Conduits of Capital

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local presence confers competitive advantages with respect to deal access, due diligence, and deal monitoring. We also considered the drivers of domicile decisions and highlighted preferences for familiar, trusted regions with such features as a tax system with DTAAs and low tax rates, a stable legal and regulatory environment, and high-quality service providers. These features are particularly pronounced in the case of Mauritius, which currently serves as an attractive option for Africa-focussed PE funds. Our final question is: What does this analysis imply for the establishments of future financial hubs for PE in Africa? We explore three implications: (1) established jurisdictions such as Mauritius have a significant “first mover” advantage due to investor aversion to new, “untested” domiciles; (2) a PE financial hub has “sticky” qualities based on alreadyestablished DTAAs, patterns of behavior, relationships with service providers, and cultural considerations; and (3) most African nations would likely be best served promoting local PE investment rather than PE domiciliation. 1. Familiarity is critical to investors for domicile choice. PE fund managers appear to base their domicile decisions largely on familiarity. IFI Global found that fund managers (PE and hedge funds) chose jurisdictions with a solid reputation and were reluctant to change from “tried and trusted” locations. In fact, managers noted that investor or regulatory demands would be the main motivations to domicile in a new jurisdiction. 67 The force of familiarity can be seen in the Singapore-based PE fund managers’ “predilection” to continue to domicile funds in the Cayman Islands, despite few “inherent advantage[s]” over Singapore in light of recent reforms. 68 As a result, absent any major legal restrictions against offshore funds or widespread changes in investor preference, the development of an onshore financial centre for Africa-focussed PE funds will be extremely difficult. The familiarity extends to confidence in the stability of the region. Our research suggests that PE investors desire a domicile with a credible government to ensure fiscal certainty and political stability, as well as a stock of reputable professional service providers for fund administration. As a result, technical assistance (TA) programs must focus on building confidence in the region from regulatory, political, and technical perspectives as well. We discuss this further with our third point. 2. The choice of a fund domicile is sticky and competing with an already-established operation will be extremely difficult. Expanding on the previous point, Mauritius has a significant first-mover advantage in providing fund domiciliation services. Any efforts to create a new financial hub for PE in Africa would involve the negotiation of tax treaties with the countries (especially African countries) that have already signed such agreements with Mauritius, as well as joining the relevant regional organisations, and creating the types of tax and legal structures that already exist in Mauritius. One can also suspect that service providers would be unwilling to invest in a nascent financial hub especially when Mauritius already exists. It is important to note that other SSA cities—such as Johannesburg, South Africa; Nairobi, Kenya; Kigali, Rwanda; Gaborone, Botswana; and Lagos, Nigeria—each have elements of Mauritius’s attractiveness as a financial hub. For example, South Africa has an even more extensive DTAA network (though Mauritius’s treaties with African countries are often more favourable) 69 and has recently modified regulations to become more attractive to PE funds 70 ; Kenya and Rwanda are members of COMESA; and well-established financial service providers are based in such cities as Johannesburg and Lagos. Still, Mauritius ranks favourably in almost every legal and cultural dimension considered by PE fund managers (see Exhibit 3; the leader in each category is noted in bold). In addition, Mauritius has a substantially larger network of DTAAs than four of the five African countries listed above, with the exception of South Africa. 71 As mentioned previously, however, Mauritius’s tax treaties with other African countries are often more favourable than South Africa’s, particularly with respect to withholding tax rates. 72 Given the familiarity of Africa-focussed GPs and their investors with Mauritius, as well its (i) cultural stability with respect to politics, regulations, and doing business and (ii) collection of other financial incentives and organisational memberships, we find it likely that Mauritius will continue to be favoured by PE groups. 60 |
For future research, it is important to understand the foundations of political pressures around offshore PE domiciliation in Mauritius. We suggest a close investigation of (a) the current perception of Mauritius among institutional investors and policymakers with respect to financial transparency and tax practices and (b) the rationales behind major criticisms. Exhibit 3: The rankings of legal and cultural dimensions considered by PE fund managers for Mauritius compared to select countries in SSA Mauritius South Africa Kenya Rwanda Botswana Nigeria Protecting Minority Investors (DB, rank, of 189, 1 = Best) 28 17 122 117 106 62 Paying Taxes (i.e., tax rates and administrative burden) (DB, rank of 189, 1 = Best) 13 19 102 27 67 179 Enforcing Contracts (DB, rank of 189, 1 = Best) 44 46 137 62 61 140 Political Stability and Absence of Violence / Terrorism (WGI, % Rank of 215, 100 = Best) 78 44 14 44 85 4 Regulatory Quality (WGI, % Rank of 215, 100 = Best) 79 64 39 53 73 25 Rule of Law (WGI, % Rank of 215, 100 = Best) 78 58 28 51 68 12 Control of Corruption (WGI, % Rank of 215, 100 = Best) 66 55 13 72 79 9 Note: DB = World Bank Doing Business rankings (rankings benchmarked to June 2014); WGI = World Bank Worldwide Governance Indicators rankings (2013 data). [Accessed January 14, 2015]. Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity | 61
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Conduits of Capital Onshore Financi
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TABLE OF CONTENTS I. FOREWORD .....
