Offshore law firms have enjoyed a period of plentiful work so far this year. Will 2019 bring more of the same? Offshore lawyers offer their insights.
Just as the offshore lawyers Asian Legal Business spoke to last year had predicted, 2018 turned out to be a big boom year for offshore law firms.
According to a report by Appleby, the total value of inbound transactions in the first half of this year alone was $216 billion. The sum from these six months alone is almost as much as the total of $232 billion recorded in 2017.
The 1,344 deals in the first half of 2018 represent a 10 percent decrease from the second half of 2017, which had 1,491 deals. However, the value of the 2018 deals saw a 68 increase.
The hefty $62 billion price tag Japan's Takeda Pharmaceutical paid to acquire Jersey incorporated PLC was noted as a huge contributor to the spike.
But billion-dollar deals have been a common occurrence this year for offshore jurisdictions. Appleby's Offshore-i report notes 28 reported in the first half of 2018 alone, with six of them worth over $5 billion.
The finance and insurance sector was a highly active one with 454 deals in H1 2018. In fact, that sector alone made up for a third of all offshore activity seen in those six months.
Meanwhile, the manufacturing ranked highly in terms of value with $82 billion in the same period.
Appleby notes that changing dynamics in sectors such as healthcare, retail and the media could see them being more relevant soon. Buyers are prepared to lay down large sums for bankable projects and companies that are an excellent strategic fit. They are also ready to do more expansionary deals, allowing their main companies to diversify and build revenue streams in new fields and markets.
The report advised that specialisation in key product areas and disposal of non-core assets would make up trending themes.
Eighty countries conducted offshore deals in H1 2018. The Cayman Islands was the jurisdiction where most of the deals were handled.
A PROSPEROUS YEAR
"So far, this year, there has been more than $216 billion spent in the offshore region, with the average deal size of $161 million representing almost double that of 2017," says Cameron Adderley, partner and global head of corporate at Appleby, in a statement.
The average size of an offshore deal is also higher than any other region in the world.
Adderley feels there have been echoes of 2015, which he deemed "a remarkable year for offshore." That year closed with a total of 2,931 deals worth a combined $420 billion.
This year sees outbound deal volume overtake inbound activity.
According to Appleby, there were 1,640 outbound deals coming out from the offshore region from January to June this year. The combined total of the deals was worth a hefty $187 billion, with the top 10 outbound deals worth over $3 billion each. Notably, half of the targets in the top 10 were data processing companies.
China, the U.S., and the UK were the main locations targeted.
Ian Mann, Asia managing partner at Harneys, feels that 2018 has been a "momentous year" for offshore firms who have had to adapt to more complex, high-value deals in an increasingly pressurised landscape.
Mann observes that offshore litigation has continued to boom with Mainland Chinese parties dominating the Court lists.
"Overall, the offshore legal services market has continued to grow at probably unsustainable levels. Offshore firms are looking to have a deeper footprint in Mainland China, but also seeking to diversify in other markets as well," says Mann.
Mark Western, the Hong Kong managing partner at Maples and Calder, describes the year as a "prosperous" one for offshore legal counsel in Asia.
"Collectively, we have advised on more Hong Kong IPOs and U.S. IPOs of Cayman/ British Virgin Islands (BVI) incorporated companies in the first nine months of 2018 than the whole of 2017, with aggregate deal size having increased substantially. We have also seen increasing use of Cayman investment funds as investment vehicle of choice for raising capital from investors in the region," says Western.
Stephen Adams, managing partner of Collas Crill's Singapore office, concurs that it has been a remarkable year.
"So far 2018 has been a good year for Collas Crill in Asia. We have experienced year on year growth in the region, driven predominantly by our Cayman and BVI corporate and funds practices. Interest in our dispute resolution practice and corporate services arm has also been up, and we expect that this trend will continue as our offering in the region matures and grows," says Adams.
"BVI company incorporations reached their highest point in Q1 of 2018 since 2015, which we attribute to an increased demand from Asia for cross-border investment, joint venture and financing activities that BVI companies are known for. We have also seen a spike in capital markets work across a range of markets, from Australia to the U.S."
Piers Alexander, a partner in the Hong Kong office of Conyers Dill & Pearman, notes that Hong Kong, in particular, has been a magnet for the growth experienced this year.
"There has been strong performance across all sectors of our business in Asia throughout 2018. With over 145 Bermuda and Cayman companies out of an approximate total of 160 listed on the Hong Kong Stock Exchange for the year up to the end of September, the Hong Kong stock market is well supported," says Alexander.
"In addition to the listings so far, Conyers has a healthy pipeline of proposed listings for the remainder of 2018 and into 2019."
LOOKING AHEAD TO 2019
Adams foresees a similar trend for his firm in 2019.
"As we continue to integrate our Cayman and BVI mergers onto the Collas Crill platform, we see opportunities for growth across the region. However, signals are mixed and geopolitical issues will have an effect on certain areas," says Adams.
