With transactional work picking up globally, offshore funds are back in vogue. We assess the most active offshore firms and the key recent developments
The renewed sense of optimism emanating from the world’s major financial centres has clearly made its way offshore. While the global financial crisis put successful launches of offshore private equity, real estate and listed funds on hold, the mood has clearly changed. New funds and start-ups are upbeat again and the fund practices of offshore law firms are enjoying healthy flows of work.
Large institutional players continue to dominate the global hedge fund arena, enjoying the greatest success in launching new funds through their ability to both raise capital and cope with the increased regulatory challenges. However, there has also been a noticeable increase in high-profile and successful traders establishing their own hedge funds, largely because global regulatory reforms restrict banks from trading with their own money, forcing traders to set up on their own.
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Following the explosion of cross-border regulation, including the Foreign Account Tax Compliance Act (FATCA) and the Alternative Investment Fund Managers Directive (AIFMD), regulation continues to have a huge impact on the structuring of funds, with clients increasingly requiring complex compliance advice. Ongoing corporate governance assistance is also being sought out by institutional funds. This new environment means lucrative instructions for offshore funds lawyers, from both traditional and non-traditional locations, into a range of sectors, including real estate and new technology.
Offshore law firms are responding accordingly, adapting the delivery of legal services to include regulatory advice, in addition to transactional assistance.
Track record
According to Carey Olsen’s Guernsey partner Ben Morgan, established fund managers who have built a solid reputation and successful following continue to be successful post-crisis in raising money from institutional investors and pension funds, including the large US pension funds, but also new institutional money coming from Asia and the Middle East.
Growing numbers of start-ups have also been helped through the launch process this year. But without a demonstrable track record, it can be difficult to access sufficient institutional capital. Furthermore, starting costs have soared and investors demand greater transparency.
‘Experienced managers with some success at former shops have done better at attracting seed capital – this remains a feature of the market,’ says Walkers’ Cayman Islands-based global managing partner, Ingrid Pierce.
Maples and Calder’s Cayman-based global managing partner, Henry Smith, says his firm’s funds group has been busy launching funds using the qualified foreign institutional investor (QFII) and the Renminbi-qualified foreign institutional investor (RQFII) schemes established by the People’s Bank of China that allow foreign institutional investors to invest in China’s capital markets; such products have become more popular with sponsors and investors around the globe. ‘We have been assisting clients to use offshore structures to house QFII and RQFII quotas to satisfy the large investor appetite, as well as providing AIFMD management solutions,’ he says.
But one of the biggest themes of 2014 has been commercial real estate activity, largely centred on the UK, according to Daniel Birtwistle, Mourant Ozannes’ Jersey funds partner. As well as establishing joint venture holding vehicles for commercial real estate, Mourant Ozannes recently acted on several Jersey and Guernsey listed real estate funds.
Some advisers have seen increased appetite from investors looking for bespoke investment prospects geared towards specific requirements, such as boutique funds with unique, tailored opportunities.
‘One trend seems to be the movement away from blind pools to a deal-by-deal fund structure,’ says Birtwistle. Such structures involve the identification of specific investors for specific proposed assets, and the wrapping or structuring of a legal entity for the purposes of the acquisition, holding and management.
Recent standout instructions for Channel Islands advisers earlier this year include Mourant Ozannes’ Jersey partners Jacqueline Richomme and Joel Hernandez advising Henderson Global Investors and its Jersey and Guernsey affiliates and managed funds in a joint venture with North American asset manager Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF), creating a new London-based global real estate investment management company, TIAA Henderson Global Real Estate, with approximately $22.6bn of real estate assets under management.
Together, the TIAA-CREF and TIAA Henderson Global Real Estate platforms represent one of the largest real estate investment management enterprises in the world, with a combined $71bn of assets under management. ‘The sheer volume and complexity of the project meant that we had to field a large, cross-jurisdictional team across Guernsey and Jersey,’ says Birtwistle.
Other headline mandates include Carey Olsen in February advising on establishing Kennedy Wilson Europe Real Estate, the largest-ever real estate fund to be listed on the London Stock Exchange, raising approximately £1bn. Led by funds partner James Mulholland, Carey Olsen acted alongside Ashurst (advising the fund on English law), Freshfields Bruckhaus Deringer (acting for the manager) and Herbert Smith Freehills (acting for Deutsche Bank and Bank of America Merrill Lynch, the joint global co-ordinators and joint bookrunners).
