2020年濒临结尾时，亚太地区的经济图景似乎呈现出前所未有的萧条：某些地区动荡的社会环境、远不够理想的经济状况、余温未了的中美贸易摩擦，当然，还有那场百年一遇的疫情——投资基金领域当然也难逃一劫。“全球交易活动都被踩了刹车，融资变成难题，小型基金的经理感受尤甚。”凯瑞奥信律师事务所新加坡办事处管理合伙人Anthony McKenzie说，“ 因此，部分基金发行被叫停，部分既存基金（及其投资组合公司）面临估值困难。有些对冲基金需要谨慎管理赎回，并利用起类似赎回上限和‘侧袋账户’这样的流动性管理工具。”
Kate Hodson是奥杰律师事务所香港办公室合伙人，她说，2020年初疫情刚爆发时，大家曾一度因为担心流动性而叫停了大量项目，尤其涉及中国的交易，很多都延期了。“不过，伴随封锁程度降低，亚洲资产管理产业逐渐适应‘新常态’，交易活动再次活跃起来。” 她指出，“科技产业尤为坚韧，疫情甚至导致新机会产生：例如健康产业，以及线上购物及支付产业。”
The U.S.-China trade war, the U.S. elections, and of course COVID-19. Last year saw unprecedented challenges for the investment fund industry in the Asia-Pacific region. But as funds adapted through innovation and technology, they expected their lawyers to do so as well, and offshore firms certainly stepped up to meet the challenges brought by a very unique year.
By the time 2020 drew to a close, it felt like the business landscape of the Asia-Pacific region had been battered like never before, with civil unrest in Hong Kong, less-than-ideal economic conditions and lingering uncertainties over the U.S.-China trade war combining with a once-in-a-century pandemic. The investment funds industry was unsurprisingly not spared. “The brakes were applied on global transactional activity and fundraising became a challenge, particularly for smaller fund managers,” says Anthony McKenzie, managing partner of offshore law firm Carey Olsen’s Singapore office. “As a result, a number of fund launches were put on hold. Several existing funds (and their portfolio companies) experienced valuation difficulties. And some hedge funds have had to carefully manage redemptions and employ liquidity management tools such as gates and side pockets.”
McKenzie adds that the Asia-Pacific investment fund industry as a whole is undergoing significant adaptation as a result of the pandemic. “Remote working, alongside fewer opportunities to interact face-to-face, go on fund-raising roadshows and to undertake operational due diligence, has led to significant changes in the way investment managers conduct their business, and law firms increasingly need to be aware of such clients’ changing expectations in order to integrate them into their strategy going forward,” he observes.
Kate Hodson, a partner at the Hong Kong office of offshore law firm Ogier, says that at the start of 2020, as the pandemic began to have its impact, there were liquidity concerns and a significant number of projects put on hold, with many China deals stalling. “However, as lockdowns eased and the asset management industry in Asia adjusted to ‘the new normal,’ activity quickly resumed,” she notes. “The tech industry, in particular, proved very resilient and there were a number of pandemic-induced opportunities such as in healthcare and those industries benefiting from changing purchasing patterns, with a huge shift to online spending.”
Meanwhile, Piers Alexander, a partner in the Hong Kong office of offshore law firm Conyers, says his firm saw fewer new real estate funds compared to 2019, reflecting the changing needs for commercial, retail and office space, as well as the down-turn in occupancy for hotel and other tourist-driven accommodation, resulting from COVID-19. “The end of face-to-face meetings affected both capital raising and manager due diligence concerning new funds,” he notes. “However, it did mean that existing investor relationships became even more important and smoothed the way for repeat funds, as well as allowing managers to leverage such relationships for new capital introductions.”
Alexander adds that the return to stronger performance of Asia hedge funds in 2020 saw renewed investor interest in this sector, placing these funds in a good position for 2021 and the prospect of increasing numbers of new launches should this performance continue. “Private credit funds also proved popular, but it was China private equity which continued to be the main-stay for the new funds we assisted on in 2020,” he says.
Likewise, McKenzie witnessed many bright spots last year. “Many fund managers were opportunistic in 2020 and took advantage of lower valuations, distressed assets and volatile markets. Venture capital and private equity funds, particularly those investing in key industries such as financial services, IT, education and healthcare were most notable. Credit funds, distressed asset funds, and dislocation funds have also been on the rise,” he says.
Ann Ng, a partner at Maples and Calder in Hong Kong, says that her firm is witnessing a maturing of the funds management industry in Asia, as well as increased innovation and dynamism. “Hedge fund managers are venturing into private investments and other illiquid assets through voluntary side pockets, co-investment arrangements or co-mingled PE funds,” she notes. “Similarly, traditional PE managers and their investors are seeking opportunities in more liquid assets on the secondary market. On the investor side, we are seeing some institutional investors investing for the first time in private equity and other alternative asset classes in the search for yield.”
