Offshore law firms have had a challenging 2023, with stiffer regulations, increased onshore competition from "Cayman-style" funds and slow M&A recovery holding back growth. Law firm leaders talk about some of their big themes for 2024, including the advent of financial technology and digital asset regulations, the rise in competition from "onshore" centres like Singapore and Hong Kong, and the potential for emerging areas like ESG and AI to grow in importance.
Another year of slow growth and insufficient economic recovery is coming to an end against the backdrop of continued conflict in Russia/Ukraine and Israel/Palestine, heightened tensions between the U.S. and China, rising inflation and interest rates and calls for decreased globalisation and increased cross-border regulation.
Offshore business hubs such as the Cayman Islands, British Virgin Islands (BVI) and Bermuda have not been spared of the repercussions of this global "growth winter." Despite this, offshore lawyers in Asia expect a busy 2024, given the region's long-standing track record of steady offshore investments and the promise of an expedited market recovery.
"Whilst investors seem set to begin next year with a similarly cautious outlook to that which we have seen during 2023, there is still a large amount of dry powder in Asia, and regional LPs appear positive on the mid/long term outlook for the region. Regional economic growth for 2024 is also expected to be a considerable contributor to annual global growth," says David Nelson, a Hong Kong-based partner at offshore firm Ogier.
"We may see an uptick in private M&A through in 2024 if some of the concerns and challenges, especially around cost of financing and asset value, ease off," he adds.
Indeed, an uptick in Asia is anticipated in the coming year, with the International Monetary Fund calling the Asia-Pacific region a global bright spot in 2024, placing it on track to contribute to about two-thirds of global growth in the year.
However, law firms in offshore markets will have to deal with increased regulatory scrutiny, shifting market preferences, and competition from onshore and mid-shore markets to be able to drive growth in 2024.
More competition from Singapore, HK
Anthony McKenzie, Singapore managing partner at Carey Olsen, says competition from onshore centres like Singapore and Hong Kong is certainly increasing.
"In recent years, we have seen new 'Cayman-style' structuring options (such as the Singapore VCC and HK open-ended fund company) together with global regulatory reforms and shifts in market preference that have resulted in offshore jurisdictions seeing competition from onshore and mid-shore jurisdictions," McKenzie says.
In 2020, Singapore's Variable Capital Companies Act (VCC) came into force, establishing a fund structure that allows for the parking of large pools of capital in low-taxed, discreet packages under a regime scrutinised by the Monetary Authority of Singapore. Hong Kong also amended its 'open-ended fund company' regime to make it more attractive.
These alternate funding models have attracted more money in the asset and wealth management sectors into Singapore and Hong Kong, in direct competition with offshore centres.
Carey Olsen's Hong Kong managing partner, Michael Padarin, adds that clients are more likely now to conduct an independent jurisdictional analysis and due diligence, comparing options available in Singapore and Hong Kong to those in offshore centres.
"Whilst we continue to assist clients on offshore fund formation projects, we are very aware that clients are coming to the process with a much more open mindset in terms of domicile, and part of our role now generally also involves facilitating introductions to domestic providers to allow clients to run their jurisdictional analysis and due diligence process," Padarin says.
But, he maintains that most of these companies decide to go offshore, even after such an analysis.
"Having done their diligence, we are seeing the vast majority of clients continuing to domicile their funds in the Cayman Islands as it remains the global jurisdiction of choice for investment funds."
Offshore law firms are also welcoming the increased regulation in offshore centres, which have increased the credibility and comfort of these offshore bases, without reducing their effectiveness, among stakeholders doing business through them.
"Regulation in the offshore jurisdictions in which we operate has increased in the past handful of years. Most clients see increased regulation as a positive development as it helps to minimise legal and regulatory risks and enhances shareholder protections," says Padarin.
"We have aimed to minimise the impact of such regulation on clients through seeking to the greatest extent possible to automate the necessary compliance tasks associated with such regulation," he adds.
A positive regulatory development has been the recognisance of virtual asset service providers in offshore jurisdictions, including BVI, Bermuda and the Cayman Islands.
"We have seen a change in the nature of enquiries and a change in the attitude towards offshore regulation around virtual/digital asset services. There is now an increasing perception that in order to do business with reputable institutions and regulated clients, virtual/digital asset service providers themselves need to demonstrate credibility through reputable regulation."
- Anthony McKenzie, Carey Olsen
"In Asia and across our wider network of offices, we have seen a change in the nature of enquiries and a change in the attitude towards offshore regulation around virtual/digital asset services. There is now an increasing perception that in order to do business with reputable institutions and regulated clients, virtual/digital asset service providers themselves need to demonstrate credibility through reputable regulation," McKenzie explains.
He says that Carey Olsen has been seeing an increasing number of mandates to assist Asian digital asset companies on Cayman Island, BVI and Bermuda registrations and licensing applications involving novel, complex and innovative projects.
"As a result, we continue to invest in our fintech and regtech practices in Asia," McKenzie adds.
With increased political turbulence and regulatory scrutiny in Hong Kong, slowing down of China's economy, and rising geopolitical tensions in the region, Singapore has emerged as the best choice for new offices for regional, international and offshore law firms.
"Singapore is considered a favourable destination for doing business due to its political stability, strong legal framework, well-regulated financial sector, competitive tax rates, excellent infrastructure and pro-business policies that attract foreign investment. Singapore is close to the next wave of fast-growing economies in Southeast Asia, is a stepping-stone to the India market and is ideally situated as a regional Asian play for international businesses," McKenzie says.
"The Cayman Islands government's recent announcement to establish its first Asia office in Singapore is a positive development and underscores the importance of Singapore as Asia's leading asset management and private client hub," he adds.
Nelson says that Asia's markets are diverse, and clients are looking to invest across various emerging Asian markets outside Singapore as well.
"The shift in jurisdictional focus and the types of players operating in different markets gives us an opportunity to grow into new markets and geographic areas and to target new entrants into certain more established ones."
He adds that increased economic distress has meant an increase in restructuring, banking and finance, portfolio management, litigation, secured debt enforcements and divestments, a trend he expects to continue in 2024.
Among emerging areas, ESG in offshore markets is growing along global lines, with environmental risk analysis and carbon reduction becoming a top agenda in parliaments and chambers of commerce.
"I expect we will continue to see offshore law firms reinventing traditional practice groups to align with client sustainable investing and ESG needs," Carey Olsen's McKenzie says.
"We have seen a flood of funds, investors and corporates doing ESG investments and a rise in the inclusion of so-called 'ESG clauses' in debt documentation. Several global megatrends are shaping this development, including the climate crisis, evolving regulation and growing investor demand, and we expect this trend to continue."
= David Nelson, Ogier
The growth of ESG has also affected the drafting of deal documentation, says Ogier's Nelson.
"We have seen a flood of funds, investors and corporates doing ESG investments and a rise in the inclusion of so-called 'ESG clauses' in debt documentation. Several global megatrends are shaping this development, including the climate crisis, evolving regulation and growing investor demand, and we expect this trend to continue," Nelson says.
To harness this growing ESG demand, Ogier has also set up a Sustainable Investment Consulting team, "which means we are able to go beyond legal advice and support clients in translating ESG policy into operations and in navigating the evolving ESG regulatory landscape," Nelson says.
Along with ESG, artificial intelligence is another area that's primed for growth. While maintaining that AI in legal is still in its nascent stage, Nelson says Ogier is undertaking research and development to assess how to maximise AI for its internal workflow and client services.
"AI is something I see as becoming supplementary to, rather than replacing, the skills of our lawyers," he says.