"The banning of Hong Kong's National Party will no doubt create uncertainty around the commitment to the ‘one country, two systems’ arrangement. Whereas the recent government change in Malaysia has already re-energised that market. As a result, we expect mixed results across the region."
Adams also expects that the activity and hype surrounding coin offerings and crypto-assets – the biggest trend of 2017 - to lessen until there is some clarity to the position in the U.S.
"The U.S. Securities and Exchange Commission has recently taken action against a crypto hedge fund, which only adds to the uncertainty. We do feel that there will be continued interest in the funds space, both in the traditional Cayman vehicles but we are also seeing interest in the more innovative BVI offerings," he says.
The Appleby report notes that private equity is also "at a crossroads" as funds sit on "record amounts" of cash reserves. However, high valuations and rising competition from corporations with high spending but low-performance expectations present a challenge.
But the biggest factor on everyone's mind is the U.S. trade war with China now. The dispute between the two superpowers that has lasted for months does not seem to be coming to an end any time soon.
"The U.S.-China trade dispute will certainly have a dampening effect on Hong Kong and mainland China," says Adams.
"2019 is full of uncertainty by reason of the trade war, China's unsustainable domestic debt, China's foreign investment strategy, the South China Sea conflict, dependency on the U.S. dollar, currency risk and the emerging market crash. These titanic conflicting positions create a loss of confidence and massive downward pressure, but at the same time may give rise to opportunities in new markets," says Mann.
Harneys' Mann says that offshore firms closely follow global economic and geopolitical trends in a bid to offer the right services in the right geography. Based on his observations, there are some trends to take note of.
"Overall, we predict lower demand for Chinese manufacturing as a result of the trade war and a correlative slowing in the global economy. This will lead to a slowing in commercial activity which in turn will mean significant defaults on loan repayments and the insolvency of corporations operating in the region," says Mann.
"Profit margins are at a knife's edge for many corporates in the region and the climate is ripe to kill off weaker players altogether. This may be partially offset by survival-type M&A to render corporates more durable but will not be enough to maintain the momentum of 2018. Growth is cyclical, and it would be naive to think that untrammelled growth will continue in 2019."
Conyers' Alexander anticipates volatility in the Asian capital markets during 2019, which may affect the appetite for new listings on the Asian exchanges.
"It is difficult to assess the full impact on offshore business of the tariffs imposed, or to be imposed, by the U.S. and China or the wider effect of a trade war between the two countries. It will likely weaken future investment and growth in trade directly between the U.S. and China, affecting cross-border mergers and acquisitions, as well as capital raisings for U.S. funds investing in China, for example," says Alexander.
"However, that is not the only relationship in play in Asia and, whilst the larger trade deals may be affected, to some extent there is a sense that business must carry on in Asia irrespective of the wider global economic effects. Companies with local or inter-Asian operations may be more insulated in comparison to those with greater exposure to the global value chain," he adds.
"Pent-up investor demand for fast growth investments, including small-cap listings, makes it a good time to go public," says Appleby's Adderley.
"Economic conditions remain encouraging, equity valuations remain high in many parts of the world and interest rates remain low."
According to Conyers, they have yet to see a slowdown in investment fund capital raising for Asian focused funds, whether single-country or pan-Asian.
This could be because investors have been looking to Asian markets for investment opportunities with the continuing political uncertainty in some Eurozone countries and the protectionism emanating from the U.S.
"Although not necessarily a safe-haven nor a certainty for future growth, the Asian and particularly the China investment story still has many compelling elements; not least that China may implement policies to reduce the impact of the global headwinds," says Alexander.
"China's economy has not just been outward-looking and much of its consumer sector demand is locally-driven. The Chinese government has previously implemented measures encouraging investment in specific sectors, including healthcare, insurance, education, social services, utilities and entertainment, which it sees as necessary for development to effect its planned shift from an economy dependent on corporate debt and governmental stimulus," adds Alexander.
He notes that these sectors have been the fastest growing aspects of the Chinese economy and chime with the view that the middle class in China will be a key economic driver.
However, Alexander does feel that large cross-border transactions involving U.S.-China investment are likely to be affected by the trade issues between those countries because the weakened investment conviction which such trade tariffs and global growth uncertainties bring.
Nonetheless, Maples' Western expects 2019 to be an "overall boom" year but with differing degrees throughout the region due to the trade war.
"As the dust settles on the trade dispute with the U.S., we expect China to roar back with a halo effect for the region," says Western.
However, Western thinks that some markets might be slower in bouncing back from the effects of the trade war in the coming year.
"Some of the emerging markets such as the Philippines, Vietnam and Indonesia will suffer as a result of U.S. interests raising," says Western.
BELT AND ROAD
But a long-term effect from the trade war could be a more integrated Asia.
