Why STAR Trusts, Foundation Companies, and SPVs Matter as Funds Wind Down

Why This Is Important Now

When hedge, private equity, or venture capital funds come to an end, lingering residual assets such as unclaimed redemptions, litigation recoveries, regulatory rebates, or illiquid securities often remain even after most investor capital is returned. Keeping the fund open just to deal with these assets raises costs and extends fiduciary and personal risk for directors.

Specialized Cayman Islands structures such as STAR Trusts, Foundation Companies, and Special Purpose Vehicles (SPVs) offer a strategic way to ring-fence these residual assets. By isolating them in dedicated entities, boards can preserve value, cap liability, and close the fund cleanly. These vehicles are now seen as industry best practice for handling long-tail or complex assets efficiently.

Where This Is Happening

Residual asset vehicles are now standard consideration of Cayman fund wind-downs, with typical assets including:

• Unclaimed investor proceeds or redemptions
• Litigation claims or recovery rights
• Regulatory enforcement rebates
• Illiquid, suspended, or tokenized securities

This need is most pronounced in closed-end funds where investments have matured but some claims or positions remain unresolved. Today, administrators and auditors expect directors to address these assets with fit-for-purpose structures.

The Opportunity and Risks

Advantages of dedicated vehicles:

• Protect directors and fiduciaries from ongoing liability
• Enable focused management or enforcement of residual assets
• Streamline audit sign-off and regulatory compliance
• Reduce overall administrative and cost burden

Risks of inaction:

• Ongoing, avoidable fund expenses
• Heightened personal liability risk for directors
• Possibility of lost or neglected asset value

Why Foundation Companies Are Gaining Popularity

While STAR Trusts are widely regarded as robust, well-established, and generally quick to set up, interest in Foundation Companies continues to grow, especially where residual assets require active management or engagement. The key distinction is legal personality: Foundation Companies, acting as SPVs, can contract, sue, and be sued in their own name.

This ability is a significant advantage for funds with residual asset pools that involve ongoing litigation, enforcement of claims, negotiation of settlements, or direct dealings with service providers and counterparties. Where active steps must be taken to realise, collect, or resolve assets, a Foundation Company can step into that role directly, providing clarity, continuity, and a recognized face for legal or commercial action. This often leads to more efficient negotiation, enforcement, and accountability, especially compared to vehicles that rely exclusively on trustees for all action.

By contrast, STAR Trusts continue to offer outstanding flexibility and confidentiality but do not have legal personality, which makes them ideal for more passive situations where the main priorities are privacy, simplicity, and prudent containment of cost. Many legal practitioners favour STAR Trusts for their enduring track record and straightforward administration, while others prefer Foundation Companies for their corporate form and direct operational power, particularly when handling complex or contentious asset pools.

What To Keep in Mind

• Formation Timing: Arrange the appropriate vehicle prior to fund dissolution for smooth asset transfers. Ideally, complete all transfers before a liquidator is appointed; if necessary, setup and transfers can be managed during liquidation to suit timing needs.
• Governance: Use experienced, independent trustees or directors. STAR Trusts require both trustee and enforcer roles; Foundation Companies are managed by a board of directors and may include a supervisory council.
• Purpose: Clearly define the structure’s mandate, powers, and the schedule for asset management and wind-down.
• Compliance: Coordinate closely with auditors and tax advisors to ensure regulatory and audit requirements (including FATCA/CRS) are met, especially where cross-border investors are involved.
• Cost Evaluation: Weigh upfront and ongoing costs for different vehicles against the risk and expense of continued fund operation.
• Small Asset Pools: For very small balances, consider alternatives such as escheatment to government or charitable donations, if permitted under fund documentation and local law.
• Support: We can assist with the setup and transition to STAR Trusts, Foundation Companies, or other SPVs at any stage of the wind-down, including during liquidation, to ensure an efficient and compliant process.

Final Thoughts

Residual asset vehicles are now an established part of responsible fund closure in Cayman. They provide directors with tools to manage, protect, and transfer remaining assets within a clear and compliant framework. For specific advice tailored to your fund, consult with Cayman Islands legal counsel.