The Partnership Act (2025 Revision) of the Cayman Islands (the Partnership Act) provides that a “partnership is the relation which subsists between persons carrying on a business in common with a view to profit.” This definition offers the first insight into why the Cayman Exempted Limited Partnership (“ELP”) has become a globally popular vehicle for investment structures: “it is a relation”, a flexible arrangement, a contractual relationship between persons.
This provides significant flexibility in structuring partnerships in the Cayman Islands, particularly the Exempted Limited Partnership, which is specifically governed by the Exempted Limited Partnership Act (2025 Revision) (the ELP Act).
While the Partnership Act applies to all forms of partnership in the Cayman Islands, the ELP Act sets out the framework for exempted limited partnerships. Exempted limited partnerships (ELPs) are structures consisting of at least one general partner (responsible for the management of the business) (the GP) and one or more limited partners, with the key requirement that the partnership must not conduct business with the public in the Islands (except as necessary for conducting its offshore business).
In this article, we explore the key reasons why the Cayman ELP has become the vehicle of choice for venture capital, private equity, real estate, and other closed-ended investment strategies, including its structural flexibility, alignment with commercial terms like capital commitments, waterfalls, and carried interest, and its regulatory and tax efficiencies for fund managers and investors alike.
Characteristics of the ELP
Legal personality
Unlike a company, an ELP is not treated as a separate legal entity under Cayman law. Instead, it is best understood as a contractual framework among its partners, with the GP holding the authority and obligations to manage the partnership’s business and assets. While the ELP itself does not have legal personality, it operates with a high degree of continuity. Importantly, changes in the composition of the partners, such as transfers of partnership interests, redemptions, admissions, withdrawals, or even the insolvency or death of a limited partner, do not affect the existence or operation of the partnership. This flexibility makes the ELP particularly resilient and efficient as a long-term investment vehicle.
Tax neutrality
Neither the ELP nor its partners are subject to any form of income, capital gains, or withholding tax in the Cayman Islands. This makes the ELP a tax-efficient platform for international investment, as it allows the tax treatment of income to flow through to the investors based on their own jurisdiction-specific tax profile.
Minimum of one general partner and one limited partner
At all times, an ELP must have at least one GP and one limited partner. The structure is simple to establish and maintain, and the parties may be individuals or legal entities. In practice, most institutional funds use a corporate GP and multiple limited partners representing different investor groups.
Centralised management in the general partner
All management and decision-making authority is vested in the GP. Limited partners are passive investors and do not participate in day-to-day operations. This centralisation of control streamlines fund governance and supports efficient execution of the investment strategy. Importantly, under Schedule 2A of the Securities Investment Business Act (2020 Revision) of the Cayman Islands, a GP of an ELP is classified as a “non-registrable person,” meaning that the GP is not required to be licensed or registered as an investment manager in Cayman, provided it only manages the ELP. This exemption is a major advantage for offshore sponsors and first-time managers.
Limited liability for limited partners
Limited partners enjoy liability protection, meaning their financial exposure is typically limited to the amount of their capital commitment. However, this protection can be compromised if a limited partner takes part in the management of the partnership in breach of the ELP Act, though the Act provides clarity on what activities are permitted.
Unlimited liability for the general partner
In contrast to the limited partners, the GP bears unlimited liability for the debts and obligations of the partnership if the partnership’s assets are insufficient. This incentivises the use of a corporate structure such as the exempted company, the limited liability company or another ELP as GP to ring-fence that liability, a common structuring practice in Cayman funds. The GP must be a Cayman-connected person: either an individual resident in the Cayman Islands, a company registered under the Cayman Companies Act, the Limited Liability Companies Act, or a partnership registered under the ELP Act (including foreign entities registered in Cayman). This local connection ensures the enforceability of rights and obligations under Cayman law and also supports jurisdiction for Cayman courts.
Duty to act in good faith
The GP owes an express statutory duty to act in good faith in the performance of its duties to the partnership. This provides a core fiduciary safeguard for limited partners, ensuring that the GP must act honestly and in the best interests of the partnership as a whole.
Registration process
Forming an ELP is a fairly straightforward process.
