Private Funds

Types of Feeder Funds

General speaking, Monark structures two types of feeder funds: one for U.S. taxable investors, and one for non-U.S. investors and U.S. tax-exempt investors.

Non-U.S. investors and tax-exempt investors often prefer to invest in private investment funds organized outside of the U.S. and treated as corporations for U.S. tax purposes for a variety of reasons. These reasons are primarily related to tax efficiency and liability protection. The use of "blocker" entities and avoidance of Unrelated Business Taxable Income (UBTI) are key concepts that influence this preference.

Tax Efficiency

Investor-friendly jurisdictions such as the Cayman Islands often have a favorable tax environment with no direct taxes on income, capital gains, or dividends. This allows both non-US investors and tax-exempt investors to enjoy the benefits of tax efficiency, resulting in higher after-tax returns.

Liability Protection

Entities organized with limited liability offer investors protection from personal liability for the actions, debts, and obligations of the fund. This form of limitation attracts investors who seek to protect their assets from potential lawsuits and losses at the fund level.

"Blocker" Entities

These entities are often established to "block" the flow-through of income and gains from an underlying investment to the investors, converting those profits into dividends instead. By investing in a Cayman Island-based blocker corporation, non-US and tax-exempt investors can avoid having income and gains attributed to them, maintaining their desired tax status.

Unrelated Business Taxable Income (UBTI)

Tax-exempt investors, such as charities and pension funds, seek to avoid UBTI, which is earned income that's not related to their tax-exempt purpose. UBTI can lead to taxes being imposed on entities that would otherwise be exempt. By investing in a Cayman Islands-based fund treated as a corporation, these investors can minimize their exposure to UBTI, retaining their tax-exempt status and avoiding additional tax liabilities.

Tax Friendly Jurisdictions

There are several jurisdictions outside of the United States, besides the Cayman Islands, that are often used to achieve the same outcomes. Some of these include the British Virgin Islands (BVI), Luxembourg, Ireland, and the Netherlands, among others. Please see below for a brief overview of similarities and differences from a tax and regulatory perspective:

British Virgin Islands (BVI) Similarities

The most significant similarity between the BVI and the Cayman Islands is their tax-neutral status. Both jurisdictions have no corporate income, capital gains, or withholding taxes, which make them attractive for private investment funds.

Differences

BVI has a slightly lower incorporation and annual maintenance fee structure compared to the Cayman Islands. Furthermore, BVI has a lighter regulatory burden, with fewer licensing requirements and less complex compliance procedures.

Luxembourg Similarities

Both Luxembourg and the Cayman Islands offer a wide range of fund structures, including limited partnerships and umbrella funds. They are both known for having favorable tax regimes and being attractive to foreign investors.

Differences

The key difference between the two jurisdictions is that Luxembourg is subject to European regulations, such as the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) directive. This can lead to more stringent regulatory requirements and reporting obligations compared to the Cayman Islands. Furthermore, Luxembourg levies value-added tax (VAT) and withholding tax on certain incomes.

Ireland Similarities

Like the Cayman Islands and Luxembourg, Ireland offers a variety of fund structures and a favorable tax regime. Both jurisdictions also have double taxation treaties in place to ease tax burdens on foreign investors.

Differences

Irish funds, like Luxembourg funds, are subject to European regulations such as AIFMD and UCITS. Additionally, Ireland levies VAT, although certain exemptions are available.

The Netherlands Similarities

The Netherlands and the Cayman Islands both have extensive tax treaty networks and offer various tax incentives to attract foreign investors. They have transparent regulatory frameworks and support different fund structures.

Differences

While the Netherlands has a favorable tax regime, it is not tax-neutral. Corporate income tax, withholding taxes, and VAT still apply but are levied at comparatively low rates. Dutch funds are subject to European regulations like AIFMD and UCITS, imposing more stringent compliance and reporting obligations than the Cayman Islands. In summary, the BVI, Luxembourg, Ireland, and the Netherlands are popular jurisdictions for forming private investment funds, but they all differ in terms of tax regimes, regulatory requirements, and compliance obligations. The choice of jurisdiction will highly depend on the specific needs and strategy of the fund in question.

Investor Qualifications

At present, all feeder funds sponsored by Monark are limited to “accredited investors ” or "qualified purchasers" as defined by the SEC. This prevents both the feeder fund and any fund it may invest in from having to register with the SEC as an investment company. In other words, all Monark feeder funds are “3(c)(1)” or "3(c)(7)" funds as described in the Platform section here.