Conduits of Capital

3. The encouragement of local PE activity will
likely create more economic development than
will domiciliation.
Academic research and Bella Research Group’s own
experiences in fund evaluation point strongly to the positive
impact that PE investments can have on a region. Given that
(i) PE domiciliation in a country does not imply increased
PE investment in that country and (ii) fund managers are
generally reluctant to change domiciles, we suggest that the
donor funding intended for developing an onshore financial
centre may be better utilised in the development of a
business environment conducive to PE deals. Encouraging
countries to adopt the reforms that would attract PE office
or headquarters in a country—regional stability, a businessfriendly
environment, rule of law, enforcement of contracts
and so forth—could also serve as a natural first step toward
the encouragement of domiciliation in the country. In the
interim, however, these reforms would foster growth through
the economy in a more balanced and developmental way
than efforts solely aimed at creating a financial hub.
We suggest that while donors, such as the European Bank
for Reconstruction and Development (EBRD), could help
increase the attractiveness of onshore financial centres,
the risks are fairly high. Given the host of advantages of
offshore domiciliation for international investors, they will
likely stay with what they know absent any additional costs
(perhaps reputational) that outweigh these benefits. Still,
we suspect that donors could have an impact in creating
onshore financial centres in Africa if substantial time is
devoted to developing the proper ecosystem in which
fund managers and their investors would feel confident.
To do so, Botswana, for example, would need to simplify
its regulatory environment to become more conducive
to business activity (as reflected by the Doing Business
rankings in Exhibit 3). South Africa, perhaps the most
viable SSA financial centre alternative with respect to
“doing business” considerations, would need to enhance
its quality of governance (as reflected by the WGI rankings
in Exhibit 3). Such changes would likely take many years,
even decades, before an onshore alternative would emerge
for investors.
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