After a game-changing 2020 and a year of patchy recovery in 2021, offshore lawyers feel that the outlook for 2022 is generally sunny despite some curveball developments in the region and globally.
The year that is now quickly coming to a close was largely touted as one of recovery.
The numbers show that, in general, economies have bounced back some-what. Global foreign direct investment (FDI) flows in the first half of 2021 reached $852 billion, surpassing expectations for rebound momentum, according to the United Nations Conference on Trade Development’s (UNCTAD) Investment Trends Monitor.
The recovery has been rapid but also highly uneven. High-income countries more than doubled their quarterly FDI inflows, but lower-income economies took a hit with a 9 percent decline.
“The rapid FDI recovery and the optimistic outlook mask the growing divergence in FDI flows between developed and developing economies, as well as the lag in a broad-based recovery of the greenfield investment in productive capacity. Furthermore, uncertainties remain abundant,” said James Zhan, UNCTAD’s director of investment and enterprise.
UNCTAD feels that the rebound in growth will be more muted in the second half of the year than the first half.
Nathan Powell, a partner in Ogier’s Hong Kong office and its global head of corporate legal services, feels that 2021 has been a fairly busy year overall, especially with mergers and acquisition (M&A) activity.
“In 2021 to date, Asia-Pacific M&A activity, and related debt financing, has continued on the upward trajectory we saw in the second half of 2020. The end of COVID-19 lockdowns and the commencement of vaccine roll-outs, a more sanguine view of the geopolitical backdrop and low lending rates have all contributed to this,” says Powell.
“Private equity-backed take privates of Chinese companies from public stock exchanges have been prevalent, for myriad reasons, including the perception that share prices of such listed companies were depressed, leaving them attractive propositions for private equity managers.”
Powell notes that Ogier has been heavily involved in these and other deals.
“We have worked on plenty of private deals too. An improved exit environment, which has been challenging for private equity in recent years, means some of these have related to sponsors divesting of existing investments,” he says.
“In terms of new targets, sectors such as technology, fintech and health-care, which are seen as COVID-resilient and future-proof, are some of those receiving interest from private equity houses.”
Other offshore law firms have reported an uptick in business in 2021 compared with the preceding year as clients adapt and adjust their operations to an environment that is rendered uncertain by the pandemic and its multiple economic side-effects. A lot of the growth has been in Asia.
“We have seen a continuation of the increased level of business from 2020. The ongoing changes and disruption caused by, among other things, COVID, means clients need advice and assistance in the current changing and challenging business environment in which they operate,” says Richard Hall, partner at Conyers’ Hong Kong office.
“2021 has been a very busy year for both our Singapore and Hong Kong offices, with each of our practice areas setting new high-water marks. Our profile, reputation and share of premium work has increased exponentially in just a few short years - we are among the fastest-growing offices in Carey Olsen’s global network across all key financial metrics, including revenues and fee earner headcount,” says Anthony McKenzie, the managing partner of Carey Olsen’s Singapore office.
McKenzie expects this trend to carry on into 2022 as Carey Olsen continues its growth trajectory in the region.
2022 APPEARS SPAC-IAL
A bit trend in 2021 was the rise of special purpose acquisition companies (SPACs) used for companies to access public equities markets and the development of regulations surrounding them. It is a development that Ogier’s Powell feels will carry over into 2022.
“2021 has seen a surge in Asia-based sponsors backing SPACs as a quick and cheap way to access the U.S. capital markets. But it remains unclear how the SEC is treating China-focused SPACs as a policy matter and this has been causing some delays. If this regulatory bottleneck clears, 2022 could lead to a very significant rise in de-SPAC transactions in Asia,” says Powell.
This will introduce even more competition for deals for the private equity industry, potentially pushing up prices as a large number of SPACs go on the acquisition trail.
“In the meantime, stock exchanges in the region have been racing to offer an alternative to New York. The Singapore Exchange now allows SPACs to list and the Hong Kong Exchange is undertaking public consultation. So, we expect SPACs to continue to feature in regional capital raising and deal-making,” says Powell.
Some believe the demand for offshore legal services will continue at the current level, or increase, based on political undercurrents that feed into the need for SPACs.
“As frictions in the global economy, relations between the PRC and the US, and global regulatory issues resolve themselves, workflow [related to SPACs] will likely go up. The publication of the regulations relating to SPAC listings in Hong Kong by the Stock Exchange will give rise to fundraising opportunities, whilst the need for existing SPACs to undertake business combinations and for investment funds to deploy capital will see M&A activity strengthen.”