REGULATIONS RAMPING UP
Even if the abovementioned events had not happened, funds would have had plenty to worry about, and many of those worries would have come from the ever-changing regulatory landscape. “I am sure that to a fund manager it feels like every year, a new fund regulation,” says Hodson. “2020 saw a new development in the private equity space with private funds domiciled in the Cayman Islands and the British Virgin Islands becoming subject to regulation. The new legislation was a result of certain EU and other international recommendations and was developed to align the BVI and Cayman Islands investment fund regulatory regime with other jurisdictions.”
Michael Padarin, Hong Kong managing partner at Carey Olsen, elaborates. “As a result of pressure from the EU and the OECD, during 2020, both the Cayman Islands and the British Virgin Islands introduced regulatory regimes for previously unregulated close-ended fund structures. The Cayman Islands regime, in particular, represented a very significant regulatory development for a jurisdiction which for many years has been the default fund domicile of choice for ex-EU asset managers. To illustrate the magnitude of this change, approximately 13,000 private funds were registered in the Cayman Islands under the requirements of the new regime by early August 2020.”
He says that his firm assisted numerous clients in navigating the registration requirements, and is helping clients come to grips with several new operational compliance obligations, in key areas such as valuation, safekeeping of assets and audit. “Unsurprisingly, clients who do not need the added expense or compliance burden brought about under the new regimes, are enquiring about unregulated alternatives,” says Padarin. “This is particularly the case for fund-of-one structures, and co-investment vehicles, and we have found solutions for a number of clients under these circumstances.”
Alexander agrees that the introduction in the Cayman Islands of the Private Funds Act (PFA) in February last year was the single measure having the “greatest impact on Cayman investment funds” for the year, as it brought closed-ended funds within the regulatory fold for the first time. “Whilst the Act imposes new regulatory requirements and ongoing compliance on closed-ended funds, we have not seen this affecting the volume of new funds established or negatively impacting the attractiveness of Cayman as the leader for private equity funds in Asia.”
This is an observation echoed by Hodson. “Despite the new obligations of having to become registered with a regulator, we saw very little interest to move out of these jurisdictions to avoid regulation. Rather, most in-scope entities have chosen to register with the BVI and Cayman regulators,” she says.
“We haven’t seen this as detracting from the continued interest in Cayman and the BVI for fund set-up, although there is now perhaps a slight uptake in drilling into the respective regulatory treatment of different vehicles in each jurisdiction,” she adds.
Padarin also notes that, separately, the Cayman economic substance regime introduced in 2019 remains a hot topic and the subject of many client queries. “Cayman Islands investment funds are broadly exempt from the regime, however, fund managers and portfolio holding companies are potentially in scope and we have advised numerous clients on structuring and compliance in this area,” he says.
Another new type of regulation that has perhaps taken managers by surprise in the APAC region, is the gradual introduction of climate change regulation, says Hodson. “Legal frameworks have begun to reflect support for the transition to a low carbon economy and this transition is expected to have a major impact on financial markets and products in the near to medium term,” she notes.
Broadly speaking, though, the issue of Environmental, Social, and Corporate Governance (ESG) is becoming front and centre for fund managers. “The momentum around ESG has started to translate into new funds products arising in Asia which incorporate ESG in some form,” says Hodson. “We have also seen several managers indicating interest to bring more ESG strategies to the market. This reflects a diversification in the sustainable investment product bank away from fixed income. Beyond new products, we are seeing a number of things happening in the funds industry related to ESG, including a spree of hiring individuals with experience in sustainable finance. This is not just into asset management firms but also banks and accounting firms. There have also been increased opportunities for new partnerships and co-operations such as in the form of blended finance and NGOs working with asset managers on fund launches.”
Hodson sees ESG as a long-term trend as substantiated by the commitments seen at the levels of government, as well as regulators. “As an example, both Hong Kong and Singapore have started a consultation process with regards to guiding the asset management industry on climate disclosures and are competitively positioning themselves as Asia’s green financial centres,” she notes. “In fact, the SFC in Hong Kong is proposing to introduce measures to require HK licensed fund managers to consider climate-related risks in their investment and risk management processes.”
Hodson also expects to see greater levels of sustainable investment in 2021. “In Standard Chartered Private Bank’s ‘Sustainable Investing Review 2020’ report, a survey of around 1,000 investors with a focus on affluent and HNW investors in Singapore, Hong Kong, the UAE and the UK, found that 90 percent of respondents in Asia said they are interested in sustainable investments and 42 percent plan to invest between 5 and 15 percent in this area over the next three years. The pandemic has accelerated and highlighted the importance of sustainability and ESG factors as a business strategy for some of the world’s largest companies and this is not a momentum I expect to slow even as we come out of the pandemic,” she says. “The growing legal and regulatory consensus that ESG is a factor to be considered when investing means that ESG is expected to be a focus for investors in Asia, and managers will need to manage such expectations.”
