Is the global economy heading towards a recession, or is this just a passing phase? As companies prepare to handle the turbulence, offshore jurisdictions have offered much-needed stability, at least in certain operational and regulatory aspects. With 2023 beckoning, offshore firms talk about how they are ready to help their clients tackle uncertain economic conditions and put in place strategies for the future.

If anyone in the year 2019 had predicted what the next few years would hold - a global pandemic and resulting national lockdowns, a major land war in Europe, and other harbingers of chaos – few would have taken them seriously.

About three years in, we see that not only have the above come to pass, but the overall sense of uncertainty only intensifies, with rising inflation in the U.S., the Chinese economy hitting a speed bump and the Ukraine-Russia crisis dragging on longer than expected.

There have also been a number of fast-evolving trends and developments that have emerged during this time, some of which have left companies and regulators struggling to keep up. These include cryptocurrencies and blockchain, the rise in prominence of ESG, and innovations in the banking and finance space to name just a few.

Given this backdrop, as the Asia-Pacific region prepares to say goodbye to another tumultuous year, offshore lawyers are expecting a busy 2023.

“The year 2022 has certainly been very challenging across almost all sectors in Hong Kong with the ongoing pan-demic locked down, Hong Kong travel restrictions, Russia-Ukraine war, liquidity concerns with PRC property companies, tensions between the U.S. and China, the decline in the world stock markets, raising interest rate and inflation,” says Flora Wong, partner at offshore law firm Conyers.

Anthony McKenzie, Singapore managing partner at Carey Olsen, says the outlook is certainly challenging. “In 2022 and beyond and the economic outlook is very different. Asia deals are being threatened by geopolitics, interest rate hikes, spiralling inflation, supply chain disruption, and slowing growth, especially in China, Asia’s largest offshore legal market.”

But it hasn’t been all gloom. The Southeast Asian region, for example, saw some of the most significant opportunities in 2022 for global investors.

“In 2022, we’ve seen a lot of activity in South and Southeast Asia, especially in equity capital markets and venture capital in Singapore, Vietnam, and Indonesia. This region has presented more opportunities in short to medium term in strategic M&A in retail, consumer, healthcare services sectors, clean energy/ESG, logistics and e-commerce,” says Nicholas Plow-man, practice partner for Ogier in Hong Kong.

TURBULENCE TO CONTINUE

The last few months have been chaotic for many global companies. Rising inflation, worries of a global economy slipping into a recession, the U.S.-China stand-off and the Russia-Ukraine crisis are all leading to challenges for the worldwide economy, and for multinationals operating across jurisdictions.

“Rising inflation, interest rates, and geopolitical tensions have resulted in an uncertain investment environment. COVID policies in both Hong Kong and mainland China have heavily impacted the cross-border flow of capital and talent, which has posed a significant challenge for clients in the region, particularly those in the financial services industry,” says Plowman.

As countries moved to protect their own interests amidst the global turbulence, some macroeconomic trends and underlying factors could continue for some time, say experts.

“A number of factors are driving inflation, including supply chain disruption, the reduced supply of manpower and the energy supply instability due to the war in Ukraine –and as inflation continues to rise, so will interest rates, which will continue to prove to challenge for debt capital markets and equity capital markets in the first half of 2023.”

— Nicholas Plowman, Ogier

“There are several factors at play here, including depressed company valuations; inflation, which amongst other things, is depressing certain key global currencies; and lingering restrictions on global travel, making it very difficult for dealmakers to meet, conduct diligence on assets and get deals done. Each of these factors is impacting deal flow, and we have seen a real slowdown in M&A activity which is not forecast to rebound significantly in 2023,” says Michael Padarin, Hong Kong managing partner at Carey Olsen.

Some companies also struggled with either setting up new supply lines or modifying the existing ones has had an impact on companies. Many multinationals have had to navigate tricky regulatory landscapes in different countries while setting up these supply lines, which added to their cost.

“A number of factors are driving inflation, including supply chain disruption, the reduced supply of manpower and the energy supply instability due to the war in Ukraine – and as inflation continues to rise, so will interest rates, which will continue to prove to challenge for debt capital markets and equity capital markets in the first half of 2023,” says Plowman.

Experts say that some macroeconomic turbulence that started this year may continue well into 2023.

“We expect many of the negative factors impacting 2022 to continue in 2023. However, on a positive note, with Hong Kong gradually opening to international travellers and the resumption of international events, such as the hosting of the global financial leaders’ investment summit in November 2022, some normality is returning to the city and we are hoping that business sentiments and appetite will improve in 2023.”

— Flora Wong, Conyers

The International Monetary Fund has lowered its growth outlook for 2023, and the risk of a global recession in 2023 increasingly looks imminent.

“We expect many of the negative factors impacting 2022 to continue in 2023. However, on a positive note, with Hong Kong gradually opening to international travellers and the resumption of international events, such as the hosting of the global financial leaders’ investment summit in November 2022, some normality is returning to the city and we are hoping that business sentiments and appetite will improve in 2023,” says Wong.

A YEAR OF CAUTION

Amidst this turbulence, many companies are rushing to hedge their corporate growth strategies, especially when dealing with investment in Asia, say experts.