Richard Hall, Conyers
“As frictions in the global economy, relations between the PRC and the US, and global regulatory issues resolve themselves, workflow will likely go up. The publication of the regulations relating to SPAC listings in Hong Kong by the Stock Exchange will give rise to fundraising opportunities, whilst the need for existing SPACs to undertake business combinations and for investment funds to deploy capital will see M&A activity strengthen,” says Hall.
“For those businesses that have suffered through the last 18 to 24 months, restructurings, privatisations and workouts will be needed to restructure these businesses. We would also expect to see an increase in shareholder and joint venture disputes particularly where expected listings have been postponed or cancelled,” he adds.
“If US regulatory concerns over variable interest entity structures and auditing requirements can be resolved, U.S. listing work. As mentioned above, more M&A work as private equity funds seek to deploy capital and acquire assets and SPACs undertake business combinations,” says Hall.
McKenzie notes there has been something of a tapering off of the SPAC IPO frenzy on the U.S. exchanges that was a hallmark of 2020 and the first quarter of 2021.
“As U.S. exchanges become less welcoming to Chinese businesses, China has been carrying out listing reforms to encourage listings of Chinese businesses in China, including on Shanghai’s newly launched SSE STAR Market. We are currently working on several list-ings of Cayman-incorporated Chinese businesses on the new STAR Market and expect to see clients viewing the STAR Market, HKEx and other regional exchanges as alternatives to a US listing,” says McKenzie.
While there is a fair amount of uncertainty ahead, Asia as a region has exhibited resilience and adaptability in the face of COVID-19. McKenzie feels the same resilience will carry the region well in the year ahead.
“What 2022 and beyond holds is unknown, but Asia is likely to rebound quickly out of the pandemic. In October this year the International Monetary Fund’s forecast that Asia would grow at 6.5 percent in 2021 and 5.7 percent in 2022, compared with 5.9 percent and 4.9 percent for the world,” says McKenzie.
All this regional economic growth and activity underway is likely to be accompanied by increased demand for deals and the legal services that go with them.
“Looking ahead, we expect that investors in the region will continue to allocate investment capital to alter-natives. There are record levels of dry powder in the Asia-Pacific region, and we will see continued growth in private equity with funds focussing on the region for fundraising and deal-flow. The venture capital space is particularly active, with Southeast Asian managers launching a number of new funds,” says McKenzie.
He expects regulatory work will remain busy as result of the ever-changing regulatory environment, particularly with new fund registrations and regulatory filings arising from the recent introduction of beneficial ownership and economic substance rules.
“We continue to see a significant increase in enquiries and instructions from clients in relation to distressed assets, structures and businesses. As a result, we continue to invest in our Asian dispute resolution, restructuring and insolvency practice as Asian businesses deal with the aftermath of the pandemic,” says McKenzie.
“Private client and trust work inter-sects with each of our other practice areas, and our global private client team is expanding quickly to meet increased client demand, particularly in Asia where the needs of high net-worth individuals are becoming more comprehensive and diversified,” he adds.
RED LIGHT, GREEN LIGHT
Several factors present both opportunities and challenges to watch out for. One would be the region’s increasing focus on going green.
“One interesting development to watch in 2022 will be the impact of the continuing focus on climate change. Most market participants agree that we will see a rise in the inclusion of ESG clauses in debt documentation. Over the past couple of years ESG has become embedded in both lenders’ and borrowers’ strategic business plans and priorities. This is a trend that will become increasingly important as we go forward.”
Nathan Powell, Ogier
“One interesting development to watch in 2022 will be the impact of the continuing focus on climate change. Most market participants agree that we will see a rise in the inclusion of so-called ‘Environmental, Societal and Governance (ESG) clauses’ in debt documentation,” says Powell. “Over the past couple of years ESG has become embedded in both lenders’ and borrowers’ strategic business plans and priorities. This is a trend that will become increasingly important as we go forward.”
Others also note that ESG issues have increasingly moved to the top of boardroom and investment committee agendas. McKenzie sees that this is clearly affecting the way investors consider potential M&A deals and allocate capital.
“We are still in the early stages of seeing an ESG impact on Asian trans-actions, but what is certain is that ESG will have an increasingly significant and long-term impact on offshore deal flows. As a result, I expect we will continue to see offshore law firms reinventing traditional practice groups to align with client ESG needs,” McKenzie deduces.