The first step is to ensure that the GP is either established, incorporated, or registered in the Cayman Islands, or registered as a foreign entity.
Once the GP is in place, the partnership is formally established by filing a Section 9(1) Statement with the Registrar of Exempted Limited Partnerships and paying a government registration fee of around US$1,300. This filing includes some basic information: the name of the partnership, the nature of its business, its registered office in the Cayman Islands, the length of the partnership (if there is one), and the full name and address of each GP.
In addition to the statement, supporting documents for the GP must be submitted. These vary depending on whether the GP is a company, a partnership, or an individual. For example, a company would submit its certificate of incorporation and good standing, while an individual would provide ID and proof of a Cayman address. A key part of the filing is also a declaration that the partnership will not carry on business with the public in the Cayman Islands, except as may be necessary for its activities overseas.
Once the Registrar receives the Section 9 Statement and the partnership agreement, the ELP is usually registered within 3 to 5 business days. If needed, this process can be expedited under express filing, which often results in registration within 24 to 48 hours.
The limited partnership agreement
While not a strict legal requirement for registration, the partners will typically enter into a limited partnership agreement (LPA) as part of the formation process.
In practice, when the ELP is being set up as an investment fund, the partners will enter into an initial LPA. The initial limited partner is often one of the fund’s promoters, or even the registered office service provider, who later withdraws from the agreement once final terms are agreed and an investor is admitted as a limited partner.
One of the key advantages of the Cayman ELP is that the LPA is not filed publicly. This provides partners with a high degree of privacy and flexibility to tailor the agreement to their specific commercial needs.
The LPA is the central governing document of the partnership. It sets out the rights, responsibilities, and entitlements of both the general partner and the limited partners. In the context of a fund, this typically includes, among others the following:
- The general partner’s authority and duties, including any limitations on what it can do without investor consent.
- Procedures for admitting new partners, transferring interests, or allowing existing partners to retire or withdraw.
- The mechanism for capital commitments and capital calls, including what happens in the event of a default.
- Indemnification of the general partner by the ELP.
- Rules around the establishment of advisory boards or committees.
- A power of attorney allowing the general partner to act on behalf of limited partners for agreed matters.
- How the LPA may be amended.
- What triggers the termination of the ELP and how the winding-up process will be handled.
While the ELP Act is built to give the partners more freedom, it still includes some default rules and legal requirements that apply unless the LPA says otherwise. Most of these can be adjusted in the LPA, either directly or by how the terms are drafted, but a few important protections are mandatory and can’t be overridden. That’s why it’s always a good idea to have the LPA carefully reviewed against the ELP Act before signing, just to make sure everything lines up properly under Cayman law.
Why is the ELP so popular for closed-ended funds?
Closed-ended funds, such as private equity, venture capital, and real estate vehicles, are designed to invest in illiquid assets that typically cannot be sold quickly or easily. As a result, investors in these funds do not have the right to redeem their investments during the fund’s life. There simply may not be a market for the underlying assets at the time an investor wishes to exit. To reflect this reality, closed-ended funds are generally established for a fixed term, typically 8 to 10 years, with the possibility of one or more extensions, allowing the GP to exit investments in an orderly manner and return capital to investors.
Another defining feature of these strategies is the uncertainty around exit timing. While some investments may mature quickly, most require patience; assets might need to be held for several years before a viable exit presents itself. During this holding period, the fund must carefully manage its positions and act in good faith, always aiming to maximise value for its investors. And when exits do occur earlier than expected, the structure must allow for interim distributions during the fund’s life, rather than deferring all returns until the end of the term. The Cayman ELP handles this seamlessly through tailored distribution mechanics in the LPA.
If a standard partnership were used for these types of funds, the investors could face unlimited, joint and several liability, which is a significant deterrent for institutional or passive investors who do not wish to be involved in the fund’s management. That’s where the Cayman ELP comes in.
As a contractual relationship between the limited partners and at least one general partner, the ELP structure offers limited liability for investors and a flexible framework for governing all aspects of the fund. The LPA can be tailored to suit the unique requirements of each strategy and investor base, addressing both legal risk and operational complexity.
