Manna from the havens

Offshore jurisdictions have weathered the financial crisis surprisingly well thanks to China’s hunger for investments abroad. John Church looks at key issues confronting the sector

The global economic turmoil of 2008 has waned although the fallout remains, and offshore jurisdictions have since borne the brunt of a new world that tolerates little financial secrecy and has acted resolutely in its pursuit of transparency from the swashbuckling islands and territories it sees as having acted as havens for ill-gotten gain.

But the continued impact of compliance is not the only thing on the minds of law firms and authorities associated with the sector as it has been these past couple of law abiding years.

The real surprise is that the offshore sector is doing so well so soon after the global slump and the regulatory backlash that followed it. Law firms are bragging that work is pouring in, deals are afoot and they are almost chirpy as they outline successes in spite of it all.

The other notable fact is that China is for the most part driving this revival. Offshore jurisdictions are courting China business like never before and many in exotic locations are even considering opening new offices in Hong Kong, China’s preferred offshore trading conduit, even as they expect their US business to dry up following tough new regulations issued in February.

The use of offshore vehicles formed in the British Virgin Islands (BVI), Cayman Islands, Bermuda, Mauritius, Seychelles, Isle of Man, Jersey, Guernsey or Cook Islands to name a few is a common structuring mechanism for transactions involving Chinese investments, whether inbound or outbound.

Chinese clients, especially State-owned enterprises (SOEs) and financial institutions, are sophisticated in their knowledge and use of offshore vehicles. The jurisdictions play a key part in the areas of banking and finance, M&A, hedge and regulated funds, and private equity, and they strive to evolve and compete with new products and services to match changing needs.

“Incorporations from Asia in 2011 were the highest since the record-breaking year of 2007, and 2012 is shaping up to look like more of the same. Demand for BVI companies in Asia remains strong,” observes Peter Tarn, the head of Harneys Services.

Jeffrey Kirk, a partner at Appleby in Hong Kong points to his firm acting as Cayman Islands counsel to Renren, the “Facebook of China”, in its initial public offering (IPO) that raised US$743 million, giving it a total market valuation of US$5.7 billion. “Over the years we have seen an increase in inward and outward China-focused work, and investment within China by Chinese companies, including M&A transactions where both parties have been Chinese corporations,” Kirk says. The firm opened a new office in Shanghai this month.

Richard Hall, a partner at the Hong Kong office of Conyers Dill & Pearman, says his firm has been busy with big China-related M&A deals in the past year. “We are usually involved on the buy side in deals which are frequently driven by PE funds,” Hall says.