In our 2022 offshore feature, firm leaders were relatively sanguine when scanning the horizon for the upcoming year’s challenges. Having ridden out almost two years of Covid-19 lockdowns, global economies – with the notable exception of China – had largely reopened, including the Crown Dependencies themselves, which had ended travel restrictions at the same time as their key clients in London.
Then, almost to the day, as readers removed the cellophane from their copies of the January/February 2022 issue of Legal Business, Russia invaded Ukraine – and the world’s economic prospects changed immeasurably. However, as material as these challenges undoubtedly are, they have yet to fully arrive on the desks of the lawyers of Jersey, Guernsey and the Isle of Man.
‘The perfect storm of a pandemic, a European war, Brexit, inflation and higher interest rates should, one would imagine, cause a fairly sizeable recession, with the consequences that usually follow, says Appleby’s Isle of Man managing partner Mark Holligon. That said, he continues: ‘Thus far, there has been little impact on the types of work we are seeing, save for high street failures.’
In several conversations with firm leaders across Jersey, Guernsey and the Isle of Man – the three Crown Dependencies – many share this degree of caution on the global economic climate, coupled with confidence at a firm and jurisdictional level of the ability to not just survive but thrive in a harsh environment. Asked about his firm’s bottom line, Jonathan Rigby, global managing partner of Mourant, says: ‘We’ve seen another year of strong revenue growth; in the last three years, we’ve grown revenue by over 30%, reaching our target revenue range for 2025 three years earlier than planned.’
Decoupling and de-risking
The Russian invasion of Ukraine meant that early 2022 saw an upheaval as many corporates – including onshore law firms – bowed out of the Russian market as economic sanctions were imposed and the country became a pariah, at least where Europe and the US were concerned. The Crown Dependencies – whose sanctions law is a home-brewed implementation of a shared foreign policy with the United Kingdom – are no exception.
‘The perfect storm of a pandemic, a European war, Brexit, inflation and higher interest rates should, one would imagine, cause a fairly sizeable recession, with the consequences that usually follow.’ Mark Holligon, Appleby
Managing partners report that offshore firms have been able to cut these connections as in many other jurisdictions. ‘We began de-risking in 2014, following Russia’s unlawful invasion of Crimea, and stepped that up at intervals including in 2018 [at the time of the Salisbury Novichok attacks],’ notes Mourant’s Rigby. Meanwhile, Jonathan Heaney, managing partner of Walkers in Jersey, credits governments onshore and offshore for making the process smooth and the legislation unambiguous: ‘The impact has been minimal – the changes to the international sanctions regime have been clear and well-communicated, and the industry has understood precisely what has been expected from it, and we have been advising fiduciary clients in particular on this point.’ Holligon echoes: ‘We have seen a number of sanctions instructions coming in from local corporate service providers who have found themselves managing structures affected by sanctions.’
Whatever these geopolitical challenges, law firm leaders are ostensibly bullish about workflow. Real estate and M&A work continue to be core areas for offshore law firms and those practice areas have proved buoyant. Walkers’ Heaney says that ‘the Jersey real estate group has been particularly busy with financings and acquisition’, while on the Isle of Man, Holligon adds: ‘M&A activity remains strong, particularly in the online gambling sector over the past six months or so, illustrating the growing maturity of that industry.’
Looking to the future, Nick Evans, managing partner of Maples Group’s Jersey office – the firm’s only presence in the Crown Dependencies – states: ‘Despite considerable uncertainty over the landscape for 2023, we are seeing record levels of activity, particularly in the PE/infrastructure and real estate spaces.’ Meanwhile, according to Rigby, Mourant has ‘continued to work on mandates for the top ten private equity and real estate managers during the year’.
Debt capital markets is another active sector, albeit one not immune to market forces. Holligon says: ‘Corporate and government bond issuances were very active in 2021/22, particularly if they had an ESG purpose, but that has cooled off slightly in the last six months; inflation and interest rate increases have posed challenges in that area but this may well return as the UK looks to bring inflation under control.’
Meanwhile, Evans comments: ‘Notable transactions include advising on the first CLO migrations to Jersey and more recently, the team advised on the first Jersey LLC to be incorporated and registered in the jurisdiction.’
Matt Sanders, managing partner of Walkers’ Guernsey office, says the firm has had a ‘stream of instructions relating to trust structures for DAOs [decentralised autonomous organisations] as a bridge between the online and offline economies’, while his Jersey counterpart Heaney has had ‘some interesting instructions advising on crypto funds using corporate structures, which have some benefits for Singaporean managers because of the islands’ array of double taxation agreements.’ He also points to ‘interesting fintech instructions flowing into [Walkers’] corporate, funds and regulatory teams’.