This flexibility allows the ELP to easily accommodate features that are essential to closed-ended funds, including:
Capital commitments and drawdowns through capital calls
One of the hallmarks of closed-ended fund structures is that investors commit capital up front, but don’t provide the cash all at once. Instead, the general partner (or a delegated investment manager) will request funds gradually through capital calls as investment opportunities arise. You can think of it like reserving a hotel; you secure your booking in advance, but payment isn’t due until you check in. This model aligns capital deployment with the timing of actual deals, avoiding idle cash in the fund.
Waterfall provisions and return hurdles
Waterfall provisions are central to how returns are distributed in a closed-ended fund. They define a clear order of payments, usually starting with returning capital to limited partners, followed by a preferred return, and finally allocations to the GP as carried interest. Think of the waterfall as a tiered system; each level must be fully satisfied before the next one starts to receive proceeds. This structure ensures alignment of incentives and fairness across all investors.
Carried interest mechanics for incentivising the GP
To incentivise performance, closed-ended funds often include a carried interest, a share of the fund’s profits allocated to the GP after investors have been repaid their contributed capital (and sometimes a preferred return). The carried interest is typically calculated as a percentage of the gains. It is only payable once certain hurdles have been met, usually at the end of the fund’s life or on asset realisation. Thisaligns the GP’s rewards with investor success.
Allocation of income and expenses
The LPA will outline how the fund’s income, gains, losses, and expenses are allocated between the GP and the limited partners. This includes everything from investment returns to fees, taxes, and operational costs. These provisions ensure transparency and consistency throughout the life of the fund and help avoid disputes by establishing a clear framework from the start.
Delegation of management and service functions
Although the GP holds ultimate responsibility for the ELP, it can delegate day-to-day investment management to an investment manager. This allows the GP to focus on governance and investor relations while the manager focuses on executing the fund’s strategy. The GP may also appoint administrators, custodians, and other service providers to handle operations, but remains accountable to the limited partners for the actions of these delegates.
Transfers of interests and onboarding new investors
The LPA typically sets out the conditions under which limited partners may transfer their interests. This can include voluntary transfers, transfers on death or bankruptcy, or transfers to affiliates. In most cases, the GP retains the right to approve or reject transfers to protect the fund’s structure and ensure compliance with regulatory or investor eligibility requirements.
Termination and liquidation procedures
At the end of the fund’s term, or upon the occurrence of a specific termination event, the LPA sets out the process for winding up the fund’s affairs. This includes liquidating the remaining assets, settling liabilities, and distributing any proceeds in accordance with the waterfall. These provisions give investors certainty about how and when they will receive their final distributions and ensure an orderly close to the partnership.
Tax transparency and global tax planning
ELPs are tax-transparent vehicles under local law. This means the partnership itself is not subject to Cayman Islands tax, and income is treated as flowing directly to the partners based on their respective interests. This structure is compatible with U.S. “check-the-box” treatment and other international tax frameworks, making the ELP ideal for investors with cross-border tax considerations.
Privacy, confidentiality and information rights
Unlike corporate structures, an ELP’s limited partnership agreement is not filed publicly, allowing for greater privacy in how commercial terms are negotiated and documented. The LPA will also typically include confidentiality provisions and define the scope of information rights granted to limited partners, balancing transparency with the need to protect sensitive information.
Temporary investments
Pending investment into portfolio assets, or while waiting to distribute cash, the GP may direct the fund’s cash into temporary investments, such as money market instruments or low-risk liquid assets. This allows the fund to preserve capital and earn modest returns while maintaining flexibility for deployment or distribution.
Change of general partner
The LPA may include mechanisms to remove or replace the general partner in certain circumstances, such as resignation, incapacity, breach of duty, or key person events. These provisions help ensure the fund’s continuity and protect investors by providing a clear roadmap for leadership transitions without triggering dissolution of the partnership.
In short, the Cayman ELP provides the legal and commercial structure that closed-ended fund managers need, while offering investors the confidence that their rights and exposures are clearly defined and limited.
Shelley Do Vale is the founder and managing partner of Vale Group.
