The role of offshore financial centres in global private credit – what makes the offshore world so appealing for private lenders and borrowers?
Currently estimated to be valued at roughly US$1.6 trillion, the global private credit market is projected to top out over the coming year at about $2.8 trillion. The rise in global private credit (which refers to non-bank lending to companies), characterised largely by private equity funds, alternate investment funds, hedge funds and other entities operating as private lenders in a bid to fill a gap left by banks signifies quite convincingly its increased importance in the facilitation of global capital flows as well. Buoyed by large sums of capital, private credit is projected to fund ever-larger deals and in so doing, will continue to claim a greater share of the global finance market. Impressive year on year growth and no indication of any slow-down in the foreseeable future given how lucrative the market has become, suggest longevity for the market as many of the macroeconomic factors credited with its genesis have largely continued to fuel its growth over the past two decades. Many of these very same factors also bear responsibility for ultimately leading to a diminution in the risk appetite of banks seeking to confirm to capital adequacy and other regulatory requirements and management of costs and have ultimately brought about restricted lending standards (particularly involving smaller or riskier borrowers). The resulting gap in the lending market is one which has been ably plugged by an entrepreneurial private credit market.
Against this backdrop, the growing importance of the private credit market to global capital flows witnessed over the past two decades and even moreso in recent years, made for an inevitable convergence of OFCs and the private credit market. The very same features which have made offshore appealing within the context of institutional lending transactions translate with equal effect within the context of private credit lending transactions. One key feature is the simple yet flexible corporate vehicles (ranging from standard companies to various types of fund vehicles) which are an integral part of the offering of OFCs like the BVI, Anguilla and the Cayman Islands. The ability to have companies with unlimited objects and purposes or with restricted purposes is central to what makes OFCs attractive for cross-border lending transactions. Flexible corporate features, bolstered by the generally creditor-friendly commercial and legal framework intrinsic to OFCs like the BVI, the Cayman Islands, Bermuda and Anguilla are a welcome boon for lenders and borrowers.
The choice of the type of corporate vehicle best suited to the needs of the parties will typically be informed by their commercial needs and the majority of transactions will see a company being used as these tend to offer the greatest degree of transactional flexibility while maintaining the separate legal personality which forms part and parcel of such transactions. The legal autonomy enjoyed by companies, with the capacity to contract, sue and be sued in their own capacity is a key feature which is generally attractive to lenders operating in the traditional banking industry and the same holds true for lenders within the rapidly expanding private credit market. Contracting parties dealing with offshore entities have come to anticipate a certain degree of contractual certainty and when deals are structured using companies formed in the BVI, Anguilla and the Cayman Islands, whether borrower-side or lender-side, the same benefits apply. There is ease of distribution of assets or profits by the company to shareholders since there is no requirement for companies domiciled in the BVI, Anguilla, the Cayman Islands to have reserves or profits prior to making a distribution (whether in cash or specie). In addition, the absence of corporate, income or capital gains tax for companies, trusts, individuals or partnerships regardless of tax residence and the absence of withholding tax are also important factors which make the OFCs named herein particularly attractive to both borrowers and lenders when structuring transactions.
The additional benefits of the absence of exchange controls and currency restrictions in OFCs like BVI and the Cayman Islands facilitates the seamless running of cross-border financing transactions. BVI and Anguilla have straightforward registration systems for security interests to determine questions of priority; something which instills confidence in lenders holding security. Similarly, all contracting parties in OFCs like BVI, Anguilla and the Cayman Islands benefit from well-established jurisprudence (largely based on common law principles) for the resolution of disputes arising from transactions where necessary.
We anticipate on-going interplay between the offshore world and private lending transactions as the demand for flexible financing options on the part of borrowers persists and private credit’s investor-base continues to exhibit an elevated risk appetite in exchange for larger returns. That investor base has expanded in recent times to include institutional lenders well acquainted with the benefits of incorporating OFC corporate vehicles into transaction structures and as private credit continues to contribute to the shaping of global finance and the OFCs named in this article continue to play the pivotal role which they currently do in global financing transactions, the symbiotic relationship between the two will continue to thrive.
Without a doubt, so long as the prevailing macroeconomic position persists, the pairing of corporate borrowers in need of financing with a desire for more optionality with respect to their banking relationships with non-bank lenders with lots of money to invest and an appetite to transact would in many ways seem a match made in heaven.
