Cayman vehicles in middle-market PE, when they earn their keep

A U.S. middle-market sponsor running a domestic-only fund usually does not think about Cayman until the first foreign LP shows up in the data room. Then the question is whether to spin up a parallel structure for one investor or whether to wave them off.

The default answer in the room is often "yes, set it up." Cayman is fast, the documents are well worn, and offshore counsel is cheap relative to U.S. rates. None of that tells you whether the structure earns its keep over the life of the fund.

What Cayman is actually solving

Three problems show up most often, and the right structure depends on which one is in play.

The first is U.S. tax exposure for non-U.S. investors. A foreign LP investing into a U.S. limited partnership picks up effectively connected income on portfolio operating profits. A Cayman exempted company sitting between the foreign LP and the U.S. fund changes the income character and breaks ECI at the LP level. That is real money and it is the reason most parallel structures exist.

The second is regulatory. Some institutional LPs cannot, or will not, invest directly into a U.S. partnership. A Cayman feeder is the path of least resistance for those investors. Whether they actually need it is a separate question that the LP's counsel rarely revisits once the investment committee has spoken.

The third is portability. A Cayman entity can move easily. If the fund acquires a portfolio company that later spawns an international expansion, a Cayman top-co can sit above the U.S. opco and license international IP cleanly. That use case is real but it is not what most sponsors are thinking about when they set up a parallel fund.

What it costs

Setup is cheap. Annual maintenance is not. A parallel Cayman fund typically runs five figures a year in administrator, audit, and registered office fees. Multiply that by the life of the fund and add the cost of running side letters across two entities. The math is fine if a foreign LP put in fifty million dollars. The math is bad if they put in five.

A simpler question

Before agreeing to a Cayman parallel, the cleanest question is whether the LP is actually going to be invested for the life of the fund or whether this is a single-deal coinvestment. Single-deal coinvestments rarely justify a parallel structure. A blocker SPV beneath the fund, for that one deal only, is usually a better answer and folds away cleanly at exit.

A parallel fund is a commitment to maintaining a second entity for as long as the main fund exists. It is worth doing if the foreign capital is meaningful and durable. It is not worth doing as a courtesy.