RIPPLES FROM CHINA
Another important part of every offshore lawyer’s watchlist is the developments on mainland China and the rapidly shifting ground there, not least of which are the changing regulatory landscape and the evolution of the real estate sector.
“Everyone is keenly watching the current developments in the China real estate sector. We are expecting to see a rise in distressed debt situations with a concomitant increase in recourse to the restructuring tools offered under Cayman and BVI law,” says Powell.
An increase in restructuring work generally is likely and offshore firms are already seeing some of it in regards to mainland Chinese property developers.
The real estate sector in mainland China has been a major contributor to the capital markets and syndicated loan markets in Asia over the last decade.
“How this plays out, and the policy adopted by the PRC government, is likely to have a big influence on liquidity and capital raising in the short to medium term,” says Powell.
Even though China continues to be a key source of offshore deal flows, the shifts happening there may have a ripple effect for the work of offshore firms in several areas.
“After decades of strong growth, China appears to be shifting into a new phase defined by more moderate growth, more policy uncertainty and greater regulatory intervention. Chinese regulators have, for example, recently announced policies aimed at tightening control of specifi c sectors (such as technology and private education), cross-border data flows and the ability of Chinese businesses to list overseas,” says Carey Olsen’s McKenzie.
“As a result, we expect to see ripple effects of these actions in certain sectors and overall uncertainty on IPOs of Chinese businesses on the U.S. and other exchanges to linger in the short term until there is clarification on certain policies and regulations,” says McKenzie.
GLOBAL SHIFTS
Some international changes are also creating new tides for businesses and law firms to consider. One significant consideration is the proposal spearheaded by the Organisation for Economic Cooperation and Development (OECD) to set a minimum tax rate of 15 percent for certain multinationals. The OECD says on Oct. 8 that 136 of 140 member countries and jurisdictions had agreed to the proposal.
“The new global minimum tax requirement will potentially create both opportunities and challenges at the same time, as businesses evaluate their structures in light of the new rule(s),” says Conyers’ Hall.
“Given the three jurisdictions (Bermuda, BVI and Cayman Islands) on which we advise are tax-neutral, it’s hard to say whether this new requirement will generate tailwinds or headwinds but it is clear that it will give rise to an increase in regulatory work for offshore law firms.”
Overall, offshore law firms seem optimistic about what lies ahead in 2022.
“There are plenty of opportunities for offshore firms on the transactional side as we look forward to 2022. For example, an interesting trend over the last couple of years has been the more regional focus of private equity firms when looking for buy-out targets in Asia,” says Powell.
Traditionally, the predominant market has been mainland China, but Powell has observed quite an uptick in instructions on deals in Southeast Asia, where private equity firms are targeting good valuations in high growth markets and international banks are keen to support these deals. Ogier expects this trend to continue.
“Further, an increasing amount of ‘non-traditional’ debt finance is available in Asia, including some through private equity funds established with an investment strategy of challenging traditional debt providers and which are often established under the laws of the Cayman Islands,” says Powell.
Nonetheless, the regional market is big enough for everyone to find something to keep busy with.
More than half of the world’s population lives in Asia-Pacific. The region has considerable economic momentum and also represents the world’s fastest-growing legal market. McKenzie says that, as a firm, Carey Olsen continues to invest time, energy and money into it.
“There are a number of transformational trends converging in Asia, some of which have been accelerated by the pandemic that could unleash the next wave of growth opportunities for offshore firms. Tech-focused M&A transactions in a particular are powering ahead because of how the pandemic has accelerated technological adoption and innovation right across society,” says McKenzie.
For all its technological progress so far, he states that there is reason to believe that Asia can drive even more innovation and so he expects Asian tech deals and the launch of tech funds to continue to be active in 2022 and beyond.
He is upbeat and positive about the demand for offshore firms in 2022.
“The war for legal talent in Asia is raging. The demand for services remains high, and firm headcounts have increased from 2020. The real challenge for any law firm will be to bring on board the right people, keep standards high and ensure that what you are doing enhances your global brand and provides a good platform for future growth.”
Anthony McKenzie, Carey Olsen
“More generally, the war for legal talent in Asia is raging. The demand for services remains high, and fi rm head-counts have increased from 2020. The real challenge for any law firm will be to bring onboard the right people, keep standards high and ensure that what you are doing enhances your global brand and provides a good platform for future growth. We have risen to this challenge and welcomed several new lateral hires to the firm and made a number of new promotions,” says McKenzie. “We are excited to discover what the future will bring as we continue to grow and evolve in Asia.”
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