The unprecedented economic shock caused by the Covid-19 pandemic has upended the status quo across industries — and corporate services is no different.
Liquidity challenges, market volatility, government intervention on a grand scale, and the unknown path of the pandemic, are creating profound uncertainty for corporate and private clients.
A mixed outlook for client demand
Vistra’s latest industry study – which canvasses the views of 620 executives – finds that 44% expect clients to delay investment plans by more than six months, with a further 19% are unsure.
This suggests a majority anticipate a drop-off in deal volumes until at least the end of 2020.
Activity levels aren’t the only challenge, however. Nearly half (46%) of industry respondents think the pandemic will do long-term damage to globalisation, while 51% think it will lead to greater regionalisation of investment activity.
In the shorter-term, there are obvious practical challenges of investing in overseas destinations to which travel is restricted. Looking ahead, it is possible investors may become less adventurous, favouring more familiar markets.
“Before the crisis a lot of regional players were looking for opportunities outside to diversify, but that’s fallen away considerably now,” says one UAE-based private wealth lawyer. “We’re putting most of our focus on the domestic market and I expect other firms here to focus more inside the region to build their pipelines in the near term.”
Even if some of these concerns begin to subside, there are signs the pandemic is exacerbating geopolitical tensions that were already underway.
Before the pandemic, countries such as the UK, US and Australia were moving towards stricter scrutiny of foreign direct investment (FDI). Now, France, Italy, Spain, Canada and India have all imposed stricter restrictions on FDI to protect domestic targets from opportunistic takeovers.
This complexity is reflected in Vistra’s research too. In 2018, when the study was last run, 61% of industry respondents were confident about the ease of doing cross-border business, while only 32% are confident today.
Offshore may prove a useful ally
Offshore centres have historically played a pivotal role in easing such impasses to cross-border investment flows.
“We’ve seen this in the past, with countries such as Taiwan and South Korea imposing politically driven restrictions on investment into China,” says a managing director at a corporate services firm. “Clients in those countries still want to do business, so they turn to third countries to cut through those barriers – and we’ll see that happening again.”
Yet the industry is divided about how the significant global economic uncertainty will affect demand for offshore centres.
Less than a third (30%) of respondents think the pandemic will accelerate a decline in the use of offshore centres, but slightly more (32%) think it will have the opposite effect, and 38% are uncertain.
This divided opinion reflects two schools of thought. Some anticipate increased government scrutiny of offshore structures to follow the economic hardship caused by the pandemic — and heightened reputational risk.
While others recognise the increased attractiveness of neutral intermediaries at a time of international tension, and the advantages of proven structures in tested jurisdictions, as we enter a period of prolonged economic uncertainty.
Government intervention creates new risks
Public bailout levels in response to the pandemic are dwarfing those of the global financial crisis. The US has already deployed nearly $4 trillion and the EU an estimated $3.5 trillion1.
Three-quarters (74%) of industry respondents expect this deeper economic intervention by governments to become the norm. But it will create new risks for clients and fresh challenges for corporate services providers to solve.
For instance, with many governments seeking to recoup some of their expenditure through higher taxation, asset protection services may be in higher demand.
The industry can also expect a rise in legal disputes surrounding transactions and structured finance agreements, as financial strain takes hold.
Unlike in 2008, governments have now mandated schemes such as mortgage holidays and rental deferments for individuals and businesses. This could create complex disputes surrounding liability for defaulting securities that rely on these underlying income streams.
Another factor that sets this economic crisis apart is that the recovery must take place beneath a cloud of uncertainty. Clients are acting in the knowledge that a second wave of shutdowns could strike at any time and, in some locations, secondary lockdown measures are taking effect.
The corporate services industry has come through a decade of radical transformation. And it has proven its ability to enable a functioning economy – through helping capital flows and safeguarding assets – in the past. In the case of Covid-19, the industry may help to facilitate global economic recovery.
Find out more about Vistra 2020 and download the 2018 report here.
1 Policy responses to Covid-19, International Monetary Fund, June 2020
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