Looking ahead to a new Cayman economy

Cayman’s position as a leading financial services jurisdiction is firmly established. Central to this is our enviable status as the domicile of choice for investment funds. But are we in danger of relying too heavily on our success as a funds domicile? Where will the next wave of growth come from?  

Cayman’s future lies in broadening our range of services, encouraging substance and being quicker to adapt to changes in the global financial markets.

Cayman is the offshore jurisdiction of choice for institutional investors and participants across the wider financial markets. Over the past two decades, we have been remarkably successful in shaping our financial services product to meet the needs of the financial markets.

We have been big beneficiaries of the globalization of capital, and the demand across the financial markets for a stable, creditor-friendly environment that is easy to operate in, tax-neutral, and which offers a high degree of certainty.

These conditions have provided the platform for us to grow an economy supported largely by our financial services industry. With four-fifths of the world’s investment funds domiciled in Cayman representing more than US$1.8 trillion in assets, we are indisputably the leading offshore investment funds domicile.

Whether directly or indirectly, fund managers also drive much of the cross-border finance which is a key component of our broader financial services offering. As the mainstay of Cayman’s economy, financial services account for approximately 60 per cent of GDP, a third of the country’s employment and 40 percent of government revenue.

While this is a record and position of which we can be proud, Cayman’s maturity as a financial services center, together with a more robust global regulatory environment (which comes with a staggering increase in costs of compliance) and competition from alternative financial centers now puts us clearly at a crossroads. Standing at that crossroads, it is apparent that the existing financial services offering is not likely to deliver the sort of economic growth that Cayman has enjoyed since the first open-ended funds were registered in 1993.

The time has come to take an objective look at the economic road ahead. Where do we go from here? Where will the next major wave of our economic growth come from?

Protect and defend

This is not to say that there are not further economic gains to be made from the existing financial services product. While we will undoubtedly continue to squeeze the lemon, we will only maximize the potential in the existing financial services product if we make the necessary investment to protect and enhance it.

This means ensuring that we are leading the way in complying with the various international regulatory and transparency initiatives that impact our jurisdiction, and that we understand and prepare for the impact of new initiatives, including the OECD’s action plan to combat base erosion and profit shifting (BEPS).

Internally, this requires us to invest in new systems, technology and expertise which minimize the cost and resource burden of compliance, engenders confidence in Cayman across the wider markets, and makes it easier and more attractive for participants in the wider financial markets to continue to use our jurisdiction.

In addition to staying ahead of a changing regulatory landscape, protecting our position as the offshore jurisdiction of choice also requires us to get closer to our clients than we have ever been. Deepening our understanding of our clients’ businesses, and the challenges they face, will be key to our ability to identify opportunities to meet their needs in a constantly evolving marketplace.

Simply put, we must not only be able to respond more quickly to regulatory and marketplace changes than our competitor jurisdictions, but we must be able to create an image of Cayman as a jurisdiction in which financial market participants will find solutions to some of their most complex commercial problems.

The implementation of a new streamlined and efficient process for passing and amending financial services legislation would distinguish us from our competitor jurisdictions, some of which are aggressively targeting Cayman’s client base, and give us a competitive advantage that would help us to entrench our position as the leading offshore domicile.  

The new growth phase

But protecting and defending our existing financial services product will not be enough to drive the next significant wave of economic growth and create new opportunities for our people. Achieving that will require us to think strategically about rebalancing our economy, away from an over-reliance on our historic financial services offering.

Fortunately, many of the attributes that make Cayman attractive as an offshore financial center also provide a foundation on which we can develop other areas of our economy. Key to that development will be a policy shift that encourages genuine economic substance in Cayman, and the establishment of physical business presence.

On my travels to the major financial centers, I often encounter opportunities that might be available to the jurisdiction but for our perceived lack of substance. If we can create the conditions that make Cayman an attractive place for certain types of business to establish a physical presence, we can leverage our existing attributes as a jurisdiction and reap the longer-term benefits of wider economic development that will create new jobs and result in broader prosperity.

Creating those conditions would require genuine social reform that encourages the importation of new expertise, promot es resettlement and supports a larger more stable population. Balanced population growth, in support of a developing substance economy that incentivizes inward investment and encourages physical presence, can be the key elements of the next phase of our economic development.

Build and they will come

We are already starting to see this nascent economic change. The establishment of Cayman Enterprise City (CEC) in 2011, the proposed redevelopment of the Owen Roberts International Airport, the development of Health City and the ongoing investment by Dart Realty along the Seven Mile Beach corridor evidence a recognition – conscious or otherwise – of the need for this economic rebalancing. These initiatives provide glimpses of what the future could hold, and have the potential to transform Cayman’s economy.

Of these initiatives, we have worked with a number of existing clients who are interested in establishing a presence in CEC. The appeal of the CEC to these clients is the speed at which a business can be established in the special economic zone, as well as the lower cost and the range of concessions on offer.

With more than 140 companies in the CEC, these concessions are more than offset by the economic benefits that flow from the establishment of special economic zone companies and the resulting movement of people to the jurisdiction.

By creating new jobs in previously undeveloped sectors of our economy, including Internet and technology, CEC is a net contributor to Cayman’s economy. Further widening the scope of the special economic zone, and making it more accessible, could drive even greater benefits for the economy by attracting companies in other knowledge-based sectors that do not currently have operations in Cayman.

The development of infrastructure will also play a key role in attracting these companies. Providing both short and long-term economic and social benefits, new infrastructure investment will provide direct employment and support efforts to attract and retain the talent needed to support the economy.

Renewing the partnership between the public and private sectors in the form of PPP projects, and encouraging external investment in domestic infrastructure, will help us to build and sustain Cayman as a vibrant jurisdiction, and an attractive place to establish a business.

There are many elements to building a successful and sustainable economic future for Cayman. The next phase of significant economic growth lies not in our existing financial services products, but in our evolving collective mindset. Let’s be imaginative and innovative as we plan ahead for the next 50 years.

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Health City is one of several ventures that broaden Cayman’s economy.
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David Collins

David Collins is a partner in Walkers' Finance and Corporate Group. He has extensive experience advising financial institutions, hedge funds, private equity funds, multinational corporations, issuers and institutional investors on complex finance and corporate transactions. His finance experience includes bilateral and syndicated lending, acquisition financings, investment fund financings, derivatives, and corporate financings, margin lending, repackaging and other structured transactions. David also has significant expertise advising on corporate matters, including mergers and acquisitions, joint ventures, preference share issues, corporate restructurings and investment fund downstream activities.


David Collins
Partner
Walkers
George Town
Cayman Islands

T:  +1 345 814 4503
M: +1 345 525 4503
E: david.collins@walkersglobal.com
W: www.walkersglobal.com 

 

Walkers Global

Walkers' Cayman Islands office was opened in January 1964 and is consistently ranked in the number one tier of Cayman based law firms by all leading legal directories and periodicals. Our Cayman office attracts leading international financial and corporate clients, including major financial institutions, investment banks, arrangers, promoters and managers, leading law firms, accounting firms, major corporations of all kinds, partnerships, trust companies and other fiduciaries.

Our extensive team of lawyers and support staff focus principally on corporate and international finance law, with an emphasis on investment funds, capital markets and structured finance. Our Cayman office has an international reputation as having the leading hedge fund and private equity funds practices in the Cayman Islands, advising the best-known asset managers, promoters and institutional investors in the investment world for more than four decades.

 

Walker House
190 Elgin Avenue
George Town
Grand Cayman
Cayman Islands
KY1-9001

T +1 345 949 0100
F +1 345 949 7886
E: info@walkersglobal.com
W: walkersglobal.com