Conduits of Capital

average. With respect to regulatory quality and rule of law,
Mauritius’s percentile rank is 79 and 78 respectively, relative
to 64 and 58 for South Africa, and 30 and 29 for the SSA
regional average. 58 Its regulatory quality is reflected by the
fact that it has entered into a co-operation agreement with
the European Securities and Markets Authority (ESMA) to
allow Mauritius-domiciled funds to market in the European
Union after the AIFMD became effective in 2013. 59
With its reliable legal and regulatory institutions, investors can
feel increasingly comfortable with the settlement of disputes
in Mauritius, a key consideration for PE fund managers. In
fact, international arbitration—generally speaking, a system
to resolve disputes involving international agreements
that is an alternative to litigation—will likely increase in
Mauritius for two reasons. First, Mauritius recently opened
the Mauritius International Arbitration Centre, which will
apply the London Court of International Arbitration Rules.
In addition, from a recent change in Mauritius’s “substance”
tests for tax domiciliation, it follows that if a fund’s legal
documents contain a dispute resolution mechanism (i.e.,
a constitutional requirement to settle disputes in Mauritius)
then the fund is seen to be evidencing Mauritius “substance,”
which assists with tax domicile determinations. 60 Thus, not
only will Mauritius domiciled funds be required to settle
arbitration in that country, but its application of the London
rules—which are well known internationally—will make
funds willing to do so.
5. Fund service providers
Mauritius has a well-established professional services
sector qualified to serve the PE industry. Internationally
recognised banks (e.g., Barclays and Deutsche) and
auditors (e.g., PwC and KPMG) have a presence in
Mauritius. It is important to note that while the availability
of such services does not differentiate Mauritius from
other cities in Africa such as Nairobi, Johannesburg, and
Lagos, the presence of internationally recognised firms
is critical to investor confidence in the region. In addition,
the Board of Investment Mauritius suggests that support
services required by private equity funds are affordable. 61
Importantly, Mauritius boasts a largely bilingual labour
force (English and French) to facilitate deals in English and
French speaking African countries. 62
5.2. How Does PE Domiciliation Affect the
Economic Growth of Mauritius?
We are also interested in the impact that PE domiciliation
in Mauritius has had with respect to economic growth. While
no studies appear to directly explore this link, academic
literature does suggest that, broadly speaking, Mauritius’s
overall economic growth has benefited significantly from
its financial sector development. For example, one study
found that higher levels of financing services and financial
intermediary development from 1952 to 2004 in Mauritius
had a measurable impact on output (real GDP per capita). 63
Another study using cross-country data further found that the
existence of an international financial centre had a positive
influence on domestic financial development (using a variety
of indicators). 64
Still, while financial sector development has indeed been shown
to reduce inequality in African countries, 65 PE domiciliation
contributes most directly to high-skilled jobs in the form of support
services to the PE firms (e.g., legal, financial, accounting). In
fact, Global Business Companies (GBCs) in Mauritius, which
comprise the offshore financial sector, directly (i.e., not including
financial, legal or accounting support services to GBCs) are
estimated to contribute only about 0.2% of total employment
(as of June 2012). 66 As discussed in Section 3, however, PE
firm location decisions with respect to headquarters and offices
appear to be extremely important with respect to value creation
and can have a major impact on entrepreneurship in the country.
The above analyses offer just a snapshot of the investor attitudes
that drive domiciliation choices and the subsequent impact on
economic performance. Below, we highlight several implications
regarding the viability of new onshore financial centres in Africa.
6. IMPLICATIONS FOR AFRICA
In this paper we discussed the location choices of PE firms
with respect to headquarters / offices and domiciles. We
explained how risk capital provided by PE funds can help
loosen the financial constraints faced by SMEs in Africa,
while the PE investment model adds value in other ways,
such as improved management practices. Increased PE
activity can have a more widespread entrepreneurial impact,
extending beyond each individual deal. PE managers
have found, however, that the “fly in, fly out” model is not
appropriate for frontier markets such as Africa, because
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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