Thanks to their flexible business models, the world’s largest offshore firms are expanding, hiring and staying calm about the year ahead. Jeffrey White speaks to the offshore legal community in the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and beyond.
Depending on how you look at it, the ongoing credit crunch spawned by last summer’s sub-prime crisis in the US has spelled either good or bad news for offshore law firms.
On the one hand, London and New York have been hit hard, and that has meant fewer big-ticket instructions flowing to offshore jurisdictions, especially in capital and insurance markets. On the other, “the relentless march of the fund product,” as one Cayman Islands lawyer puts it, continues to pick up steam thanks to the crunch, as investors look to protect their money by using offshore vehicles. In fund-dependent jurisdictions such as the Cayman Islands, the British Virgin Islands (BVI) and Guernsey, for example, that is helping to soften blows delivered by shaky markets.
Predictably, offshore lawyers are almost uniformly taking the positive line - though perhaps not without some justification.
They point to robust business models built on diversity, which can easily adapt to practice areas now in greater demand: not just funds work but litigation, corporate restructuring and insolvency. Instructions from emerging markets such as India and Russia continue to provide a needed buttress (Caribbean giant Conyers Dill & Pearman is set to open an office in Moscow this month). Meanwhile, law firms in the Channel Islands await proposed changes to the UK tax regime that could drive even more onshore business their way.
Yet challenges remain. Europe is clamping down on money laundering and tax evasion with new directives - this even before last month’s scandal involving top German executives sheltering their money in tax-friendly Liechtenstein. Whether that will scare away investors, who have enjoyed the anonymity the offshore world has traditionally provided, is unclear. More pressing is the perennial debate about whether offshore firms should go global, which has garnered renewed attention in recent months as Walkers and Mourant du Feu & Jeune failed to ink a merger deal (citing poor timing), while Maples and Calder sealed a strategic tie-up with Jersey’s Carey Olsen - one of the few top-flight firms not to have merged with a Caribbean outfit.
That deal, announced in January, capped off a year of remarkable personnel changes and growth across the offshore world, with several key mergers and office openings, and with many firms confirming record recruitment - perhaps the most significant sign that offshore firms expect any hard times to be short-lived. “I believe there has been reasonably significant downturn,” says Appleby managing partner Peter Bubenzer (pictured right). “But the expectation is fully that things will come back.”
Fund vehicles to the rescue
The credit crunch has impacted predictable practice areas across the offshore world, with firms seeing less securitisation, real estate, start-up financing and capital markets transaction work, particularly new collateralised debt obligation (CDO) products. Toward the end of 2007, Bubenzer predicted funds would join that group, since logic says they would be harder to launch with markets all over the map. He admits now he was wrong - unusual candour for a lawyer.
Investors with opportunity funds, eager to pick up bargains on skittish marketplaces, are turning offshore in increasing numbers - not just to form private equity and open-ended vehicles but in particular debt funds, with products being established to invest in or acquire the assets of distressed debt issuers. “There are different players who are active now,” says Stef Oostvogels, name partner at Oostvogels Pfister Feyten in Luxembourg.
Bubenzer adds: “Where market conditions would appear to be somewhat challenging, that has not affected the appetite for the creation of new vehicles. There is still a lot of money in the world that is chasing a decent return, and those returns are to be found even in a time when the markets are not doing well.”
The major offshore jurisdictions all saw significant funds work in 2007. At Appleby, says Bubenzer, funds work is up 25% on the year across its Bermuda, BVI and Cayman practices, on the back of some significant deals last year. Appleby acted for Coller Investment Management Limited in the closing of Coller Investment V, a secondaries fund with commitments of $4.5bn (£2.23bn) (Cayman partner Stephen James and associate Simon Raftopoulos led the transaction).
In Guernsey, long a leading offshore jurisdiction for private equity, Ogier acted as local adviser to Dominion Fund Management, which listed a £1bn open-ended investment fund covering fashion, luxury goods and services on the Irish Stock Exchange. Ozannes Guernsey partner Peter Harwood led a team advising Babcock & Brown on the establishment of a wholesale fund focusing on European infrastructure, which closed with €2.2bn (£1.7bn) in commitments.
Offshore lawyers point to their firms’ active funds work as evidence that their business models are robust and flexible enough to weather an economic downturn, even in jurisdictions linked closely to major onshore financial centres. “No one is immune, of course,” says Maples managing partner Julian Reddyhough (pictured left). “But offshore firms do have some advantages because they typically do not rely on one transaction type and one dominant client, or clients from any single geographical area.”
