Conduits of Capital

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VI. South Africa is viewed as the most attractive onshore fund domicile in Sub-Saharan Africa. When asked to rank the leading onshore African fund domiciles, survey respondents listed South Africa as the most attractive market with 102 of the 118 survey respondents ranking it as one of their top three onshore African fund domiciles. South Africa was followed by Kenya, Botswana and Nigeria, which garnered 65, 47, and 35 votes, respectively. Other notable jurisdictions receiving interest include Morocco, Ghana, Rwanda, Tunisia and Egypt. VII. Greater use of most onshore jurisdictions, including South Africa, is inhibited by the quality of local legal and regulatory environments. In South Africa, tax and cost competitiveness join the legal and regulatory environment as leading inhibitors, while political stability is the second-biggest hurdle in Kenya, and the availability of skilled human capital and efficient support services are cited as core challenges in Botswana. This finding maps to survey responses regarding what is important to participants when considering a fund domicile: a sound legal and regulatory environment, tax competitiveness and political stability. VIII.Survey respondents would advise stakeholders who are interested in promoting the broader adoption of onshore domiciles by Sub-Saharan Africa-dedicated private equity funds to focus on strengthening legal and regulatory environments and implementing tax reforms. These two actions received 69% and 56% of survey respondents’ votes, respectively. 14 |
INTRODUCTION Across the emerging markets, private companies face two persistent growth constraints: expansion capital and expertise. 1 Frequently, small and mid-size businesses are unable to secure bank lending to finance their aspirations for growth, particularly if they lack hard assets that can serve as collateral. Local banks often tend to prefer vanilla, asset-based—and frequently short-term—lending, and shy away from cash flow-based lending, let alone more exotic structures. Moreover, for the most part, local capital markets remain out of reach for all but the largest emerging market companies. In addition to the financing gap, companies frequently face an expertise, or human capital, gap. Whether it’s corporate governance, financial management or operations, there are often many international standards and efficiencies that can be implemented to enhance an emerging market company’s enterprise value. These two constraints of financial and human capital are particularly evident in Sub- Saharan Africa, the focus of this report. Private equity is uniquely suited to fill these gaps. On the one hand, private equity fund managers are a source of longterm, patient capital that can help to finance a company’s growth. On the other, private equity fund managers can take companies to their next level of development by instilling management expertise, inculcating global best practices, and leveraging experience and networks to help companies achieve scale—either organically or through acquisitions. Indeed, private equity fund managers are incentivised to work closely with entrepreneurs and company management teams to create value—it is how they make money. OVERVIEW OF PRIVATE EQUITY FUND STRUCTURING AND CONSIDERATIONS Private equity funds are typically structured as limited partnerships, wherein the fund sponsor (the private equity fund manager, or general partner (GP)) raises capital from qualified investors (limited partners or LPs) for a pooled fund, whose capital the GP then invests in portfolio companies. 2 The LPs retain limited liability (meaning their financial liability is limited only to the amount that they have committed to the fund), whilst the GP, which retains decision-making authority, faces unlimited liability. Many African private equity funds, however, are not structured as limited partnerships but as companies due to the popularity of Mauritius corporate structures for funds. Whilst there are significant differences between limited partnerships and corporate structures, the commercial terms for both tend to be similar. The prevailing wisdom is that taxation and a credible legal and regulatory regime are the key drivers that LPs, GPs and their advisors contemplate when structuring a fund, along with limited liability for investors. In broad terms, there are three levels—the fund level, above the fund, and below the fund—that come into consideration. − The fund level – fund vehicles are usually located in a jurisdiction that enables a limited partnership structure. The fund itself typically operates as a passthrough vehicle, and is often located in what the GP views as a tax-efficient jurisdiction so that there is minimal leakage of cash flows among the LPs, the fund and the underlying portfolio companies. In addition, the fund domicile may have investment and / or tax treaty networks with the market(s) the GP is targeting for deals, providing favourable tax treatment and enhanced legal protections. As noted above, corporate structures may be preferred in some jurisdictions, such as Mauritius. 1 For more on this topic, see Roger Leeds, Private Equity Investing in Emerging Markets (Palgrave Macmillan: 2015). 2 The content for this section is drawn from a Debevoise & Plimpton presentation, “Legal Strategies: Protecting GP Interests and Maintaining Competitive and Marketable Positioning to LPs,” delivered at EMPEA’s Fundraising Masterclass, held in Washington, DC on 14 May 2015. The information presented in this section should not be construed as legal, tax, investment or other advice. Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity | 15
Page 1 and 2: Conduits of Capital Onshore Financi
Page 3 and 4: TABLE OF CONTENTS I. FOREWORD .....
