25 February 2008
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Since the late 1990s the offshore legal market has changed significantly as the result of a swathe of mergers between law firms and an unprecedented level of international expansion. Leaders from eight of the top offshore firms reflect on the factors driving these changes and what the future holds.
Matthew Thompson, acting managing partner, Ogier
The key answer to date has always been market forces and client demand. Ten years ago in Jersey there was a business opportunity to advise clients on the most appropriate jurisdiction within the Channel Islands. That same reasoning has led to cross-Atlantic mergers in jurisdictions that complement each other in terms of their areas of business.
The growth in the offshore world also reflects the shrinking of the business and legal world generally. Many clients and law firms have become much more international in nature, spread across the onshore world. Changes in the offshore market therefore, in part, reflect changes that have occurred in the financial services industry as a whole.
One significant difference from the onshore legal business is, however, that most, if not all, of the significant players in the offshore market also have fiduciary businesses. Again, the fiduciary part of these businesses has grown out of opportunity, client demand and the confidence that clients have in an ongoing relationship with the organisation that helped create the structure under administration.
The scale of these operations means that the multi-jurisdictional offshore firms are no longer dependent on one jurisdiction or market, but cover a range of activities and jurisdictions, thus lessening the impact of any credit crunch compared with a business primarily focused on one part of the world. Those businesses that cover the Americas, Europe, the Middle East and the Far East are best placed for the future and will build on the global brand they have already developed in the offshore world.
A key issue for all offshore players will always be to harness talents across the seas and across cultures. If that is achieved, market demand linked to being in the right jurisdictions with quality people will secure the future.
Stephen Ball, chief executive, Mourant du Feu & Jeune
The offshore legal landscape is changing dramatically. Consolidation in the market is rapid as law firms increase their multi-jurisdictional presence in the established offshore centres such as Jersey, Guernsey, the Cayman Islands, the British Virgin Islands (BVI) and Bermuda.
I predict that by 2020 the offshore world will be dominated by three or four firms that will cover all the mainstream offshore centres. The aim is to make offshore transactions as seamless and efficient as possible for clients. As structures become increasingly complex this means being able to field teams of lawyers that can cover multi-jurisdictional deals without the need for multiple interfaces.
I expect more offshore firms to be establishing offices in New York and expanding their presence in London and Hong Kong to be close to the world's leading onshore law firms and the financial institutions, private equity firms and hedge funds that form the backbone of their client base.
But we do not anticipate that they will have started to offer New York or English legal advice by 2020. They are too reliant on referrals from the magic circle to want to compete with it, and the magic circle is sufficiently focused on the growth potential in Asia and India that it is unlikely to focus offshore.
The interesting conundrum is whether it is the 'offshore magic circle' or the onshore version that will become dominant in the 'quasi-offshore' jurisdictions such as Ireland and Luxembourg, which do not fall neatly into either's territory and yet are interesting to both.
Richard Gerwat, managing partner, Bedell Group
We're all having to come to terms with the greater regulation that has been introduced to offshore centres over the past 10 years. Generally, we welcome this because it assists transparency and best practice, and so helps to make these markets as resilient as many of the onshore jurisdictions - which in turn increases client confidence and business flows.
There has also been a move towards a broader, more global perspective, often involving complex cross-jurisdictional instructions. In particular, both the burgeoning Far East and the Middle East are becoming much more important for offshore law firms and fiduciary companies.
Keeping a level playing field between competing offshore centres is the watchword for insular authorities in offshore finance centres - whether from a tax, regulatory or legal infrastructure perspective. Frequently, we see particular centres moving to redress any perceived imbalance. For example, Jersey is due for a significant expansion of its product range and the introduction of a new funds regime.
Funds and fund management remain critical areas for the offshore legal market. Generally, there has been an increase in the creation of new legal structures and we believe this will continue. The pioneering concept of incorporated cell companies in the Channel Islands is one recent example of a growing area of expertise.
Following the apparent contraction of several smaller jurisdictions, we've seen the emergence of a top tier of offshore centres, including Jersey, Guernsey, Dublin, Switzerland, Luxembourg, Cayman, Bermuda, Singapore, Hong Kong and Dubai. We expect to see this rationalisation continue, with a few key centres rising to the very top.
Client and investor perception, along with relevant international recognition will be key in this determination. Indeed, these centres will continue to engage positively with onshore governments as the scrutiny applied by the Organisation for Economic Cooperation and Development and others will continue to be a factor of life offshore as well as onshore.
As the level playing field concept develops across the board, increasingly the 'offshore' tag is blurring with 'onshore' - serving only to identify those businesses organised from offshore locations.
Grant Stein, global managing partner, Walkers
The primary driver in much of the market consolidation is that many offshore matters - from complex transactions and international liquidations to investment fund structures - are becoming more global.
In addition, emerging markets such as Asia, the Middle East, South America and Russia/Eastern Europe continue to develop and add new opportunities for global investments.
When it comes to globalisation, scale is a relevant factor. We expect to see the consolidation continue as larger firms acquire smaller ones to get a local footprint, or firms merge to increase their scale and expand their global reach.
When considering a merger, the firms involved need to look at the potential synergies of the existing lines of business and the jurisdictional footprints of the two groups, and the need for scale (and the resultant increase in capacity) to be able to develop new lines of business and jurisdictions.
These types of consolidation are a win-win. Clients benefit from the fact that no matter where in the world their deals are, they have a trusted partner in place. They can deal with one offshore service provider that they know, rather than several providers. This 'one-stop shop' principle simplifies their administration and is usually more cost-effective.
In addition, offshore firms often practise law in a variety of jurisdictions, so their clients can choose structures from one particular jurisdiction, such as Cayman, Jersey or BVI - or a combination of structures - depending on their needs.