In all the major jurisdictions, firms say their broad practice base provides a cushion against hard times, and that other activities on the corporate and finance side are joining funds work to help offset business slowdowns. A significant portion of the world’s aircraft fleet, for example, is financed through Cayman and Bermuda holding and leasing vehicles (Boeing and Airbus recently committed to register 20,000 new aircraft in the Cayman Islands), so Caribbean firms with solid asset financing practices remain busy.
“It is as much a function of allocating resources to other types of activities as anything else,” says Ernest Morrison, managing partner of Bermuda’s Cox Hallett Wilkinson. “We are certainly focusing more on opportunities such as restructuring and potential insolvencies. Litigation has been robust, with a lot of restructuring. It looks to have potential for further growth, that is for sure.”
Still, funds look to be a leading driver in the months ahead. Just last month Jersey introduced two classes of unregulated funds, intending to win back some market share from Cayman. “You will find that a lot of firms with a significant funds practice are really gearing up for further growth in their funds practice on the backs of these unregulated funds,” says Mourant partner Jonathan Rigby, who has just moved back to Jersey after a stint at Mourant’s office in London.
Meanwhile, the Isle of Man is seeing a different type of fund compete for attention: sovereign-wealth funds (SWF), the surplus cash from nations such as Qatar, Singapore and South Korea, which continue to pour their money into the recapitalisation of investment banks waylaid by the subprime crisis. “It has been an interesting area over the last year,” says Daniel Mackelden of Isle of Man firm Cains.
Emerging markets
The rise of SWFs illustrates the continued importance of emerging markets, which are driving workflows offshore and turning firms’ sights eastward to capture new business.
There is, however, some debate as to how vulnerable these developing sectors are to slumps in established financial centres. Mackelden, for one, sees them bearing up: “The large firms very much see emerging markets as a way of smoothing times when they are tough. There are quality instructions still coming out of emerging markets, in particular Kazakhstan, Ukraine, India, China and Africa. All of this provides quality work for the big firms here and quite often involves the offshore world in those deals structures.”
London’s Alternative Investment Market (AIM) listings continue to be driven by emerging markets, as countries such as China and India tap into the UK’s capital markets with an AIM listing, turning offshore to gain shelter from UK tax through an Isle of Man or Channel Islands listing vehicle. Nearly 75% of Indian companies raising money in London are now domiciled in the Isle of Man.
Mourant recently acted on the establishment of an Indian opportunity fund for ICICI Bank, India’s third-largest private sector bank, and is currently advising two Malaysian companies on AIM listings. Russia also continues to provide steady business, not just for the Channel Islands but also for BVI, whose vehicles remain popular among Russian businesses investing into former Commonwelath of Independent States countries.
How are offshore firms responding to these markets? They are chasing the business. Cains is opening an office in Singapore this summer, staffed by five and led by director Mike Edwards, and there are plans to begin hiring locally.
Conyers is set to become the first large offshore firm to market in Moscow, dispatching managing partner Carolyn O’Hare, who has been with the firm since 2005, to open an office there later this month. The Moscow office will practise only BVI, Cayman and Bermuda law and will feed into the firm’s London practice, which cites a surge in initial public offerings, M&A and aircraft financing coming out of Russia. “The increase in the corporate finance business coming out of Russia is only going to increase the amount of transactional work being done in London,” says Conyers’ Ross Webber. “We see our presence in Moscow as being a boon to our London office.”
Global versus local
The offshore world has long debated the value of staying local or going global and the growing importance of emerging markets has made the major players rethink their corporate strategy, as the offshore legal market grows ever smaller and more competitive on the backs of significant mergers and tie-ups in recent years. “We have seen a huge rise in business coming from India and other parts of Asia, so in order to benefit our clients in that time-zone we needed to have an office in the region,” says Cains’ Mackelden.
Even offshore firms which have resisted global expansion - opting to stay local and capitalise instead on solid relationships with onshore players, which result in significant international instructions - are rethinking the path ahead.
Bermudian outfit Cox Hallett Wilkinson acted last month, with Clifford Chance, on Toll Holdings’ €221m (£169m) acquisition of BALtrans Holdings, a large Asia freight forwarding company, and enjoys consistent referrals from Conyers. Still, Cox’s Morrison says the firm will give “serious thought” during the next 18 months to expanding into new markets. “It has become a client service issue rather than a need to grow for growth’s sake,” he says. Bubenzer adds that Appleby is looking to open in Singapore, in order to bridge the gap between the firm’s London and Hong Kong offices.
