For law firms based in offshore destinations like Jersey or the Cayman Islands these are uncertain times. A lot of the work they received during the boom years originated in the world’s top onshore business centres. But as financial institutions everywhere battle the downturn, deal flows have decreased substantially.
“In a typical lending transaction a bank in London would instruct a City firm to take a lead role and ask us to handle the Jersey aspects of the deal,” says Alex Ohlssen, a partner at Channel Islands-based Carey Olsen. “We have seen a decline in that kind of work.” Structured finance departments have been hit hard.
The securitisation boom saw the establishment of vast numbers of Special Purpose Vehicles in offshore jurisdictions, creating a wealth of legal work. But that demand has dwindled to almost nothing. Likewise the hedge fund industry, which has close ties to a number of offshore destinations and has been a steady source of legal work, has been hit hard by the downturn. It has suffered huge losses and faces tough new regulations.
Adaptability and flexibility have become the name of the game as offshore firms fall back on restructuring, insolvency, and litigation work – in addition to private client work – to replace the drop off in commercial and M&A mandates. The sense of uncertainty has been amplified by threatening language from world leaders looking for easy targets.
Governments, grappling with soaring budget deficits, have accused offshore jurisdictions of costing them billions of dollars in lost tax revenues. A number of top offshore jurisdictions – including Jersey, Guernsey, Gibraltar, the Isle of Man, Bermuda, the Cayman Islands and the British Virgin Islands – are under British jurisdiction.
Their appeal to non-resident businesses rests on minimal – or zero – taxes and business-friendly rules. So all eyes will be on London in April when the UK hosts the upcoming G20 summit. Prime Minister Gordon Brown hopes that world leaders will agree on tough measures against offshore centres that could, potentially, put pressure on offshore firms’ client bases.
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For the time being offshore firms are consumed with adapting to the market downturn. The largest firms like Ogier and Maples & Calder, boast 200-lawyer networks that operate in multiple jurisdictions that include Dublin and Hong Kong alongside Jersey and the British Virgin Islands. Others, like Channel Islands-based Carey Olsen or Gibraltar-based Hassans, concentrate their efforts on one geographical region. For many firms, the dramatic decline in securitisation presents a big challenge.
“The volume of structured finance work has decreased dramatically,” admits a managing partner at a leading offshore firm. Says Carey Olsen’s Alex Ohlsson: “There has been a change in the nature of the work were have been doing. The public securitisation work has come to an abrupt halt.”
Ogier, which has 11 offices around the world, saw its structured finance fees decline 10% last year on the previous year. But this shift has not led to redundancies – yet. The uncertain economic climate has meant that thousands of SPVs that were set up offshore over the last few years require ongoing advice. Many have to be restructured.
Last year, Ogier opened more than 300 files providing on-going legal and administration services to existing vehicles. “The insolvency and restructuring work, corporate migrations, cash box financings and an increase in the number of structured equity products go a long way to filling the gap,” says Jonathan Rigby, managing partner at Mourant du Feu & Jeune which is based in Jersey, Guernsey and Cayman.
“But we are obviously concerned about the lack of new vehicles coming through because Alex Ohlsson, partner, Carey Olsen when the restructuring work drops off it could leave a gap. It’s something we need to plan for.”
Many of the offshore SPVs are so complex that when they fail, unwinding them and dealing with the resultant litigation can become a long and drawn-out process. This could keep litigation teams busy for many years to come.
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Hedge funds make up a key part of many offshore firms’ client lists. But the industry is in crisis. In 2008, the number of hedge funds going into liquidation far exceeded the number of launches. Total global assets held by hedge funds slumped from $1.8 trillion in 2007 to $1.4 trillion last year, according to Hedge Fund Research Inc. More than 10,000 funds are listed in the Cayman Islands. As one of the world’s principal hedge fund centres it is a crucial source of revenue for many law firms based in the territory.
“Hedge funds form a big part of our client base,” says Sophia Harris, managing partner at Solomon Harris. The firm, which has 14 lawyers, has carved itself a niche in the Cayman market by focusing on investment funds in addition to insurance and restructuring.
But Harris says, these days, the firm’s hedge fund work is more likely to be advising funds facing the withdrawal of capital. “Last year our main focus was on setting up funds. Now a lot of time is being spent on restructuring and advising firms in crisis situations,” Harris says. Maitland Group managing director Steve Georgala says its funds practice is focusing on advising investor clients about litigation in addition to winding up and restructuring funds.
“A lot of work is about trying to sort out the mess that has resulted from the illiquidity on the market,” he says. The financial crisis, coupled with the fallout from the Bernie Madoff scandal, has put hedge funds under the spotlight of global regulators in recent months. In the UK, the Financial Services Authority has called for tough new rules on capital and liquidity to be applied to larger funds.