The year 2023 may continue to see caution from companies but will also present some opportunities in terms of investment.

“The next 12 months will likely be characterised by continued caution in terms of deployment of capital and opportunistic investment. We expect that investors in the region will continue to allocate capital to alternatives. There’s still so much dry powder on the sidelines and Asian private equity funds have continued to increase in size, despite global economic uncertainty. We are seeing PE funds shift their focus away from China towards Southeast Asia because of China’s slowing growth, continued COVID-zero policies and geopolitical tensions. India, another Asian giant, will also ben-efit from such a shift,” says McKenzie.

The opportunities on the transaction side could also go up as many PE funds look at buyout targets throughout Asia.

“Traditionally, the predominant market has been mainland China, but we have seen an uptick in instructions on deals in Southeast Asia, where private equity firms are targeting reason-able valuations in high-growth markets. We’re also likely to see continued trends towards strategic M&A in retail, consumer, healthcare services sectors, clean energy/ ESG, and logistics in e-commerce – some of which have been driven by the pandemic and post-pandemic behaviour, such as a renewed focus on health and a preference to work from home,” says Plowman.

Some of the turbulence could also lead to a rise in distressed assets across the Asian economies, which again could lead to some opportunities for offshore markets.

“We have also seen an increase in instructions related to distressed structures, businesses, and assets in Asia. As a result, we continue to invest in our Asian litigation, restructuring and insolvency practice as U.S.-China tensions continue to mount and Asian businesses deal with global uncertainty and the aftermath of the pandemic,” says McKenzie.

Mark Yeadon, a partner at Conyers, agrees. “We expect to see a significant increase insolvencies, restructuring and disputes arising from troubles in the PRC economy, typified by the collapse of the PRC residential property sector. We expect that after the Party Congress there will be a fresh impetus to resolve problems although this may take some time to show in initiatives,” he says.

“We have seen Asian clients becoming increasingly interested in tapping into the UK and European markets via other offshore jurisdictions such as Jersey and Guernsey. In addition, several Singapore-based managers are now using Jersey as the jurisdiction to domicile their crypto funds because of Singapore and Jersey tax considerations, including potential relief available under the Singapore-Jersey Double Tax Agreement.”

— Anthony McKenzie, Carey Olsen

It’s not just American and European companies that are interested in investing in Asia. Some Asian companies also route their investments through offshore destinations such as the Cayman Islands and the British Virgin Islands. And this could only go up in the next 12 months as many Asia companies will look at expansion due to turbulence at home and opportunities abroad.

“We have seen Asian clients becoming increasingly interested in tapping into the UK and European markets via other offshore jurisdictions such as Jersey and Guernsey. In addition, several Singapore-based managers are now using Jersey as the jurisdiction to domicile their crypto funds because of Singapore and Jersey tax considerations, including potential relief available under the Singapore-Jersey Double Tax Agreement,” says McKenzie.

Experts also expect digital currency trends could also continue.

“There are a couple of trends we already see, which are aligned with the global economy. Crypto regulation, ESG and cybersecurity are areas where development will speed up. Corporates will likely be focusing more on these areas and looking for business opportunities around them,” says Preetha Pillai, director and head of the Singapore office at Conyers.

GROWTH STRATEGIES FOR FIRMS

Macroeconomic trends combined with persisting disruption resulting from the COVID pandemic mean that top offshore law firms have to implement certain strategies for attracting growth in the next 12 months.

Experts say that clients now require multidisciplinary, real-time solutions to business challenges in an increasingly complex and fluid geopolitical environment.

“Our top priorities now (and going forward) are to continue to invest in our people and to be innovative in how we connect and engage with those clients, meet their commercial needs and address the challenges they are facing,” says McKenzie.

Many offshore firms also focus on sustainability as part of their growth strategy. “With funds focused on or incorporating sustainability themes into their investment strategies have picked up over the last year and could continue to do so for the next few years. Working with such clients has been particularly rewarding as Ogier is positioned to provide a unique value-add in the offshore context. Namely, combining sustainability expertise with legal expertise backed up by our ability to advise on European sustainability-related regulations given our Luxembourg and Irish offering,” says Plowman of Ogier.

One of the other strategies for off-shore law firms revolves around technology. Technology use ramped up during the pandemic, and firms will continue to use it as an integral part of their growth momentum going forward.

“Our management team and IT department have been very busy over the last two years as we are rolling out new entity governance and compliance platform, documents automation tools, developing client’s portal to allow clients to directly access their own company portfolio, enhancing our IT infrastructure, strengthening systems for our data control and security. Developing new tools and using new technology will continue to be an important focus as competition has been intense and compliance requirements change quickly,” says Wong of Conyers.

Some firms also view this period as a unique opportunity to consider expanding in a variety of ways.

“This is a time of unique opportunity to reshape the way lawyers work with their clients and rethink the structure and scale of our practice areas, sectors and geographic locations,” says McKenzie of Carey Olsen. “Our Singapore and Hong Kong offices have continued to grow and evolve and are among the fastest growing in our global network We have launched a trust and private client practice in Asia, welcomed several senior lateral hires, and made several new promotions. We expect this to carry on into 2023 and beyond as we continue our growth trajectory in Asia.”