Conduits of Capital

White Paper on Private Equity
and Financial Hubs
Josh Lerner, Ann Leamon, Andrew Speen
221 Essex Street, Suite 21 • Salem, MA 01970 • 978.498.4467
1. INTRODUCTION
Private equity (PE) funds—which encompass venture,
growth equity, and buyout transactions—are recognised
as increasingly important financial intermediaries because
they provide a combination of capital, governance, and
mentoring to the companies in which they invest. This
role is particularly helpful in emerging economies, where
research suggests that there is a substantial need for risk
capital along with a substantial number of firms that are
poorly managed relative to their Western counterparts.
Extensive research also suggests that PE is a local
business, with investment success—and the accompanying
social benefits—frequently flowing from the presence of a
firm based (or at least with an office) in a local economy.
This has triggered an intense interest on the part of many
governments in promoting the establishment of local PE
industries. This issue is particularly relevant in Africa, where
some investment groups have chosen to be based locally
(e.g., AfricInvest, African Capital Alliance), others are
based in a global centre such as London or Washington
with local offices (e.g., Emerging Capital Partners, Actis,
Carlyle Group, Helios), and yet others have worked on a
“fly in, fly out” basis from the West (the traditional
approach of Development Partners International).
An additional complication is introduced by the presence
of offshore domiciles for many funds. Whether in response
to restrictive domestic laws (as is the case for Chinese and
Indian funds) or a desire for tax savings, PE funds often
have a legal domicile that is different from their physical
bases. While the regions that serve as the homes to such
funds, such as the Cayman Islands and Mauritius, may
experience some degree of increased economic activity as
a result of hosting these firms, these back office facilities
typically do not confer the same types of benefits as private
equity investment activity would.
This paper—based on a review of academic literature and
practitioner surveys and reports, as well as our general
experiences from advising PE groups and governments—
explores these issues in detail. The remainder of the report
is structured as follows: Section 2 explains the importance of
PE in frontier markets. In particular, we touch on why PE is
important and how it impacts firms and economies. Section
3 discusses the “localisation” of PE and the impact of office
proximity in these markets. Section 4 details the drivers of PE
domiciliation decisions. Section 5 looks at the attractiveness
of Mauritius as a domicile for Africa-focussed funds. Finally,
Section 6 touches on specific implications for Africa. We argue
the following:
• Already-established domicile choices for PE, such as
Mauritius for Africa-focussed funds, have a “first-mover”
advantage in terms of tax treaties with a host of countries
in addition to the familiarity and existing support systems
developed by PE firms. Such existing infrastructure and
patterns of behavior make PE firms reluctant to change.
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