But Georgala is unfazed by the increase in regulation that Maitland’s lawyers will have to wade through. “Do I think regulation of hedge funds will make it more difficult for us? No. Regulation has never made it more difficult. It has simply made it better for lawyers. In my experience, provided your business is focused on complying with regulation and ensuring your clients are tax-compliant, the more complicated the rules are the better it is for us.”
Others, like Ogier chief Nick Kershaw, are sanguine on the hedge fund industry’s prospects during the downturn. “It’s inevitable one will see a contraction in the number of funds, but the overall volume of offshore funds work hasn’t seen a major contraction,” he says. “The nature of hedge funds is that they are seeking absolute returns, so in many ways they can play off volatility. You are not necessarily going to see contraction in hedge funds because you see contraction in the markets as you would with long-only funds.”
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Offshore jurisdictions have been consistently adapting to shifting economic and regulatory climates since they emerged as financial centres a couple of decades ago. It is this agility that has helped them thrive, says Maitland’s Steve Georgala. “If the European Union, for example, alters a law it is easier for small offshore destinations to adapt to that change,” he says.
Many of the top law firms that operate in these jurisdictions reflect that agility, Georgala adds. “These recent changes in the market will have an impact. But firms should be agile enough to deal with that,” he says.
Mourant’s Jonathan Rigby says the offshore firms that should fare best in the current market are those that have a reasonably good level of diversification. “Firms with the ability and resources to adapt their teams and expertise to restructuring and refinancing, and to deal with complex innovative new structures under development rather than the high-volume plain-vanilla issuance of the past, should be better equipped to weather the conditions,” he says.
But Carey Olsen’s Alex Ohlsson strikes a note of caution. “At the moment our turnover numbers are holding up well and we are doing what we can to maintain that. But only an optimist would predict that the healthy levels of activity we have seen over the last couple of years will continue unaffected.”
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Law firms based in offshore centres will also have to adapt to whatever measures world leaders agree to impose at the London G20 summit in April. Gordon Brown, in setting out Britain’s agenda for the meeting, highlighted the need to “ensure consistent regulation in all jurisdictions.”
The British Prime Minister is seeking a co-ordinated response the global financial crisis and has offshore destinations in his sights. He has reason to be optimistic that an agreement can be reached. US President Barack Obama will arrive at the Excel Centre in East London on the back of strident criticism of offshore jurisdictions during his election campaign. Another G20 attendee, French President Nicolas Sarkozy, recently questioned whether, in an era when the taxpayer is funding the bailout of lenders everywhere, banks should even be allowed to operate in tax havens.
But partners at offshore firms say the idea that these jurisdictions’ primarily role is to dodge taxes and stash suitcases full of illegal cash is a million miles away from the modern reality. “There is still the perception onshore that offshore destinations are all about banking secrecy and tax evasion,” says Mourant du Feu & Jeune’s Jonathan Rigby.
“But in reality that view couldn’t be further from the truth.” Tough laws on money laundering and illegal tax evasion have ensured that destinations like Cayman and Jersey thrive, not because of shadowy dealings, but because they are well run and well regulated, he adds.
“I get annoyed when I constantly read that people use offshore destinations for something nefarious,” says Maitland Group managing director Steve Georgala. “There’s no doubt that some people use tax havens to avoid paying tax but not our clients. We don’t have a single US client that is not completely tax-compliant.” Georgala continues: “A private trust company might go to Cayman these days because the destination has tailored itself to its needs. Companies don’t do it to avoid tax; they do it to optimise tax. A lot of companies are based in countries all over the world so it’s not a case of avoiding tax as making sure they don’t pay double tax.”
Gibraltar: reverse fortune? Gibraltar has always punched above its weight in world affairs. The six-kilometre-square British territory on the southernmost tip of the Iberian Peninsula shares a border with Spain and has historically been an important base for British forces.
Gibraltar’s law firms have long cashed in on its close ties with the UK coupled with its position as one of the few sophisticated offshore centres within the European Union. (Neither the Isle of Man nor the Channel Islands are part of the 27-country bloc.) Sixty-lawyer firm Hassans’ main office is in Gibraltar – supplemented a smaller office in southern Spain – but it boasts a client list packed with heavyweight London-centric financial institutions including Barclays Bank, Lloyds TSB and Deutsche Bank.
The majority of its work comes from big international clients and the firm prospered during the boom, but as the downturn deepens the number of deals has shrunk.
Hassans’ partner Michael Castiel estimates that Hassans revenues will be down 20% this year. “We’re not yet in the position where we’ve had to lay people off,” he says, “But if it continues to get worse who knows?”
As a British overseas territory, the currency of Gibraltar is sterling. The slump in the value of the pound has its downsides, Castiel admits, but it has also boosted his firms’ appeal to some overseas clients. “As sterling goes down it’s cheaper to export your services making the firm cheaper to clients in the US and the Eurozone,” Castiel says.
“The weak pound helps us bill at the level we want to. If the client is able to use the sterling-zone it makes more sense for them to come to us.”