‘Despite considerable uncertainty over the landscape for 2023, we are seeing record levels of activity, particularly in the PE/infrastructure and real estate spaces.’
Nick Evans, Maples Group
More traditional investment funds practices have been thriving too. As Rigby observes: ‘From a private capital funds perspective, we’ve seen a significant increase in liquidity solutions – advising open-ended fund clients on redemption gates; an increase in fund secondary transaction activity – whether manager or investor led; fund extensions; and the continued expansion of the fund financing market, particularly subscription line and NAV facilities, notwithstanding the altered interest rate environment.’
‘Dispute resolution teams also remain busy and regulatory and employment have also performed well,’ according to Holligon – two significant mandates for those being the insolvency work surrounding the demises of retailers Arcadia Group and M&Co. Rounding out the other sectors, Sanders in Guernsey reports that the firm’s ‘Guernsey private capital and trusts team, now led by three partners, has had an impressive year, and that the arrival of David Cooney has opened a rich seam of work in the Swiss market, where he practiced as a partner for a number of years’.
Domestic work has also proved lucrative. Rigby comments: ‘The Jersey and Guernsey economies are in relatively good shape. They recovered well from the pandemic and are well-placed to weather further global shocks. The size of both economies and the number of jobs have returned to pre-pandemic levels, vacancy rates are high and unemployment low.’ Heaney observes that ‘the local markets have weathered the storms of Brexit, Covid-19 and the inflation spike’.
Tooling up
All this activity means that firms have been investing in talent, even in transactional practices which have slowed. Evans says: ‘I’m pleased to report that we’ve grown significantly over the past year, increasing our headcount by 45% to meet the requirements of our expanding client base. Among our recent notable hires was the addition of David Allen who joins [Maples] as a corporate partner.’
‘There has been some hesitancy in doing deals in relation to higher interest rates, but it doesn’t really change the nature of the work, and it tends to involve deals being delayed or repriced, rather than put off entirely.’
Jonathan Heaney, Walkers
At the junior levels, even if there is scant evidence on the ground of a City-style recruitment war, there is certainly a desire to attract talent, and not exclusively in the time-honoured way of offshore firms recruiting senior associates, associates and junior to mid-level barristers. Referring to a programme that trains English solicitors, rather than the separate Jersey Bar exams, Evans adds: ‘A key priority for us has been developing and investing in our people at all levels across the firm. In late 2022, we were delighted to launch our new Jersey Trainee Solicitor Programme which has been carefully developed to be comparable to that of London law firms.’
Evans is not the only leader in recruitment mode. Sanders observes: ‘The real challenge for us is recruitment, and continuing to grow our numbers. It is a tough recruitment market, but we have consistently been able to make a compelling career proposition, and have recently moved to new, expanded offices [in St Peter Port] as a result.’
So what does this mean when hazarding market predictions? Rigby is sanguine that private equity players are still sitting on dry powder from easier periods of fundraising: ‘The opportunity for investment into targets with more attractive valuations and inflation-busting characteristics will support selective deal activity. Investment in energy transition, food security, infrastructure and the re-mapping of supply chains to enhance resilience through diversification will all see significant new commitments. And while banks may be more demanding on terms and covenants, this will open new space for private credit to occupy.’
‘We are very interested in Singapore as a jurisdiction where wealth holdings work might open up. Channel Islands law firms have anticipated that and indeed the trust companies too.’
Kathryn Purkis, Serle Court
Acknowledging that his view is more contrarian than that of some market observers, Rigby notes: ‘If central banks manage the transition to conventional monetary policy without significant market disruption, we see alternatives providing enhanced returns and a diversification play for public market investors. Private equity has developed tools that will cushion write-downs in values that will occur for some existing assets, and continuation funds provide a valuable means to address market timing and liquidity issues, providing the opportunity to safeguard high-performing trophy assets from untimely disposal.’
On the impact of high inflation and interest rates, Heaney adds: ‘There has been some hesitancy in doing deals in relation to higher interest rates, but it doesn’t really change the nature of the work, and it tends to involve deals being delayed or repriced, rather than put off entirely.’
International conversation about decoupling of the West – or at least the US – and China has affected offshore firms in the Caribbean more than the Crown Dependencies. Walkers’ Heaney says that Asian clients ‘tend to look to BVI, Cayman or Bermuda in terms of offshore work, and while there are Jersey and Guernsey structures involving Asian clients and investors, it is not a key focus’.
