited partners becoming liable as general partners by virtue of participating in the management of the partnership. Such funds are regulated under the Cayman Islands Private Funds Act (as revised) (for closed-ended funds). The main governing document is the limited partnership agreement.
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