But while firms such as Conyers look to expand their global reach unilaterally, others are going the route of the tie-up or merger. Last year Ogier entered the Far East and South American markets by merging with BVI-based WSmiths, and Mourant merged with Cayman firm Quin & Hampson.
However, one of the most anticipated mergers - that between Mourant and Walkers - fell apart earlier this year, with both firms now following “individual growth plans”. Mourant’s Rigby says. “It would have been a huge, complex endeavour and both firms came to the same view that the timing for a merger on that scale was not quite right.”
In January, Maples and Carey Olsen sealed a best friend relationship, with Maples handing its Guernsey and Jersey work over to Carey and gaining Carey’s BVI and Cayman work in return. Carey Jersey partner Alex Ohlsson says the relationship is working well for both sides and that it is preferable to point clients to a leading firm in another jurisdiction rather than setting up operations there from scratch. (Others are calling the Maples/Carey relationship a “poor substitute” for a merger and one that could damage the respective market share enjoyed by each. Says one lawyer: “There is frankly no particular incentive for the firms to work together or cooperate.”)
Those firms that remain rooted in only one or two jurisdictions say staying local has its advantages: the boom time in recent years enjoyed by the Channel Islands means there is substantial local M&A and private equity work. Carey’s largest corporate transaction last year involved advising on private equity firm Sandpiper Bidco’s acquisition of CI Traders, the largest retail group in the Channel Islands.
“People think that offshore is really just a conduit for something bigger that is going on elsewhere. There is actually an awful lot of economic activity that is going on in Guernsey and Jersey,” says Ozannes Guernsey partner Robert Shepherd. “There is more of that kind of [local] work than 10 years ago.”
Changes on the horizon
The term ‘offshore’ also conjures another thought: secrecy. The offshore world has long enjoyed the anonymity favoured by money launderers and tax dodgers. Liechtenstein - not technically an offshore jurisdiction, although its tax structures still make it attractive to outsiders - vows to begin overhauling its banking regulations this month in the face of a growing scandal that outed hundreds of investors who use the principality to shelter their money and assets anonymously.
The scandal, which has hit Germany hardest, follows new European Union (EU) directives meant to crack down on money laundering in offshore jurisdictions. The directives now extend know-your-client disclosure procedures to law firms, which will affect corporate and banking practices as firms implement the regulations by the summer.
Offshore law firms will now be regulated like banks: they will need to know whom they are working with and where the money is coming from. “I think trying to do that under the previous EU guidance notes was sometimes a bit difficult,” says Ogier Guernsey partner William Simpson.
But few offshore lawyers believe the money laundering regulations will adversely impact business. Rather, many point out that the offshore world in recent years has been increasingly regulating itself in this matter. “The consequences for not following these procedures have always been too severe,” says Appleby’s Bubenzer.
Another law change that looks to impact offshore work more are the UK’s plans to begin taxing non-domiciles, a development that the Channel Islands are following very closely: many non-doms use offshore structures to house income. Mourant is putting resources in place to take advantage of what Rigby believes will be a “raft of instructions” in the run-up to the changes.
Tax practices in Jersey and Guernsey look set for further work increases, as both Channel Islands are moving toward eliminating corporate taxation (Guernsey already has, with Jersey soon to follow).
Hiring for the year ahead
One thing is for sure - offshore law firms will have the bodies to push towards robust practice areas this year.
For the biggest offshore players, 2007 was the year of recruitment, with many acknowledging record hiring - in areas that hint at where firms intend to focus in the coming months.
Ogier has doubled in size since 2006 and is planning more of a finance focus for its Cayman, BVI and Guernsey offices. Maples hired 70 lawyers globally last year, 20 of which were for the firm’s Dublin office, a jurisdiction Maples entered in 2006 and is singling out for sustained growth. Bedell Cristin’s Guernsey office, opened in 2006, grew from three to 15 lawyers last year, according to partner Mark Heylar. Appleby hired 43, notably former DLA Piper securitisation head Jeanne Bartlett, who joined the firm in January to lead its structured finance practice in the Cayman Islands.
Conyers’ Webber says the firm, which hired about 20 lawyers last year, will be adding to its litigation, private client and corporate rosters throughout 2008 and is looking in particular to expand its trust and private client practice in the BVI and the Cayman Islands.
Such moves illustrate that firms are looking to feed practice areas that can grow fat even in a troubled global economy. “The offshore firms by their very nature have had to be adaptable to different types of work,” Carey Olsen’s Ohlsson concludes.
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