Jersey also experienced its first Bitcoin (a software-based online payment system) fund launch in August 2014. Carey Olsen’s Mulholland led for Global Advisors, a Jersey-based investment management company, on the legal and regulatory aspects of the establishment of the Jersey-regulated open-ended Global Advisors Bitcoin Investment Fund.
The first regulator-approved Bitcoin investment fund, the digital space is a relatively new focus for the investment sector, as are the structures that can be created to take advantage of the new digital world. ‘We would expect to see more fund innovation in the digital space as they become more commonplace and the associated risk reduces,’ says Mulholland.
The Bitcoin fund launch demonstrates that a cutting-edge combination of international financial services and technology is present in Jersey. The launch and associated publicity means Jersey successfully grabbed some first-mover advantage and lawyers in Guernsey have been watching with interest. ‘The Guernsey regulator has made it clear that it embraces innovation, but is cautioning industry to consider the risks with this new technology carefully,’ says Collas Crill’s Guernsey partner Paul Wilkes.
These developments also mean new work avenues for legal advisers. Law firms will need to field a solid understanding of how crypto-currencies work, with advice requiring an in-depth knowledge of the methodologies used.
While the leading Channel Islands-based global offshore firms have seen a significant uptick in deals, those based in the Caribbean have likewise picked up significant work. Walkers’ Pierce and Cayman partner Dawn Howe acted as Cayman counsel to Darsana Overseas Fund, Darsana Intermediate Fund and Darsana Master Fund on their $1.2bn June launch.
‘Working to a tight launch timetable, this was one of the largest start-ups of 2014 and involved intensive negotiations on fund terms for initial investors,’ says Pierce.
Appleby has also picked up high-value mandates. In July, the firm’s Cayman-based funds head Ian Gobin, alongside Cravath, Swaine & Moore partner David Perkins in New York, advised on the establishment of an investment fund – a multi-structured offering with an extremely diverse investment strategy – for a Chicago-based investment manager. It raised over $3bn with its first closing.
‘China not ready to establish its own City of London on the mainland’: offshore firms tackle Asia
In April, Appleby became the first offshore law firm licensed to provide offshore legal advice in mainland China, where it has had a Shanghai base since 2012. Up until then, Appleby had only been offering fiduciary services from Shanghai, but its legal practice certificate opens up a host of new opportunities. ‘It means we can bring our relationship with China-based clients much closer and service them better,’ says the firm’s Hong Kong-based group chairman, Frances Woo.
She adds that a critical success factor for the firm in Asia is its depth of understanding of the market and this can only be developed over a lengthy period of time, pointing out that the mainland China market differs from more established international financial centres like Hong Kong. Language and culture are the most obvious points of distinction, but lack of familiarity with financial structuring and products is a key practical difference. ‘Our experience also tells us that there is a real emphasis on winning confidence and building solid relationships with our clients in China,’ says Woo.
Understanding how the market is going to evolve is key. As China goes from strength to strength economically, many expect Chinese (and Asian) growth to remain highly dependent on international cross-border investment and dealflow, which require efficient access to capital. China’s business and regulatory environment will also develop further, but restrictions and control will remain for the short-to-medium term, as illustrated by the establishment of the Shanghai Free Trade Zone in August 2013.
‘What is clear is that China is not yet ready to establish its own City of London on the mainland,’ says Woo. As a result, established financial centres, both onshore and offshore, will continue to play significant roles in China’s outgoing investment.
Elsewhere, Harneys’ most significant recent development was the launch of a new Singapore office in March, with Colin Riegels, head of the firm’s banking and finance practice group, relocating from Hong Kong to Singapore as the managing partner of the new office, accompanied by Hong Kong funds partner Lisa Pearce. ‘The team combines the deep offshore knowledge and pedigree of leading British Virgin Islands (BVI) and Cayman partners supervising a team of lawyers, who, having worked for leading Singapore firms, understand the local business culture and have worked on some of the biggest, most complex cross-border transactions generated by that market,’ says Hong Kong-based Asia managing partner Jonathan Culshaw.
