Hong Kong-based Vistra aims to be one of the global ‘big four’ in the corporate services industry
- The corporate services industry is entering a new era, shedding its association with tax shelters and expanding service offerings, according to Jonathan Clifton, regional managing director, Asia and Middle East, at Vistra
- The industry is in a similar position as the accountancy and tax advisory business 30 years ago, before consolidation created a ‘big four’ of dominant global players
Offshore corporations in the British Virgin Islands (BVI) and the Cayman Islands were once known as the hiding places of money for the world’s wealthiest jet-setters.
That image was reinforced in 2016 and 2017 with the release of the Panama and Paradise Papers, which revealed holdings in offshore corporations and beneficial ownership structures that put wealth beyond scrutiny.
But the corporate services industry, which specialises in such offshore company formations and trusts, is entering a new era of respectability and consolidation, says Jonathan Clifton, regional managing director, Asia and Middle East, for Vistra, one of the world’s largest corporate services providers and headquartered in Hong Kong.
While offshore companies have been used to lower taxes, increasingly, they are being used to facilitate capital flows. For example, joint ventures that are incorporated in the BVI, which means legal disputes get settled under UK law. They are also the means by which international mergers and acquisitions (M&A) might occur, leading Clifton to describe his services as the “plumbing” of international finance.
Vistra’s operations emerged from Hong Kong-based Offshore Incorporated (OIL), founded in 1987, which was a wholesaler of offshore corporate entities. OIL’s founder, Frank Mullens, created a large number of companies incorporated in the BVI on August 8, 1988 (8/8/88), correctly guessing that these companies would then be sold to Chinese clients, thus kick-starting the Caribbean archipelago as a key offshore centre for Hong Kong businesses and private clients.
In more recent years, the industry has tried to rebuild its reputation by embracing professionalism and new regulations such as the Common Reporting Standard, which is aimed at transparency.
Since 2010, Vistra’s management has been expanding the company through acquisitions. The aim, according to Clifton, has been to make Vistra big enough to outcompete smaller rivals in what has traditionally been a fragmented industry. In an interview, he says Vistra has gone from five offices in 2010 to around 80 today, and staff has risen from 150 to 4,000.
Clifton sees the corporate services industry in a similar position as the accountancy and tax advisory business 30 years ago, before consolidation created a Big Four of dominant global players. He expects a similar path for corporate services.
“It is strategically important that when the music stops, we are one of the big players and have created significant barriers to entry. That’s why we are making these acquisitions and a global network.”
Clifton argues that the old days of using corporate entities in offshore jurisdictions as a way to dodge taxes are largely gone. He expects that the regulatory impact of the Common Reporting Standard and base erosion and profit shifting rules will actually help large corporate service providers such as Vistra against smaller rivals that cannot navigate complex international reporting requirements. Further, he says his clients are more interested in “mid-shoring” – having corporate entities based in Hong Kong or Singapore, rather than the BVI or Cayman Islands.
Vistra was the first corporate services provider to be majority owned by a private equity firm, when US private equity giant Carlyle bought a majority stake in 2004. Nine of the top 10 corporate service providers are now either owned by private equity firms or listed, said Clifton.
One of the world’s largest, Intertrust, is listed on the Amsterdam stock exchange and had €485 million (US$548.41 million) in revenue in 2017. Its biggest shareholder is US private equity company Blackstone, with a 23.3 per cent stake. TMF Group, another global player, had planned to list on the London Stock Exchange until it was bought by CVC Capital Partners for €1.75 billion in 2017. According to its 2017 annual report, TMF Group said its revenue had climbed from €528.9 million in 2016 to €564.4 million in 2017, a 6.7 per cent rise. It also estimated the global industry as being worth €10 billion.
Vistra has been majority owned by Hong Kong based Barings Private Equity since 2015. Clifton declined to say if an IPO of Vistra was imminent, but suggested that it was a “realistic” option. In November, Vistra proposed a debt-financed dividend recapitalisation of US$222 million, which Moody’s Investor Services viewed as grounds for a credit downgrade. The plan was shelved soon after.
“Our view is that there’s another three to four years of consolidation to take place in the industry. We think the big four or five [companies] will account for 50 per cent of market share. The big four currently account for 20-25 per cent share.”
Clifton estimates that Vistra is currently second or third in size globally, with 6-8 per cent of market share. The aim is to reach 15-18 per cent in the next few years, combining organic growth, internal integration and acquisitions that will fill geographic gaps. Moody’s estimated that in 2017, Vistra’s revenues were split between Asia and Europe.
In April, Vistra acquired Radius, a US private-equity backed company that helps American businesses expand overseas by providing legal, tax and administrative services. The terms were undisclosed. Radius had 880 staff at the time of the takeover, and the business will be rebranded and integrated into Vistra next year.
Clifton says that Vistra gets about a quarter of its business providing administration services to private equity, real estate and hedge funds, about 35 per cent from companies expanding internationally and about 25 per cent from handling trusts for private clients. The traditional offshore company business accounts for about 15 per cent.
In addition to digitalising its processes, Vistra is considering a partnership with one of Hong Kong’s new virtual banks, with the aim of one day offering clients the ability to both open a bank account and start an offshore corporate entity with a mobile phone. Clifton sees technology investment as another way to create barriers to entry for smaller competitors.
Vistra hopes to capitalise on increased investment flows between emerging markets. Clifton says Hong Kong was becoming a connection point for Chinese investment to the Middle East, while Singapore had become the favoured place for investors going into India. Mauritius, once the favoured offshore jurisdiction for investment into India, has become the launch pad for investments into Africa.
Law firm Baker McKenzie forecasts that global M&A activity will fall in 2019, although cross-border IPOs are expected to rise. The firm forecasts that M&A activity will fall from US$3.1 trillion in 2018 to US$2.3 trillion by 2020, with about a third being cross-border M&As. The firm also noted the increasing participation of private equity firms. Globally, cross-border IPOs are expected to cool from a peak of US$68 billion in 2018 to $34.5 billion in 2020.
Given the current volatility in the US-China trade relationship, Clifton says his firm has seen some uptick in work from clients wishing to move China operations into Southeast Asia, but views a long term trade war as bad for business.
Even as Vistra looks for new lines of business, one traditional source of revenue – wealthy individuals – looks set to increase. The Knight Frank 2018 Wealth Report notes that the global population of ultra wealthy individuals – those with US$50 million or more in assets – rose by 18 per cent from 2012 to 2017, and is projected to rise by 40 per cent from 2017 to 2022. In Asia, there are 35,880 people who can be considered ultra wealthy, with China and Hong Kong accounting for 13,940.
A 2017 Bain study on the industry noted that once acquired, clients rarely shift to new providers. Amid a potential downturn in business, this means global players in corporate services trying to claim top positions may be forced to work against the clock.