"The trade war has created an adds imperative for China to make new friends, in new markets. American isolationism will serve to create a new China dominated "Eurasia", with Europe as a geopolitical bolt-on. The U.S. will become its own isolated bloc outside of this new economic bloc," says Mann.
And that could only help China's ambitious infrastructure initiative – the Belt and Road initiative (BRI) – to grow. The plan could entail about $1.7 trillion of investments in infrastructure per annum according to estimates from the Asian Development Bank.
According to a report by Appleby, the severe downturn in outbound activity at the moment is likely to be short-lived as China's determination to make a success of the BRI would help turn things around.
Alexander says Conyers has assisted on the setting up of offshore entities and investment funds established specifically for investment in the targeted sectors and countries along the “Belt” - the land route from China across Central-Asia into Europe.
But he thinks that it is early days yet, and it is difficult to predict the impact of the Belt and Road over the next year as this is multi-decade long initiative.
"The opportunities will come from the sheer scale of the project: through the Belt and Road, China will access over 65 countries representing more than 60 percent of the world's population and around 30 percent of global GDP. Not only will China gain new markets, but it will also be in a position to secure key commodities, minerals and energy resources," says Alexander.
"A core aim is to make it easier for businesses operating in and out of China to reach the middle classes along the Belt and Road. The view is that, if infrastructure development leads to urbanisation in developing countries along the routes, the domestic economies will also develop," he adds.
"If domestic demand drives activity across the region, the economic landscape for China and other countries along the Belt and Road will move away from debt-fuelled investments and reliance on exports. This will also release over-capacity pressure should China's traditional markets not be able to continue to absorb its available exports."
Hong Kong, in particular, would benefit from this.
"The BRI will finally take off this year for both onshore and offshore firms in a huge way. This is the latest instalment in the seamless balletic duet between Hong Kong lawyers and their offshore colleagues. This will solidify Hong Kong as a global legal centre for the next few decades," says Mann.
"The great opportunity for Hong Kong lawyers is that dispute resolution for massive infrastructure projects will likely be by way of arbitration in Hong Kong. In June, Harneys established the Belt & Road Initiative Practice Group unusually comprising a veritable mix of lawyers from finance, M&A, corporate and investment funds. We were also appointed by the Academy of Law, the training wing of the Law Society, to organise the inaugural Belt and Road Initiative Offshore Training Day."
As with all cross-border international trade and investment, the foundation of the structuring will be offshore. Western believes Cayman and BVI structures are well placed to support the Belt and Road initiative.
"What we have typically seen is Belt and Road projects structured as joint venture transactions and as investment funds. China financial institutions are familiar with Cayman and BVI joint venture corporate structures, being based on common law and modelled on English company law principles," says Western.
"Cayman investment funds, and, in particular, private equity funds structured as limited exempted partnerships, are likely to be the investment vehicle of choice for raising capital from investors for a target project. Cayman is the leading jurisdiction for such structure that meets and delivers on the commercial expectations of all participants."
Others concur about how offshore law firms are well placed to service the BRI though.
"Offshore financial centres, such as Bermuda, the BVI and the Cayman Islands, (OFCs) have been an integral part of the development and financing of Asian investment, infrastructure projects and cross-border deals for over 30 years and, with the flexibility afforded by the available structures for debt and equity financing, whether as investment funds, capital market offerings or bond issues, the OFCs are ideally positioned to continue that relationship," says Alexander.
A recent Institute of Economic Affairs discussion paper also held that offshore centres raise aggregate investment by mitigating instances of double and triple taxation. Many sectors would, and have, benefit from this by turning to offshore jurisdictions and law firms.
"Cayman Islands investment funds and BVI SPV's and joint ventures will dominate by reason of continued demand from banks and financiers. That is an immutable truth of the global economy. However, the governing law of the finance will continue to be a mix of Hong Kong, English and we predict, Chinese law," says Mann.
Adams sees offshore vehicles being utilised as an efficient way to make investments. However, that doesn't mean the five-year-old BRI hasn't had its stumbling blocks.
"China's BRI will offer opportunities for offshore structures, as traditionally these have been the foundation of cross-border investment. It is, however, fair to say, there have been recent issues with the BRI, for instance, with Malaysia cancelling infrastructure projects, questions over Maldives debt and the Sri Lankan port of Hambantota. It may be that the opportunities for investment in the BRI projects, or ancillary projects, have not yet trickled down to private investors," says Adams.
Beyond the BRI, Adams sees another quietly rising opportunity in the region.
"There is certainly much noise around the BRI and the potential it offers, however, we think that the quiet story which is gathering momentum revolves around the ASEAN Economic Community (AEC) and the potential that offers. AEC represents a market of $2.6 trillion with over 622 million people and by some accounts will be the world's fourth-largest economy by 2025 behind the U.S., China and the EU," says Adams.
"When we consider China and the BRI, coupled with AEC and add to that the potential of India, we expect that this larger region will be the driver of growth for our business over the next 10 years."
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