The offshore M&A market increased in value at twice the worldwide average last quarter, compared to the previous quarter, according to a report released by Appleby, the world’s largest provider of offshore legal, fiduciary and administration services. The latest edition of Offshore-i, the firm’s quarterly report which provides data and insight on merger and acquisition activity in major offshore financial centres, focuses on Q2 2012 and highlights Jersey’s consistent activity levels over the course of the year.

The key themes emerging from the report show that in the second quarter of 2012:

– The value of deals involving offshore targets increased 12%, up US$3.8bn from the previous quarter – this compares to a 6% increase in the worldwide value, and vastly outpaces many of the major financial markets, including the United States and Asia.
The number of deals involving offshore targets was down slightly, by 4%, from the previous quarter, and down 34% from the same quarter in 2011, an indication of continuing market consolidation exhibited by fewer, larger deals.
– The Cayman Islands took the top spot as the most popular destination for investors doing deals involving offshore targets, completing 104 deals worth a combined value of US$19bn. Much of this value was encapsulated by a number of large transactions including the take-private by Alibaba Group, a global e-commerce group based in China.
– The financial services sector continues to significantly dominate deal activity levels involving offshore targets.
– The top 20 deals of the quarter, as well as the largest pending or rumored transactions, paint a picture of ongoing confidence in Asian markets and in energy and natural resources.
– The combined energy and natural resources sector continues to generate bullish deal flow, accounting for six of the top 10 deals of the quarter.
– The overall deal value growth realised in the first quarter has continued into the second quarter of 2012, attributed in large part to the top eight deals which were valued at US$1bn or more each. Of particular significance were the two leading deals which related to the privatisation of the Alibaba Group, worth a combined value of US$9.4bn.

“This quarter we can observe a certain robustness returning at the larger deal end of the transactional landscape,” said Peter Bubenzer, Appleby’s Bermuda-based group chairman. Mr. Bubenzer also noted, “Financial sponsors find themselves sitting on cash that needs to be invested, and corporate balance sheets look strong and ripe for spending on the right deals in the right places.”

Deal activity in Jersey has remained fairly steady during the course of the year, with the jurisdiction completing 37 deals this quarter, down from 40 in the first quarter, worth an aggregate value of US$1.53bn.

Mark Lewis, Appleby’s Practice Group Head for the Corporate & Commercial department in Jersey said: “The M&A market has been dominated by private equity houses, particularly those who have raised recent funding. Although the large corporations have plenty of cash available, they appear more reticent to spend it, the private equity houses appear less risk adverse. Mr Lewis added that “In Jersey we have acted in some of the largest, most complex and high profile M&A transactions seen in Europe this year.”

The Cayman Islands experienced significant growth in the second quarter – due in large to the Alibaba deals –with deal value and volume up 323% and 17% respectively from the preceding three months. The British Virgin Islands experienced the biggest increase in volume, up 25% from 77 deals to 96 deals.

Activity levels in Hong Kong, meanwhile, slowed this quarter—having previously topped the offshore ranking by volume for Q1 2012 and Q4 2011—the jurisdiction now has fallen to fourth place. “There was a pretty dramatic drop-off in the volume of money flowing into Hong Kong deals in the second quarter. In the prior quarter deal values were skewed by the US$6.015bn minority stake acquisition in the AIA Group. This quarter, 61 Hong Kong deals were announced against 128 in the same quarter of 2011, a drop of 52%, but many of the deals going on elsewhere were driven by underlying Asian interests” Mr. Bubenzer said.

The financial services sector accounted for the largest number of deals this quarter, up 4% from the previous quarter but down 15% from the same quarter in 2011. Mining and extraction and other natural resources sectors are continuing to grow steadily.

Minority stake transactions led by volume this quarter, consistent with measures for Q2 2011 and previous quarters, while acquisitions led the rankings by value, up 36% from the first quarter of 2012 and 10% from the same period last year. Only nine IPOs across the offshore markets were recorded in the second quarter, down from 17 in the first quarter and a more buoyant 53 in the second quarter of 2011. On a more positive note, planned IPOs are comparatively high, with 23 recorded in the second quarter, suggesting that things are improving. In Jersey, minority stakes led the deals by volume, with the jurisdiction completing 30 minority stake deals compared to three acquisitions in the second quarter.

Comparing deals involving offshore targets to other world regions this quarter, the offshore market ranked fifth in deal value out of 13 designated, placing it ahead of Russia and Eastern Europe. Two years ago, the offshore market ranked sixth in deal value.

“The offshore markets are performing better than many other world regions, showing a 12% increase in transaction values in the second quarter as against quarter one, 2012, at a time when North America, the Middle East and the Far East and Central Asia all saw deal values falling,” Mr. Bubenzer said, adding that “In terms of M&A activity, our region compares favourably when lined up against other world markets, generating more transactions than both the Middle East and Africa combined.”

Turning to deals involving offshore acquirers, the report reveals that both the volume and value of transactions has fallen, but average deal value remains reasonably strong at US$86m against an average of US$62m for 2011. The biggest number of deals involving offshore acquirers came out of Hong Kong and the BVI, with both jurisdictions boasting just over US$5bn of activity. Meanwhile in Jersey, the jurisdiction completed 25 deals, up from 23 in Q1 2012, worth an aggregrate value of US$1.7bn.

Looking forward, whilsts it is unlikely that the floodgates will suddenly open for increased deal flow soon, a certain level of robustness is beginning to emerge in the offshore M&A figures.