Harneys also placed its first dedicated trusts/private wealth lawyer in Asia in 2014, with the recruitment in April of Henno Boshoff from Trident Trust Company (Singapore).
According to Philip Jennings, London and offshore private practice head at global recruitment firm JLegal, offshore firms have looked to Singapore and Hong Kong as a result of their burgeoning client base from those regions. ‘The recruitment of funds lawyers, with strong business development skills and the ability to make inroads into their competitors’ markets, can be a key part of these office openings and that will continue,’ says Jennings.
Offshore firms are also expanding their contentious practices in Asia. Ogier launched a litigation and restructuring and insolvency practice, relocating BVI and Asia litigation head Ray Ng to Hong Kong from the BVI in July. The practice will focus on company, board and shareholder disputes; corporate insolvency and winding up issues; the effect of decisions on the Hong Kong matrimonial division on Cayman and BVI trusts; as well as investor and founder disputes. It will not deal with Hong Kong law.
Ng’s move to Hong Kong is a direct result of increasing client demand for on-the-ground access to BVI-acquired litigation experience and Mandarin language skills. ‘He is the most senior Mandarin-speaking, BVI-qualified litigator in Asia, has spent over four years in the BVI courts and provides a superior level of expertise in the Asian market for offshore contentious legal work,’ says Ogier’s Hong Kong partner Nicholas Plowman.
The offshore law firms are not alone in ramping up their efforts in Asia. This summer, Jersey Finance affirmed its commitment to maintaining strong relationships with Greater China by appointing Yumei Zhang as its new business development director in Hong Kong and establishing a launchpad presence in Shanghai through the China-Britain Business Council, headed up by project manager Garry Zhao.
This followed a Jersey government-led visit to China in April this year, during which the Jersey Financial Services Commission and the China Securities Regulatory Commission signed a memorandum of understanding, which paves the way for allowing Jersey-domiciled funds to participate in the qualified foreign institutional investor and qualified domestic institutional investor programmes.
Regulatory focus
Along with the increased appetite for offshore funds, greater levels of regulation have emerged. For example, the AIFMD – introduced in July 2013 to regulate hedge funds and private equity, and the promotion of alternative investment funds within the EU – means firms are advising clients on its implementation, as well as the consequences for offshore funds wishing to market themselves to European investors.
According to Kate Anderson at Jersey firm Voisin, AIFMD has been a key driver of demand for legal advice both on new and existing (open-ended) structures. ‘Jersey is utilised as part of the overall structure, but the fund vehicle itself is becoming more complex, often including an onshore European element in jurisdictions such as Luxembourg, with existing open-ended funds looking to incorporate Luxembourg elements to simplify European marketing,’ she says.
Consequently, some firms are increasingly utilising overseas offices as a result of more regulation. Ogier’s Luxembourg office, which it opened in 2012, has been a distinct asset to its global funds service offering, providing in-depth advice on AIFMD and additional structuring options to clients.
Ogier has also advised clients wishing to circumvent Europe altogether, according to its Cayman-based global investment funds head Giorgio Subiotto.
Another significant regulatory development has been the implementation of FATCA in July, which requires US persons, including individuals living outside the US, to report their financial accounts held outside of the US and to foreign financial institutions report to the Internal Revenue Service (IRS) about their US clients. The FATCA framework is now also a matter of law in some offshore jurisdictions. The 2013 Cayman Islands and Bermuda-signed intergovernmental agreements with the US Treasury and the IRS are intended to surpass local country information security, privacy and confidentiality laws that would conflict with reporting financial account information to the IRS.
In Cayman, the challenge for law firms has been applying and interpreting the agreements and associated guidance notes. This is in addition to working with onshore advisers to obtain input on the meaning of the US Treasury Regulations relating to FATCA; and, in light of that analysis, to produce standardised fund documentation and informational requests relevant to particular types of investor.
Corporate governance has also become a focal point for institutional investors, particularly in Cayman. For example, Cayman law firms have been advising fund clients and managers on directors’ registration requirements, following the introduction of the 2014 Directors Registration and Licensing Law.
However, one of the key issues has been the independence of the boards of Cayman hedge funds, with lawyers frequently advising on independence and how best to build the boards in a way that will address institutional investor concerns.
