Conduits of Capital

− Above the fund (i.e., where the LPs are based) –
some of the LPs that commit to private equity funds (e.g.,
banks, insurance companies, high net-worth individuals
and family offices) face tax liabilities in their home
jurisdictions, while others may enjoy tax exemptions
(e.g., pension plans, endowments, international /
development finance institutions). Regardless, a layer
of tax at the fund level effectively reduces the net
return to the LP, thereby decreasing the attractiveness
of international investments. Tax efficiency in fund
jurisdictions thus facilitates international capital flows,
an important consideration for regions that suffer from a
paucity of local financing, such as Sub-Saharan Africa.
−
Below the fund (i.e., where the portfolio companies
are based) – the selection of a fund domicile can
impact the ease and flexibility with which a fund can
deploy capital into a portfolio company. In addition to
double taxation avoidance agreements (DTAAs)—
bilateral agreements that seek to avoid or eliminate
double taxation of the same income in both countries—
some jurisdictions, such as Mauritius, have networks
of investment promotion and protection agreements
(IPPAs), which aim to provide equitable treatment of
investments, protections against expropriation, and
agreed-upon means of enforcement.
However, beyond taxation, there are additional factors that
stakeholders consider in the fund domicile selection process.
This survey seeks, among other goals, to determine just
how important tax considerations are in selecting a fund
domicile, while exploring market participants’ overall views
toward other hard (e.g., legal and regulatory regimes) and
soft (e.g., availability of support services) components.
THE OFFSHORE ADVANTAGE
Given the considerations highlighted above, GPs frequently
domicile their funds in offshore jurisdictions, which typically
provide LPs limited liability and tax efficiency, and GPs
the flexibility to identify, structure and deploy capital into
promising portfolio companies. For example, of the 59 GPs
that participated in this survey on African fund domiciles,
nearly 75% report that they currently use an offshore
jurisdiction for their current fund domicile (e.g., Mauritius,
Jersey / Guernsey, Cayman Islands, British Virgin Islands).
Moreover, of the African Development Bank’s 38 approved
commitments to Africa-focussed funds as of January 2014,
the majority were legally domiciled in Mauritius. 3 Clearly,
market participants are comfortable and familiar with
offshore structures, and it is a model that has facilitated
capital flows to Africa.
THE ONSHORE PUSH
In spite of the attractiveness of offshore jurisdictions—covered
later in this study—two forces are contributing to a growing
interest in the use of onshore jurisdictions in fund structures.
Outside Africa, some global investors have cited concerns
about transparency, harmful tax practices and civil society
criticism of offshore jurisdictions, prompting a push to onshore
international investment activity.
Within Africa, local institutional investors, such as pension
funds, are increasingly looking to private equity as a
potential means of driving performance and diversifying their
investment portfolios. As a result, some are encouraging GPs
to create onshore fund structures so that they may make
commitments and build experience with the asset class, whilst
maintaining compliance with local regulations. This nascent,
but important, pool of capital is one that could unlock more
than US$29 billion in capital for private equity investment
in Africa. 4
3
African Development Bank, Mauritius: Country Strategy Paper 2014-2018, January 2014, Annex 9.
4
Commonwealth Secretariat, EMPEA and Making Finance Work for Africa, Pension Funds and Private Equity: Unlocking Africa’s Potential, 2014.
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