“The big allocators are getting even bigger and with an increase
in size comes a consequential increase in bargaining power.”
70 CAYMAN FUNDS | 2019
Justin Savage is a partner at
Ogier. He can be contacted at:
and a healthy infrastructure with a capacity for growth, a manager’s
willingness to amend fund offering terms to adapt to the demands
and requirements of large investors has become another common
expectation, particularly for smaller and emerging managers (although
as we will discuss below this can often lead to a more collaborative
and supportive relationship between investor and manager).
Having examined the ‘blurring of the lines’ between more traditional
hedge fund terms and private equity style offering terms, and how
this combined with other market pressures has led to a shift in the
balance of power between investors and managers, it is interesting
to note some of the common trends that we have seen emerge in
offshore fund structures as a consequence.
Trends and the impact on fund structure
Management and performance fees is obviously a key, and in many
cases, the first item for negotiation for large, institutional or strategic
investors, particularly during a period of lower returns. Additional
items that are typically requested include favourable lock-up periods,
transparency and information rights.
For existing structures, the amended offering terms are typically
addressed within side letters between the investor, the fund and the
manager. We have seen a significant increase in both the number, as
well as the length and complexity, of such side letters over the past
One particular trend that we have seen develop recently within side
letters has been an increased pressure from investors arguing for a
‘most favoured nation’ or MFN provision to be included within a side
letter, whereby the investor would benefit from any improved terms
successfully negotiated by any subsequent investor and the manager
would be contractually obliged to extend such terms to the existing
investor with the benefit of the MFN provision.
For existing structures it is increasingly common to see agreements
with larger investors for the rebate of a portion (or all) of management
fees, and in very limited instances we have seen certain investors
successfully negotiate for a percentage equity interest in the general
partner as a condition of investment.
For new fund launches, in an effort to attract institutional, large
or strategic investors it is increasingly common to see a ‘founder
class’ or ‘seed class’ of shares offered, whereby select investors
are provided with beneficial terms in consideration for an early and
One side effect of the negotiation process between investors
and managers for preferential offering terms, which we have seen
managers increasingly willing to provide as the price to pay for
attracting capital, is that following such negotiation process, a trend
has emerged for a more collaborative approach to investor relations
as managers will often look to their larger investors for comfort before
making significant or strategic decisions in an effort to retain such
capital, and avoid upsetting an established investor base.
One particular characteristic more commonly seen within hedge fund
structures that, in recent years, has become increasingly visible across
private equity and hybrid structures is the presence of independent
governance within the operations of the fund structure. This trend can
take many different forms, but is often addressed by means of either
direct representation for the investor’s fund vehicle or representation
at the general partner level. In addition to independence at the level of
the investor facing fund, there has been a marked increase in board
representation or advisory board structures being put in place at
the master fund level, with independent directors seen as providing
investors with an additional layer of comfort that the level at which
the assets are held benefits from the same degree of oversight as
the feeder fund. In certain instances we have also seen institutional
investors advocate to see the same independent representation on
the governing body of an onshore entity also (although we would
suggest this continues to be the exception rather than the rule).
Prior to undertaking an investment in a fund, we have observed a
notable increase in the length and depth of due diligence undertaken
by investors on a fund. Historically the traditional focus for an investor or
allocator may have started and finished with a review of the performance
data or track record for a manager. However, recently the focus for
investors appears to have expanded to include a much wider frame
of evaluation criteria—to include the personnel and infrastructure of a
manager’s operations, the legal documentation in place for the fund, and
extending in certain instances to a manager’s commitment to corporate
social responsibility in its investment and diversity within its team.
From Ogier’s perspective, we have seen a marked increase in
instructions from investors seeking to undertake a detailed review of
the legal documentation and constitutional documents prior to making
an investment rather than relying upon the work of the investment
manager’s own counsel. This review is often not only to identify any
critical risks or red flag items, but also to identify possible pressure
points for negotiation or amendment as a condition for an investment.
How has Cayman adapted?
For more than 25 years the Cayman Islands as a jurisdiction
has successfully demonstrated itself capable of meeting the demands of
investors and managers in the ever-changing investment funds industry.
While it is impossible to say with certainty how the relationship
between investors and managers will evolve in the future, we can
be confident that managers will continue to need legal counsel and
service providers to come up with increasingly creative solutions to
adapt to the ebb and flow of this delicate balance of power.
Recent examples of the dynamic approach taken by the Cayman
Islands government in support of the investment funds industry
have been the creation of new entities, such as the Cayman Limited
Liability Company and Foundation Companies—in each case offering
greater optionality for structuring solutions.
From a legislative standpoint, the introduction of legislation in
respect of anti-money laundering and beneficial ownership have
further strengthened the jurisdiction’s reputation for regulatory
excellence, transparency and investor protection, ensuring that
whatever challenges the future may bring to the investor/manager
dynamic, the jurisdiction will be able to offer imaginative outcomes
that safeguard the interests of both sides of the negotiating table.