The footprint of the Belt and Road initiative (BRI) spans more than 68 countries, including the British Virgin Islands (BVI), Cayman Islands (Cayman), Ireland, Luxembourg and Jersey. The role that Cayman and BVI already play in the BRI is simply an extension of the dominant role that Cayman and BVI structures presently play in the China growth story.
China’s economic growth is, perhaps, most visibly seen through corporations like the BAT companies, namely Baidu, Alibaba and Tencent. They are no longer just China companies, but instead global companies – all of them are incorporated in the Cayman Islands and internationally listed China operating companies. These global structures embody the essence of what the BRI represents: domestic Chinese capabilities operating on a global platform – in the case of the BRI, Cayman and BVI structures provide that platform, being the bridge connecting China outbound transactions to the wider Asia region, Europe, the Middle East and beyond – enabling BRI infrastructure projects in sectors such as utilities, transport, telecoms, social, construction, energy and the environment to flourish.
A tale of two growth stories. President Xi Jinping’s landmark 2013 address, which set the BRI in motion, has spawned projects including the central government’s plans to invest RMB3.5 trillion (US$0.5 trillion) in railway networks from 2017-2020 connecting 80% of China’s major cities, and the development of the Guangdong-Hong Kong-Macau Greater Bay Area announced recently by Hong Kong’s chief executive, Mrs Carrie Lam.
It is the China growth story that has driven the BRI. That growth is exemplified by the dynamism of Chinese entrepreneurship that occupies the China outbound venture capital space where Cayman and BVI structures dominate.
Presently, outbound transactions remain strong with more than 300 transactions valued at over US$41 billion in the first quarter of 2018. Unicorns (privately held companies valued at over US$1 billion) stand at more than 150 – more than 30 this year alone. Traditional private equity remains robust where 2018 first quarter volumes represent more than 40% of the global market.
The Cayman and BVI growth stories make for just as good reading: (1) Chinese businesses structured through Cayman companies that have filed for listing on the Hong Kong Stock Exchange in the first half of 2018 account for more than 80% of about 130 applications, including Xiaomi Corporation and Meituan Dianping; (2) Cayman is the leading jurisdiction globally for the establishment of hedge funds with more than 10,000 registered funds with total assets of US$6.142 trillion representing 40% market share of total funds launched at the end of 2017; (3) Cayman continues to be ranked as the sixth largest banking capital internationally based on the value of cross-border assets.
Internationally accepted legal systems. Cayman and BVI structures are well placed to support Belt and Road projects. What we have typically seen is such projects structured as joint venture transactions and as investment funds.
China’s financial institutions are familiar with Cayman and BVI joint venture corporate structures, which are based on common law and modelled on English company law principles. Such structures have a simple corporate management structure, and internationally recognized shareholders’ and creditors’ rights – such as shareholder limited liability, and creditor priority.
Project entities are able to raise financing in traditional forms of debt instruments including listed or rated notes, warrants or securitizations – all widely recognized in the international capital markets. Lenders can provide secured or unsecured credit with the comfort of knowing that such concepts as statutory and contractual ring fencing, preferred creditors and shareholders’ liquidation preference, are recognized and well understood by Cayman and BVI courts, which routinely hear complex international disputes. As Cayman and the BVI are British overseas territories, the final court of appeal from both Cayman and BVI is to the Privy Council in the UK, ensuring international investors’ rights will be regulated and enforced.
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 structures, enabling investors to structure: (i) clear project investment objectives; (ii) drawdown mechanics for capital contributions; (iii) provisions for limited partner representation on investment committees; (iv) market practice management fees and waterfall matrix; (v) orderly winding up of the project through liquidation of the fund; (vi) a general partner’s exclusive right to manage the fund project; and (vii) a recognition of standard concepts such as carried interest. In short, a structure that meets and delivers on the commercial expectations of all participants.
Win-win partnership. The objective of the BRI is an ambitious one: for nations to work together to build the Silk Road Economic Belt and The 21st Century Maritime Silk Road. The jurisdictions of the Cayman Islands and BVI are slightly more modest, but no less clear in what is on offer: (1) an à la carte menu of structures to choose from, including companies, trusts, partnerships, LLCs and SPCs; (2) an immediately available structure set-up; (3) an internationally recognized private equity regime; (4) tax neutrality; (5) light touch regulatory regime allowing parties to achieve their commercial goals with minimal regulatory interference; (6) no capital controls; (7) confidentiality as opposed to secrecy; (8) OECD compliance, including know your client rules; (9) internationally accepted anti-money laundering regime; (10) professional advisers with international experience with a strong presence in Asia; and (11) FATCA and CRS participants.
President Xi made clear in his speech at the Belt and Road Forum for International Cooperation that China will endeavour to build a win-win business partnership with other countries participating in the BRI, such efforts designed to promote growth both in the respective regions and globally. The Cayman Islands and BVI are well positioned, ready and able to build such a mutually beneficial, win-win partnership with China.
Anthony Webster is a partner at Maples and Calder in Hong Kong, and the firm’s head of private equity practice in Asia. He can be contacted on +852 2971 3001 or by email at [email protected]
Everton Robertson is a partner at Maples and Calder in Hong Kong. He can be contacted on +852 3690 7424 or by email at [email protected]