We find ourselves in 2018, some 10 years on from the financial crisis that affected worldwide markets in such a documented fashion, in a world that is going through a period of great disruption. Whether its lifestyle technology that is redefining the planet (think of Facebook, Uber, Airbnb, Amazon), technology advances such as SpaceX or the politics of Brexit, disruption is all around us.
And Brexit has been a substantial point of focus as the UK and Third Country jurisdictions like Guernsey have been navigating for many months. However, as we were reminded by the agenda of the recent Guernsey Finance Funds Masterclass, we should not forget that Guernsey has a global value proposition and appeal to markets far beyond the shores of EU countries. Take for instance China which is the focus of this article.
A recent report by the Credit Suisse Research Institute is reporting total global wealth has increased 27% to $280 trillion since the crisis hit.
Whilst the US still dominates with almost 40% of this total, the research is proving China’s overall increase with $18 trillion over this 10-year period amounts to $29 trillion in private wealth.
In terms of individuals, the US dominates the UHNW individuals with some 49% of those with net assets greater than $50 million. However, China has now moved into second place, granted some way back, with a rapidly rising 12% of the total number of global UHNW individuals.
At the Guernsey Finance Funds Masterclass the escalating number of billionaires in China was referenced. Soon this component of China’s population is predicted to outnumber those in the US in both number and value. Yet another indication of the rapid rise of wealth in China.
In terms of outward investment, over the years we have seen a steady rise where Chinese investors are spending quadruple the funds on EU Investments than is seen from the EU investment funds flowing into China in a growing imbalance between two of the world’s largest markets. The same can be said of China and US investment although more evenly matched. Whilst 2017 recorded a drop in outward investment, the first since 2009 as a result of tighter capital controls levied to protect the Yuan from depreciation, the trend is expected to return given the strength in the Yuan against the dollar.
The demand arises where Chinese investors are seeking to diversify and balance their local portfolios with the many opportunities that exist in the West. China is benefitting from the strength of the Yuan (or weakness of the pound and dollar) resulting in low valuations of quality assets in sectors such as real estate, technology, biotech and aerospace. In London alone, some high profile real estate assets have been acquired such as 122 Leadenhall Street (“the Cheesegrater”) owned by CC Land and 20 Fenchurch Street (“the Walkie Talkie”) owned by Lee Kum Kee. ChemChina is acquiring the Swiss biotech Syngenta AG in the largest foreign takeover in Chinese history in a deal worth $43bn. There is also Dutch chipmaker NXP Semiconductors divesting Nexperia acquired by a consortium including JAC Capital (Beijing Jianguang Asset Management) and Wise Road Capital for $2.75bn in 2017.
Structuring of these investments is key and this is where a jurisdiction such as Guernsey can come to the fore. Guernsey has a leading and well established Private Equity industry (with almost 60% of closed ended structures being private equity structures) with internationally recognised funds located in a stable (yet innovative), well-developed and regulated tax transparent domicile. This enables cross-border transactions during a period when the world is going through such uncertainty and change.
Substantial launches such as private equity promoters including Permira, Apax Partners, Cinven, Macquarie, Partners Group and Inflexion all contributed to the record-breaking high, boosting the value of Private Equity to over £110bn in 2017.
Whilst there are a number of investment vehicles available in Guernsey, a common entity used for private equity and venture capital investing is the limited partnership.
The principal attraction of the limited partnership is its tax transparency for partners. Profits and losses of the limited partnership are attributed to the Partners in their own place of tax residence with, usually, the added benefit of any losses set off against the profits from other investments attributed to them in the same partnership. Additionally, those same profits and losses may be treated as arising in the country in which the investment of the LP occurs.
The limited partnership vehicle is neither a person nor a company and as such is not subject to any Guernsey tax. Nor will any non-Guernsey resident Partner be subject to tax on their share of profits in Guernsey, unless there is Guernsey source income.
Limited partnerships are formed, registered and operated under the provisions of the Limited Partnerships (Guernsey) Law, 1995. A limited partnership exists following the signing of a written limited partnership agreement (“LPA”) and registration of the Partners on the register of the LP.
For each LP there is one or more general partners (“GP”) who are jointly and severally liable for all debts of the limited partnership without limitation. There would also be one or more limited partner(s) who contribute or commit an investment sum to the capital of the limited partnership but unlike the GP are only liable to the extent of their contribution (or commitment). Both the GP and LPs can be body corporates or individual persons.
BDO in the UK has an established China Advisory Services Team in London to provide strategic, operational and technical guidance necessary to ensure the successful design and implementation of any China and European strategy. The UK team includes over 30 bi-lingual Mandarin speakers based in our London office and we have significant experience and knowledge of executing China business strategies over the short, medium and long term. Together with close collaboration with our BDO member firms in the Greater China Region (China, Hong Kong and Taiwan), the team provides coordinated expertise and support across our key advisory, planning and compliance services.
BDO Global’s EMEA Region has a European China Desk that works with BDO member firms and their respective China service groups across Europe and China.
BDO Lixin in China is headquartered in Shanghai and operates over 32 offices throughout China covering all major cities including Beijing, Shanghai, Guangzhou and Shenzhen, and with over 10,000 employees. BDO’s China firm offers full range of services including audit, tax, advisory, international business, risk management, Information Technology, training, asset appraisal and accounting policy research center. BDO’s clients include over 300 listed companies, over 300 IPO companies, and more than 2,000 enterprises with foreign investments.
The China Advisory Services Group and the BDO offices in China, Hong Kong and Taiwan have a network of excellent local connections, and are available to support companies with aspirations in other South East Asian countries.
BDO Guernsey is a key member of the BDO global network of public accounting, tax and advisory firms. BDO has robust international representation in 162 territories, with 74,000 people working out of 1,500 offices and so we are privileged to work with clients who are growing and trading internationally.
For more information on how BDO can assist with your structuring and introductions to the necessary parties, contact Justin Hallett, Director of BDO Limited (Guernsey), Partner BDO LLP.
To contact our China Desk directly visit: https://www.bdo.co.uk/en-gb/services/advisory/international-advisory-services/china-advisory-services