Page 5 and 6: predictable, legal systems that res
Page 7 and 8: works and that everyone loves.” D
Page 9 and 10: Because of the fragmented nature of
Page 11 and 12: Industry Views: EMPEA 2015 African
Page 13: EXECUTIVE SUMMARY In April 2015, FS
Page 17 and 18: As a general rule, GPs tend to foll
Page 19 and 20: “Offshore” refers to a jurisdic
Page 21 and 22: expressed by GPs). Over 61% of GP r
Page 23 and 24: “The industry has found a very sa
Page 25 and 26: INDUSTRY ATTITUDES TOWARD ONSHORE A
Page 27 and 28: A RANKING OF ONSHORE FUND DOMICILES
Page 29 and 30: Conduits of Capital - Onshore Finan
Page 31 and 32: WHAT COULD MAKE ONSHORE SUB-SAHARAN
Page 33 and 34: “Other” actions include: “rem
Page 35 and 36: “ STAKEHOLDER VIEWS ON THE RELATI
Page 37 and 38: APPENDIX 1 - DETAILS ON SURVEY PART
Page 39 and 40: Expert Perspectives: Onshore Financ
Page 41 and 42: Experts were asked to make recommen
Page 43 and 44: Table 2 - Prerequisites for a succe
Page 45 and 46: 3. FINDINGS 3.1 Evolution and Compa
Page 47 and 48: particular jurisdiction (communicat
Page 49 and 50: that it is obvious: a well-function
Page 51 and 52: • The development of an onshore f
Page 53 and 54: amined the impact that venture capi
Page 55 and 56: 4.1. Where do Private Equity Fund M
Page 57 and 58: in absolute terms, or relative to t
Page 59 and 60: average. With respect to regulatory
Page 61 and 62: For future research, it is importan
Page 63 and 64: ENDNOTES 1 World Bank Enterprise Su
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33 African Development Bank. Maurit
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71 Unfortunately, the DTAAs lists b
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The financial activities carried in
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The OECD has reviewed over 100 juri
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Importance of Domestic Flows The re
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Rwanda is not included in any of th
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Other possible contenders may emerg
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APPENDIX 1: LISTING OF COUNTRIES IN
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Country / Territory Palau Listed by
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Country Mauritius Morocco 16 Nigeri
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Onshore Options for Africa-focussed
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Developing skills in these areas re
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2.2 Policy Issues Related to Onshor
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• Good accessibility. Good commun
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4. ROLE OF DONORS AND TECHNICAL ASS
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Thus, while some PE general partner
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management extends to monitoring co
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ANNEX 1: CATALOGUE OF FINANCIAL CEN
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Dublin Mauritius Dubai Botswana Cap
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To some extent, policymakers also n
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In administrative financial centres
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services industry. However, recent
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gains, even if it involves offshore
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ather than an onshore centre that i
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generally look to London or in some
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Onshore Options for Africa-focussed
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whether it is ‘Local,’ ‘Trans
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are suited to particular financial
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In GFCI 16, only three African cent
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The ‘stable’ centres in the bot
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GFCI 16 Investment Management Centr
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Professional service providers tend
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Busan and Doha have been advancing
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Zambia and Zimbabwe, the report not
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Get Connected - Ease Scaling Up In
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Financial centres are added to the
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The SVM then uses the data to predi
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Instrumental Factor Country or City
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Instrumental Factor CA* BU DO DU IS
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Open Government The World Justice P
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Securitisation TheCityUK http://www
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Human Capital Instrumental Factor S
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Global City Competitiveness EIU htt
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6.4 Appendix D - Group Respondent P
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Dubai Istanbul Conduits of Capital
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6.5 Appendix E - Country Summary Ov
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Uganda 26.086 33,800,000 772 Kampal
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