"It is obviously much easier to talk to them if they are in the same time zone," he says.
Cost may be a factor in which offshore jurisdiction gets chosen, though. "The BVI is more popular for startup companies because the corporation, registration and maintenance fees are cheaper than the Cayman Islands," says Knowles. Many larger companies, on the other hand, prefer the more established Caymans.
"There is an element of prestige to being registered in the Caymans," he says.
Like their onshore counterparts, the offshore firms are dealing with the recent slowdown in Asian economies. Listings of Chinese companies in Hong Kong and the United States, deals that make great use of offshore entities, are way down from last year, and there is broad concern that the market isn't coming back anytime soon.
Then there are emerging regulatory concerns. In China, it is still illegal for foreigners to directly own interests in certain industries, including large swathes of the Internet and telecommunications sectors. To get around such restrictions, Chinese companies and their foreign investors have made use of so-called variable interest entities (VIEs). In a VIE, foreign parties own shares in an offshore entity that is then given rights in an onshore business via contract.
Major Chinese corporations such as Internet company Baidu and online marketplace Alibaba have made use of VIEs in order to list in the U.S. or otherwise attract foreign investment, but the Chinese government circulated a memo earlier this year questioning the legality of the VIE structure. No action has been taken, but the foreign investment community has been on tenterhooks for the past several months, as hundreds of billions of dollars have been invested through VIEs.
To make matters worse, the U.S. Securities and Exchange Commission has also begun probing the use of VIEs. Last week, U.S.-listed Chinese company New Oriental Education and Technology Group announced it was the subject of an SEC investigation into whether there was sufficient basis for its China-based operations to be included in the company's financial statements.
Offshore firms say they are watching the situation closely and will deal with whatever either Chinese or U.S. regulators decide. They also think that any decision on VIEs won't detract from the long-term business opportunity in the region.
"Although there may be some pressure on VIEs ahead, I believe that Cayman Islands and British Virgin Islands vehicles will continue to be used in structures for foreign investment in the Chinese market and will continue to remain the investment vehicles of choice," says Andy Randall, a partner in the Hong Kong office of Walkers.
Indeed, the ubiquity of offshore entities in cross-border transactions means a downturn in one area may be balanced by growth in another. Though initial public offerings may be down, Randall notes, so-called "take-private" deals are on the rise, and they also make copious use of offshore vehicles.