The offshore firms benefit too, of course. While one jurisdiction may be more active than another at any given time, there are often opportunities for growth overall.
For example, with the hit on the US and global credit markets, we saw fewer structured finance deals in the last half of 2007, but a lot more insolvency and corporate recovery work as companies and funds tried to recover from the sudden and dramatic devaluation of assets.
Despite some political pressures in certain markets, we anticipate that 2008 will be another excellent year for offshore firms.
Peter Bubenzer, global managing partner, Appleby Global
The past 12 months has seen some degree of further consolidation among offshore law firms, against a background of a continuing surge of significant new work in all major centres.
While there are jurisdictions that are well known for specific products, in each of them different factors are at play. In the entire offshore world it is still the tax and regulatory environment that creates opportunities for the efficient international employment of capital, which attracts the work. In the legal profession offshore in 2007 there was a continuing consolidation, with two mergers announced and completed. The consolidation is now being driven by both increased client demand (the benefits of a single integrated law firm that provides a global perspective on offshore solutions) and the business needs of the large firms (diversification of their practices and ancillary businesses and leveraging their brand and reputation).
I believe we are in a pause in the further expansion of the larger firms. Firms with small equity groups and high profits per partner, which have expanded by acquisition will need either to find other acquirable firms to continue their expansion or to change their equity structures to be able to merge.
Firms will face the increased cost of the expansion of their networks as they work to reduce the disparity in size, reputation and success between their offices. Those with disparate remuneration structures - commissions or separate profit pools - will need to find structures to avoid internal competition that is damaging for them and their clients.
Finally, firms also need to make the choice between positioning themselves as legal firms with associated businesses or as integrated offshore businesses, which will likely drive them in different directions in terms of their target markets.
I expect the present contestants for the title of leading offshore law firms will be reduced to a group of three. I believe that the characteristics of the true leader will be a leading legal practice in each of the major offshore centres and fully integrated operations in terms of structure, management and equity ownership..
Peter Harwood, head of corporate, Ozannes
One of the most significant trends we have seen over the past 10 years has been the 'globalisation' of offshore law firms. Initially, this became evident through the establishment of offshore offices as representative or marketing offices for the domestic jurisdiction. Clearly, this makes sense for those jurisdictions that operate in time zones that do not coincide with the principal financial markets.
Subsequently, certain firms have extended their franchise through strategic mergers, alliances or, in some instances, through self-development. Firms that originate in the Caribbean have now established offices and/or separate practices in EU member states, the Channel Islands, the Middle East and the Far East.
Within the Channel Islands, local firms having initially established themselves as pan-Channel Islands brands are now seeking to compete against the Caribbean global reach.
In many cases, the globalisation has come on the back of development of the law firms as financial services businesses. In this regard they are competing against both onshore and offshore service providers, both in the corporate and in the private client sectors. It is often the development of the non-law practice of these global businesses that has driven the move to new jurisdictions.
There is no evidence that this globalisation process is likely to diminish and, indeed, every day one hears rumours of one or more of the offshore law firms opening an office in even more remote parts of the world. Where one firm leads, others inevitably tend to follow.
Unfortunately, one of the less desirable aspects of this drive for globalisation is that many offshore global law practices have taken a conscious decision to pull out of providing full legal services within their jurisdiction of origin to concentrate on their international legal practice.
John Collis, head of corporate, Conyers Dill & Pearman
We perceive that the demand for offshore services will continue to grow in the years to come. The large industrialised countries continue to steadily seek out markets around the world for their goods and services.
Over the past several years, less industrialised or emerging markets have taken huge leaps into the international arena. The use of offshore financial centres in these transactions is becoming virtually indispensable.
In addition to the foregoing, the transactions continue to become more complex and sophisticated. To compete, therefore, the major offshore law firms will find themselves continually recruiting at the higher and more senior level.
Perhaps with one or two exceptions, I suspect that there will not be as many big mergers between the offshore firms as we have seen in recent years. On the other hand, as the major firms strive to offer an all-encompassing offshore service, they may start adding other offshore financial centre services to their inventory.
I think we will see among those firms that have recently merged a period of consolidation as they try to market and exploit the new services they now have on offer.
Those firms that have grown organically will add to their attorney compliment as they grow into their new markets. As the number of onshore financial centres around the world begins to grow, the competition will move into those centres. In my view, the first firms into these new onshore centres will be the leaders.
Chris Bound, managing partner, Collas Day
The issues of scale, multi-jurisdictional presence and range of activities cannot have escaped the attention of any law firm's management.
Those firms that have raced for scale have gained certain advantages, but given the speed of growth - and taking a lesson from the failure rate of mergers and expansion in the corporate sector - it will be interesting to see which of the 'supersize me' firms are shown to have made good choices and implemented those choices well.
Benefits from scale and reach have to be offset against the costs of consolidation and the drain that represents on management time and attention. A critical test will be whether the forced pace of growth increases remuneration while partners still retain their patience.
There are clients for whom the multijurisdictional offshore model is attractive and others that will prefer to make their own choice of service provider in each jurisdiction. Even where existing clients are happy, future growth rate is likely to depend on establishing a presence in other jurisdictions. Still, it is prudent that such expansion is subjected to commercial scrutiny, preferably independent of normal concerns about revenue generation.
Multi-jurisdictional firms will face a challenge to demonstrate that they are able to provide the best advice to clients regardless of where the firms happen to have offices. The neutrality to be gained from a free choice of provider in each jurisdiction means it is still a valid option for delivering multi-jurisdictional advice.
Every firm will emphasise the benefits of its strategy. Debate will not resolve the question. Winning strategies have a way of becoming clear in hindsight, so this issue will be worth revisiting over the next few years. n