Conduits of Capital

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
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