Conduits of Capital

to participate in funds domiciled in “tried and trusted
jurisdictions,” and that this quality was more important
than its onshore or offshore status. Interestingly, the
study also indicated that the investors were equally or
more concerned with the brand names of the fund’s
service providers. To reduce anxiety among the investors,
the fund managers will prefer jurisdictions familiar to
their investors. 31
A 2011 Oliver Wyman study noted that alternative investment
funds (hedge funds, PE funds, and real estate funds) have
traditionally preferred offshore domiciles due to “favourable
tax regimes, confidentiality, lower levels of ‘red tape,’ and
the higher quality of fund infrastructure available at these
locations.” The study did find, however, that offshore
centres have attracted some negative attention and that
certain institutional investors require onshore funds, due to,
for example, their own bylaws / constitutions and perceived
investor demand. 32 Along these lines, we note that political
rationales have led the European Investment Bank (EIB)
to invest increasingly only in funds domiciled onshore. In
contrast, however, the majority of private equity funds
in which the African Development Bank has invested are
legally domiciled offshore in Mauritius. 33
In a 2014 follow-on study, Oliver Wyman explored the
primary domiciles of alternative investment funds in the
Americas and Europe and highlighted key domicile decision
drivers across private equity, real estate and hedge
funds. 34 The authors noted the following characteristics of
jurisdictions typically considered by these fund managers:
an attractive tax system with favourable tax rates and
a network of double taxation avoidance agreements; a
legal environment that accommodates flexible limited
partnership regimes and follows international standards
and regulations, especially with respect to investor
protection rights; high-quality local service providers;
manageable investor requirements with respect to redomiciliation,
registration, and fees; and responsive,
trustworthy authorities.
In addition, we found a broad consensus that domicile
choices are also a function of country risk. Fund managers
generally prefer to domicile in regions that exhibit political,
regulatory, fiscal, and economic stability. 35 For example, in
most cases funds domiciled in jurisdictions that lacked the
regulatory capacities to negotiate a co-operation agreement
with the European Securities and Market Authority (ESMA)
and comply with the Alternative Investment Fund Managers
Directive (AIFMD) would be unable to market to European
investors. 36 Moreover, beyond the fact that political instability
gives rise to increased fiscal uncertainty, 37 research suggests
that without democratic political stability, institutions that
protect investors, such as courts and regulators, cannot
function properly. 38
4.3. Economic Impact of Becoming a
Private Equity Hub for Domiciliation
The economic impact of PE domiciliation is also significant.
On a conceptual level, domiciling PE funds in a region
brings additional tax revenue as well as growth in the overall
fund management (e.g., administrators, custodians), and
financial and legal services industries. 39 The establishment
of tax stability and regulatory stability may attract other
industries as well, such as hedge funds and real estate
funds. 40
It is important to note, however, that the PE domiciliation
does not imply a boost in PE deals in the country. In
fact, attractive PE domiciles facilitate PE activity in other
countries through economic cooperation treaties (such
as double taxation avoidance agreements): for example,
Luxembourg and the Cayman Islands appear to have a
very modest amount of economic activity from PE-funded
firms’ back office operations. While we found no empirical
studies exploring the economic impact of increased PE
domiciliation attractiveness, we suspect a relatively modest
net impact with respect to indicators such as aggregate
employment—particularly with respect to the low-skilled
jobs that many emerging countries most need to create. It
is important to note that while broadly speaking, financial
sector development is essential to economic growth and
poverty reduction—a claim supported by a large amount
of empirical evidence—the developmental benefits that
directly stem from legally housing PE groups is not clear. 41
The costs associated with the financial and regulatory shifts
required to house the back office operations of PE firms,
such as the development of suitable investment vehicles
and the onshoring of the specific accounting and clerical
services to PE funds (see Section 5 for more detail), are
unlikely to drive proportionate development growth to these
expenses.
In other words, the economic growth associated specifically
with PE domiciliation is unlikely to be “pro-poor” growth, a
phrase often used by the World Bank to describe types of
growth strategies that boost the average income of the poor
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