There is a strong preference for independent directors, believes Walkers’ Pierce. From a survey conducted by Walkers of all funds formed for clients in 2013, nearly 80% had some form of independence at board level.
Additionally, there has been greater focus on boards’ processes and procedures, in part driven by the Cayman Islands Monetary Authority’s 2013 Statement of Guidance. This has brought about several instructions for Ogier, where it has provided advice and prepared policies and procedures for boards to follow, Subiotto tells Legal Business.
Where in the world
A range of geographical locations are supplying offshore funds lawyers with valuable instructions, but the US, especially New York, remains a key user of Cayman hedge funds. However, particular interest has been shown by New York recently for Bermuda fund structures, which is again working hard to make itself an attractive jurisdiction.
Following discussions with industry stakeholders last year, Bermuda’s funds legislation was amended to introduce a new Class A Exempt Fund – a fund with a manager licensed by the Bermuda Monetary Authority or licensed in a recognised jurisdiction, or with assets under management of not less than $100m – which could appeal to larger or more established fund groups.
According to Conyers Dill & Pearman’s Christopher Page, the firm is receiving more enquiries about Bermuda funds. ‘While Cayman remains the brand leader by a long way, as the costs of setting up and running a Cayman fund increase, Bermuda may provide a viable choice, which can only be a good thing for clients,’ he says.
Meanwhile, at the Jersey Finance Annual London Funds Conference earlier this year, 37% of the audience of fund professionals indicated that most opportunities would come from Asia, followed by Africa and Latin America (26% each), according to Geoff Cook, Jersey Finance’s chief executive.
Supporting this, Jersey Finance, together with Jersey’s government and regulator, is implementing the recommendations of a strategic jurisdictional review, which underlines the key overseas markets that can sustain Jersey’s international finance industry.
Asia is producing a growing number of start-up funds (see box, ‘Offshore firms tackle Asia’). Overall, there has been a rapid rise in the sophistication of fund managers in the Asia-Pacific region, attributable partly to the increased complexity of clients’ businesses and the strong growth in assets under management.
Many of the start-ups are emerging from People’s Republic of China (PRC)-based managers and the size of the start-up capital means they are looking for either lightly or non-regulated funds. ‘The Cayman private fund is proving particularly attractive, not just in terms of commencing business without seeking regulatory approval, but also the cost savings on fees,’ says Conyers’ Hong Kong partner Piers Alexander.
Maples’ Smith has seen an increase in multi-discipline managers wanting to manage both traditional open-ended hedge fund products and closed-end private equity products, in addition to more Chinese managers investing outside of the PRC. Furthermore, since opening in Singapore in 2012, Maples has enjoyed a steady increase in work from South-East Asia, Smith says.
South-East Asia is also a significant region for Collas Crill. Recent instructions for its Singapore office include acting for a Singaporean promoter establishing a Guernsey fund for marketing to investors in Asia, with a view to investing in real estate development projects in central London.
According to Page, Conyers’ Singapore office has seen smaller funds launching with assets under management of less than $50m, with many new managers electing to launch on manager platforms as a way of navigating the increasing burden and cost of regulation, both domestically and overseas. ‘Using a manager platform provides a cost-effective alternative, allowing the promoters, who are also often the portfolio managers, to focus on establishing a track record and raising capital,’ comments Page.
Japan has also attracted interest. At Conyers, the firm’s Japanese funds team has seen increased numbers of new hedge funds, with much of the private equity work from Japanese fund houses, where offshore vehicles are used for the fund, directed towards investment outside Japan, according to Alexander.
In Latin America, Chile has emerged as another current hot spot for funds, according to Pierce. She recently acted for a Santiago-based real estate-focused private equity house, with major interests in Chile and across Latin America, on the formation and launch of its new private equity real estate fund, which closed in July. The fund was established with a target size of $150m for US real estate-related investments.
Elsewhere, Brazil continues to be a focus for Ogier, mainly through its Cayman office, while the Middle East is generally covered by the Jersey and Guernsey offices.
But while Africa, Latin America and the Middle East are all developing matters for funds practices, the international coverage achieved by the successful global offshore firms means that competition to service clients from the US and Asia has intensified again, and will continue to be a key driver for business. A return to market and subsequent renewed confidence is leading funds domiciles and their law firms to raise their game both home and away to remain competitive. LB