Offshore-related IPO work in 2008 has been affected by the continuing turbulence in the world’s capital markets.
Although numerous secondary issues have taken place and a few high-profile companies have migrated to the Official List this year – such as Hardy Oil and Gas – very few new companies have debuted on the UK markets.
This slowdown has been noted in the offshore world, as a significant percentage of international companies that have routed to AIM have done so by incorporation in the offshore centres. Indeed, of more than 300 international companies on AIM, more than two-thirds are based offshore. The bulk of these companies are located in the Isle of Man and the Channel Islands, with the remainder coming from Caribbean centres such as Bermuda, the British Virgin Islands and the Cayman Islands.
Emerging marketsThe situation is not, however, without hope, as many companies from the world’s key emerging markets are still actively engaged in pursuing listings, especially where they have strong underlying existing businesses. A healthy pipeline exists and it is very much a case of when rather than if these companies will proceed.
Ongoing and new instructions for offshore advisers are coming primarily from the world’s emerging markets, with India leading the charge. Twenty-four Indian companies are listed on AIM and all but two have holding companies in offshore jurisdictions. There is still a healthy mix of Indian companies looking to the UK and AIM, notably in the media, power and infrastructure sectors. Singapore is also being discussed as a possible listing venue, but one would expect, given the size, profile and relative liquidity of AIM, that it will remain the market of choice, especially for the larger, better-known players. Even though some companies have shelved listing plans in the short term, there are still private placements being effected in anticipation of an improving market later in the year.
Chinese work remains a slight enigma as the current stance of the Chinese government has effectively curtailed London listings at the current time. This temporary embargo hits both the on and offshore world. Continued interest also exists in the Commonwealth of Independent States, primarily in the oil and gas sector – one of the few successful Main Market IPOs this year was Zhaikmunai LP, a holding entity of an independent oil and gas enterprise operating in northwest Kazakhstan.
Wherever these companies are coming from and irrespective of the offshore centre used, similar legal issues arise, effectively superimposing UK plc standards on the listed vehicle normally through the memorandum and articles. Although corporate governance and accounting questions have been levelled at international companies, on the larger higher profile deals at least they have readily adopted City Code on Takeovers and Mergers -type provisions and Combined Code on Corporate Governance principles as well building in greater disclosure requirements for directors, shareholders and accounting matters in order to reassure and attract suitable institutional investors.
The size of international companies coming to AIM has also increased significantly in the past three years. Towards the end of 2007 there were numerous listings of companies with market capitalisations in excess of £200m. Historically AIM was viewed as the market for small and mid-cap clients, but some of last year’s entrants were bordering on whether they should have been on AIM or the Main Market. Some may not have had a choice if they did not have a sufficient track record; others may have seen AIM as a better place to begin and after their internal processes and procedures are developed will seek to join the Official List.
The futureWhen the market does pick up, hopefully the use of offshore vehicles will continue. The reason why offshore centres are used is, of course, primarily driven by tax, often combined with roadblocks to domestic listings. For example, intense competition to list, such as found in Shanghai last year for Chinese companies, or regulatory or political reasons why the underlying company cannot be listed overseas encourages the use of an offshore topco (top company).
Corporate entities based in offshore jurisdictions will generally be subject to low or no tax. Similarly, stamp duty and withholding tax do not generally exist. The ability to tap capital markets but keep the holding company and its profits in a tax-efficient jurisdiction, is a powerful business driver. These holding companies can also be used to embark on tax-efficient M&A activity elsewhere around the globe.
Daniel Mackelden is a departmental director and head of Cains’ London office