Hodson believes that this is an opportunity for offshore law firms to play their part as well. “Just as is the case for the businesses we advise, law firms need to consider how they build resilience to ensure sustainability,” she says. “We have an active focus on D&I, the environment and wellness, in addition to our investment in technology and client services. The environment has become a particularly big focus for us. We are building an environmental management system for the firm and have hired a head of sustainability to lead this process.”
TIME TO SHINE
As their clients have innovated and adapted to weather a succession of challenging situations, so have offshore law firms. “This is a time of unique opportunity to reshape the way offshore lawyers work with their clients and rethink the structure and scale of our practice areas, sectors and geographical locations,” says McKenzie of Carey Olsen. “Law firms with strong knowledge of their clients’ businesses will be better placed to weather the pandemic and react quickly. In addition, law firms that recognise the value of a ‘communication-driven’ culture will have an added dimension of resilience and will find themselves better placed to evolve and more effectively collaborate with their staff and clients. For those offshore law firms who are innovative, flexible and invest in technology, the pandemic experience will build goodwill and brand loyalty from both their clients and their employees.”
Hodson of Ogier says that given the significant number of regulatory changes at the start of the year, it was important to continue to reach clients and support their needs as efficiently as possible. “Technology was very much at the forefront of the solutions,” she recalls. “We were quick to move to online seminars, rolling out educational series at the start of the year and continued to deliver these over the course of the year. Further, Ogier’s IT infrastructure and common use of tested platforms allowed us to facilitate a timely move to remote working and online deal completion.”
“Ogier has been using an electronic signature product for some time now and we were able to roll this out to clients who were unable to provide wet ink signatures. Fortunately, the Cayman Islands has been well placed to adjust to the move to the signature of documents in electronic form having introduced the Cayman Islands Electronic Transactions Act in 2003,” Hodson adds.
She also points out that there were high levels of collaboration between offshore law firms as they came together to ensure that the raft of new regulatory changes for the funds industry in the BVI and Cayman Islands was dissected and disseminated in a clear and as consistent manner as possible to support the industry. “It was very much an industry-first mentality, and this was particularly important with clients under so many other strains this last year,” says Hodson.
“Whilst there have been many downsides to the lack of face-to-face interactions in the industry there has also been a resulting efficiency benefit. As an example, we have been able to attend more conferences this last year than ever before and across a wider number of jurisdictions as we have been able to do so from the comfort of our homes and offices. However, online forums don’t offer the same networking opportunities and so extra efforts have been required to stay connected and to continue to expand our connections,” she notes.
Alexander of Conyers says that the firm will continue to provide offshore assistance to clients in order to meet their business needs. This premise has driven, and will drive, our legal offering in Asia,” he notes. “The strength of our offshore services is reflective of the strength and breadth of the offshore jurisdiction premise itself, namely, to provide a stable, well-regulated, flexible platform which can provide offshore entities to meet our client business requirements.”
WHAT TO EXPECT IN 2021
Looking ahead, McKenzie of Carey Olsen says that he anticipates investors in the region will continue to allocate investment capital to alternatives. “We expect that China will continue to be the source of significant offshore deal flows, ranging from Chinese fund managers launching offshore funds, to joint ventures, IPOs on the STAR Market, promoter-led take-private deals, preference share financings and large global M&A transactions. Cayman and BVI structures, in particular, continue to have a central role in these deal flows, having already become embedded in Chinese structures since the late 1980s, and Chinese managers and investors remain responsive to innovative fund and other products introduced by these offshore jurisdictions,” he notes.
Padarin adds that economic down-turn that has resulted directly from the pandemic has increased the number of companies in the Asia-Pacific region which are suffering financial distress. “In the past six months we have seen a significant increase in the number of restructuring and insolvency-related instructions (both contentious and non-contentious) and would expect this trend to continue for at least the next 12-24 months as the economic effects of the pandemic shake out,” he notes. “From the perspective of the funds management industry, this has spawned opportunistic acquisition funds looking to acquire assets at distressed levels and/or acquire secondary interests in existing funds at discounted valuations.”
Meanwhile, Alexander predicts that the growth in Cayman funds will be in step with the recovery of the economies in Asia. “Such recovery will be affected significantly by the ability of a jurisdiction to manage the impact of COVID-19, including the ability to implement a vaccination roll-out. Some jurisdictions in Asia have been more effective at handling this and, subject to new local outbreaks, will be better positioned in 2021,” he says. “The recently reported 2.4 percent GDP growth for China’s economy is likely to set the global bar for 2021.”
For Hodson, the start of 2021 has demonstrated a significant amount of pent up activity, and her firm has been experiencing a very busy January with a significant number of new fund launches kicking off and new enquiries. “We are cautiously optimistic about the 2021 pipeline,” she says. “Another key trend is likely to be China-focused activity with the further opening up of China to foreign investment, allowing foreign firms to take majority stake ownerships in securities and fund management firms.
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