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predictable, legal systems that res
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works and that everyone loves.” D
Page 9 and 10: Because of the fragmented nature of
Page 11 and 12: Industry Views: EMPEA 2015 African
Page 13 and 14: EXECUTIVE SUMMARY In April 2015, FS
Page 15 and 16: INTRODUCTION Across the emerging ma
Page 17 and 18: As a general rule, GPs tend to foll
Page 19 and 20: “Offshore” refers to a jurisdic
Page 21 and 22: expressed by GPs). Over 61% of GP r
Page 23 and 24: “The industry has found a very sa
Page 25 and 26: INDUSTRY ATTITUDES TOWARD ONSHORE A
Page 27 and 28: A RANKING OF ONSHORE FUND DOMICILES
Page 29 and 30: Conduits of Capital - Onshore Finan
Page 31 and 32: WHAT COULD MAKE ONSHORE SUB-SAHARAN
Page 33 and 34: “Other” actions include: “rem
Page 35 and 36: “ STAKEHOLDER VIEWS ON THE RELATI
Page 37 and 38: APPENDIX 1 - DETAILS ON SURVEY PART
Page 39 and 40: Expert Perspectives: Onshore Financ
Page 41 and 42: Experts were asked to make recommen
Page 43 and 44: Table 2 - Prerequisites for a succe
Page 45 and 46: 3. FINDINGS 3.1 Evolution and Compa
Page 47 and 48: particular jurisdiction (communicat
Page 49 and 50: that it is obvious: a well-function
Page 51 and 52: • The development of an onshore f
Page 53 and 54: amined the impact that venture capi
Page 55 and 56: 4.1. Where do Private Equity Fund M
Page 57 and 58: in absolute terms, or relative to t
Page 59: average. With respect to regulatory
Page 63 and 64: ENDNOTES 1 World Bank Enterprise Su
Page 65 and 66: 33 African Development Bank. Maurit
Page 67 and 68: 71 Unfortunately, the DTAAs lists b
Page 69 and 70: The financial activities carried in
Page 71 and 72: The OECD has reviewed over 100 juri
Page 73 and 74: Importance of Domestic Flows The re
Page 75 and 76: Rwanda is not included in any of th
Page 77 and 78: Other possible contenders may emerg
Page 79 and 80: APPENDIX 1: LISTING OF COUNTRIES IN
Page 81 and 82: Country / Territory Palau Listed by
Page 83 and 84: Country Mauritius Morocco 16 Nigeri
Page 85 and 86: Onshore Options for Africa-focussed
Page 87 and 88: Developing skills in these areas re
Page 89 and 90: 2.2 Policy Issues Related to Onshor
Page 91 and 92: • Good accessibility. Good commun
Page 93 and 94: 4. ROLE OF DONORS AND TECHNICAL ASS
Page 95 and 96: Thus, while some PE general partner
Page 97 and 98: management extends to monitoring co
Page 99 and 100: ANNEX 1: CATALOGUE OF FINANCIAL CEN
Page 101 and 102: Dublin Mauritius Dubai Botswana Cap
Page 103 and 104: To some extent, policymakers also n
Page 105 and 106: In administrative financial centres
Page 107 and 108: services industry. However, recent
Page 109 and 110: gains, even if it involves offshore
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ather than an onshore centre that i
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generally look to London or in some
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Onshore Options for Africa-focussed
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whether it is ‘Local,’ ‘Trans
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are suited to particular financial
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In GFCI 16, only three African cent
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The ‘stable’ centres in the bot
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GFCI 16 Investment Management Centr
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Professional service providers tend
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Busan and Doha have been advancing
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Zambia and Zimbabwe, the report not
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Get Connected - Ease Scaling Up In
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Financial centres are added to the
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The SVM then uses the data to predi
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Instrumental Factor Country or City
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Instrumental Factor CA* BU DO DU IS
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Open Government The World Justice P
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Securitisation TheCityUK http://www
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Human Capital Instrumental Factor S
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Global City Competitiveness EIU htt
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6.4 Appendix D - Group Respondent P
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Dubai Istanbul Conduits of Capital
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6.5 Appendix E - Country Summary Ov
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Uganda 26.086 33,800,000 772 Kampal
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