Kathryn Purkis, chambers director of Serle Court, a top-tier set in The Legal 500’s The English Bar Offshore, expresses a vote of confidence in the Channel Islands’ role in the trusts space in Asia: ‘European financial services providers are being looked to in order to assist families from the East, either Middle or Far, on their wealth holding and we are very interested in Singapore as a jurisdiction where that kind of work might open up, particularly after what’s been happening in Hong Kong. I think that the Channel Islands law firms have anticipated that and indeed the trust companies too.’
‘The global economic downturn will bring greater scrutiny of IFCs as onshore governments look to shore up their economies – but any restraint of IFC activity will be misguided.’
Jonathan Rigby, Mourant
Others take a glass half-full view of the Asian market. ‘It’s been a very hard time for our colleagues and clients in Hong Kong, and the wider region, but difficult times are a great opportunity to build and strengthen client and intermediary relationships and we’ve certainly been doing that,’ observes Mourant’s Rigby. ‘Despite the obvious challenges, we’ve generated significant growth in our Asia revenue since 2020, driven largely by our transactional practice. With China opening up again, post-pandemic, and the economy in recovery, IFCs will continue to play a key role in facilitating inbound and outbound Chinese investment.’
Downturn brewing
An impending recession seems sure to bring on distressed situations that have been a long time coming. Says Walkers’ Heaney: ‘Higher interest rates will pile up the pressure on leveraged businesses and investments and will create difficulties as financing terms expire. This has been forecast at the beginning of every year since 2019, but the interest rates could potentially be a game changer. My own view is that consensual restructuring will be favoured – it is not always in anyone’s interests to press the insolvency button.’
Sanders in Guernsey observes: ‘People have been predicting insolvency wave and recession for years, and we have not really seen it come to pass. The potential – and I stress potential – difference this year is the higher interest rate environment, which will have an impact on extending or restructuring existing lending.’
Jonathan Hilliard KC, a member of Wilberforce Chambers who has worked with firms in the Crown Dependencies on litigation, notes: ‘Well set-up fiduciary firms may have quite sophisticated investment structures in place and in practice if that’s the case then it can be quite difficult to challenge in investment decisions because by their nature legitimate decisions can cause assets to go up or down.’
Instead, he identifies an alternative potential source of work for trusts litigators: ‘It’s probably more been driven by some of the trusts set up decades ago, having now come into their second and third generations and people in those generations having their own views as to how the trust should work, and that spawns quite a lot of the removal work.’
Many observers point out the growing focus on ESG factors. Heaney notes: ‘ESG has filtered through to work, and interestingly it has been driven by investor demand and behaviour and not by managers or regulators.’ Notwithstanding its buzzword status, a definitive answer on what ESG actually encompasses escapes most. As such, offshore lawyers see an opportunity for governments to provide the market with clarity. ‘ESG is an increasingly complex area creating advisory opportunities for ESG experts but crying out for harmonisation of global standards,’ states Rigby.
‘The pending Moneyval inspections also pose a challenge in the sense that legislative change in the run-up to the inspections has created significant demand for our regulatory team.’
Matt Sanders, Walkers
Sanders adds: ‘The big moment in my view will be the development of a global or EU taxonomy or framework for ESG and sustainable finance. There may be more of this work going on than people realise, but because of differences in codification and how the work is described, there is no universal benchmark.’ The absence of standards, according to Rigby, is posing challenges to asset managers ‘trying to coherently assimilate into their investment and reporting policies and procedures, the disparate ESG regulations and taxonomies created by global regulators to address green-washing concerns and meeting specific investor ESG requirements in relation to investment strategies and reporting policies and procedures’.
Anti-money laundering measures and combating terrorist finance present their own challenges. Referring to the European Union’s FATF implementation body, Sanders warns: ‘The pending Moneyval inspections also pose a challenge in the sense that legislative change in the run-up to the inspections has created significant demand for our regulatory team.’
As far as ethical scrutiny of the firms themselves is concerned, Holligon at Appleby in the Isle of Man shares a fairly relaxed view: ‘What was patently clear from the politically motivated scrutiny of five years ago is that offshore firms take great care over the type of work they undertake and the clients for which they act.’ Setting out the stall for his jurisdiction, Rigby observes: ‘The global economic downturn will bring greater scrutiny of IFCs as onshore governments look to shore up their economies – but any restraint of IFC activity will be misguided. IFCs, and the capital flows they facilitate and support, have an important role to play in the global economic recovery. We’ll need to continue to make this case in the face of the inevitable political posturing.’ LB