Offshore law firms' services remain in demand among Singapore-based companies, despite the sharp slowdown in growth across Asia. John Rogers explains why

There can be little doubt that the story of Singapore's economy has been one of resounding success – a progressive, free market economy which has benefited greatly from a highly-skilled and well-educated workforce, a welcoming environment for foreign business talent and a highly-developed and well-respected legal system and business framework.

The Singapore Government has been quick to identify the strengths and weaknesses in the economic composition of the jurisdiction and has encouraged and successfully attracted a large number of financial institutions, private equity funds, hedge funds and law firms to establish a presence in the country. In many cases, these institutions have been attracted by the possibility of using Singapore as a hub for their ambitions and operations within the Association of Southeast Asian Nations (ASEAN) and in India.

Despite the impact of the Asian financial crisis, 9/11 and the SARS epidemic, the expanding role of Singapore over the last several years as a hub for financial and legal services has led to increased demand from its financial institutions, private equity funds, hedge funds and law firms for entities incorporated and established in various tax-neutral jurisdictions. Locations such as the Cayman Islands and the British Virgin Islands (BVI), which are stable and secure jurisdictions with an independent legal and judicial system based on English common law, are increasingly popular.

Despite the introduction of robust 'know your client' legislation, entities can still, subject to sufficient due diligence being obtained, be formed in these jurisdictions quickly, at little cost and without requirement for specific regulatory approvals.

Furthermore, special purpose vehicles are free from any form of corporation tax, capital gains tax or stamp duty. No withholding tax is levied on cash flows and there are no foreign exchange controls.

In the face of the current economic and financial challenges, what lies ahead for offshore jurisdictions and the offshore law firms and corporate services providers which have benefited from the previous increase in demand?

Financing transactions

There have been a large number of financing transactions in the Southeast Asian region and India in the last several years which have involved Cayman Islands and BVI companies. These transactions have included corporate acquisitions, infrastructure investment, aircraft and shipping finance and trade finance, as well as working capital and corporate finance deals. Many of these transactions are driven by the demand for capital within emerging market countries including Indonesia, Malaysia and India.

As part of the security package provided to the lenders or investors into these transactions, there is often one or more Cayman Islands or BVI entity in the structure providing a variety of security in favour of the relevant lenders. If the current financial and economic crisis continues to deepen, there may well be an increase in the number of defaults in these transactions, and the relevant creditors will be looking to enforce their security packages or consider other restructuring and work out options. In a number of cross-border transactions throughout Southeast Asia and India, this will require multi-jurisdictional legal input from law firms in various jurisdictions.

It is certainly noteworthy that the legal system in each of the Cayman Islands and BVI is creditor friendly, which will be of particular importance in a period of increasing defaults.

With both international and Singaporean law firms having a role in many of these transactions, it is reasonable to expect that there will also continue to be an increase in demand for input from law firms offering Cayman Islands and BVI legal services.

Asset management

Aided by government incentives – predominantly in relation to tax – the fund management industry in Singapore has grown dramatically over the past five years. In addition to tax breaks, the high standard of living and the continued growth of local trading markets has created not only a growth in local management, but also a migration from Hong Kong and Australasia to Singapore. Further, a number of large US and European managers have established their Asian offices in the region (often in preference to Hong Kong).

By the end of 2007, total assets managed by Singapore-based asset managers demonstrated a 32% growth rate from 2006 levels – the seventh consecutive year of double-digit year-on-year growth in total assets under management registered by Singapore-based asset managers.

Times have changed, however, and the industry has seen a number of issues in relation to illiquidity of holdings, waves of redemptions and risk aversion on the part of investors. This has led to the closure of a number of open-ended funds. In addition, the decreased activity in private equity investments in the region, notably India, has further dampened confidence.

The recent turmoil in the markets has kept both onshore and offshore counsel busy addressing the legal and commercial ramifications of investment managers exercising withdrawal gates; suspending redemptions and/or net asset value; advising upon the ability to side pocket illiquid holdings or those which the manager cannot currently value; and reviewing and improving the constitutional documentation of funds. Where the imposition of a gate or a suspension of redemptions would, in previous times, have signalled the likely demise of a fund, legal advisers have been able to work closely with clients, advising them not only on the powers and restrictions which emanate from the legal constitution and documentation of their fund vehicles, but also on their communications to investors. In many cases legal advisers assist in obtaining agreement to continue the fund (and even grow it) despite the imposition of such restrictions on investors holdings. Because many investment managers may be coming across these scenarios for the first time, offshore lawyers who have been embroiled in these issues for many months are able to add real commercial and legal value to the situations faced.

In terms of personnel and geographic spread, there has been an emphasis on international firms adding India-related capability to their offices in the region. Offshore firms will look to work closely with such teams, forging relationships and exchanging information so that all are better placed to understand fully the nature of the Indian private equity market and the clients' requirements for that (and other regional jurisdictions) in the future.

Despite the poor economic environment, it has been an excellent opportunity for investment managers and their advisers to get closer together and better understand the implications that can befall a fund and its business. It is an excellent time to improve upon the understanding of the new marketplace and the structure of both hedge funds and private equity funds. As the tide turns and a new era of confidence blossoms, the industry and its legal advisers will emerge stronger and better prepared than ever before.

It is apparent that while economic conditions are difficult, they do nevertheless create certain specific conditions under which offshore law firms' services will continue to be required in Singapore, and the region, in order to add value to clients' transactions beyond what may have been envisaged when the particular transactions were originally entered into.

John Rogers, the partner leading the finance team in Walkers' Singapore office, advises on Cayman Islands and BVI law in relation to general banking, debt capital markets, structured finance, asset and project finance, acquisition finance, securitisation, private equity and general corporate transactions.