Africa has emerged as the Continent of hope, and in its new course, managed to attract global investors' attention. Hedge funds allocated funds to it significantly last decade and continue to do so. However, capital markets, with one or two exceptions, are as yet undeveloped in Sub-Saharan Africa (SSA), so the ability of companies to raise capital by means of public offerings is limited. Even in more developed countries many small enterprises find it hard to raise equity capital in this way. To put the capital markets of SSA (ex-South Africa or SA) in context, one needs to bear in mind that, based on recent data from World Federation of Stock Exchanges, Malaysia and Indonesia have each market capitalizations almost four times larger than SSA (excluding SA) while SA itself is almost eight times larger than the rest of SSA.
But given the rapid economic growth now being seen in the whole of Sub-Saharan Africa, the demand for investment in all sectors has never been greater. One solution is for this capital to be raised through "private equity" (PE). PE has a number of meanings. PE is risk capital provided in a wide variety of situations, ranging from finance provided to business start-ups or incubator finance (often referred as "venture capital" (VC) financing at the very early stage of a business' life), small to medium enterprises to the purchase of large, mature quoted companies, and everything in between.
The PE activity is rapidly growing and various economies are starting to feel the benefit of this type of capital. The decision some nations in the continent need to make is whether they remain a hopeful recipient of this new source of capital or whether they also position themselves as the jurisdiction hosting and/or administrating the redistribution of some of this capital base. Mauritius, a sea-locked services economy, has been so far the uncontested champion. It is clear that a country that wishes credibly to position itself as a global domicile for international funds should have a regulatory framework that recognizes the various types of funds, whether they are to be publicly offered collective investment schemes or more specialized professional schemes such as private equity funds or hedge funds. All the other competing domiciles have such a framework. It is critical to first understand what could one of the African economies gain from being a preferred PE jurisdiction, then what it takes, before starting to understand which nations could be contenders or partners of Mauritius.
Benefits of being a PE preferred jurisdiction
According to Preqin's Fund Manager Profiles database, there are currently 120 private equity firms headquartered across Africa. Of these firms, there are 100 based in Sub-Saharan Africa and 20 based in North Africa. Collectively, these firms have raised approximately $19.3bn in capital over the last 10 years and have an estimated $4.8bn available in dry powder. Seventy-four percent of all the capital raised in the region has been raised by firms based in Sub-Saharan Africa.
Given the scale of the PE industry, a nation serving as a preferred jurisdiction will benefit from the capital raised from this industry. For example, currently more than 820 Global Funds operate from Mauritius. Well known institutions which have established funds in the jurisdiction include Standard Life, Goldman Sachs, Carlyle and BlackRock. Other funds groups include ECP, Helios, Aureos Capital, Adlevo Capital, the Grofin Group and I&P Capital. Consequently other administrative, custodian and service based activities are further helping the nation diversify from traditional industries and is securing foreign exchange.
Mauritius successfully implemented a low flat tax regime enabling sectors such as business process outsourcing (BPO), financial services, hospitality and real estate. This has also encouraged many high net worth individuals (HNWI) to elect Mauritius as domicile or as a hub for financial transactions, thereby creating much trickle-down effect and creating new business sectors.
Key Criteria to becoming a PE preferred jurisdiction
There are a host of legal, operational and fiscal factors to capture for a nation aiming to become a PE preferred jurisdiction, amongst them:
Legal: A clear strong and comprehensive legislative base coupled with a competent regulatory body is clearly a must. At the structural level, a full range of legal structures: trusts, companies and limited partnerships. Preferred jurisdictions for private equity investors are destinations with a modern government which values the importance of working closely with the private sector to provide legislation that meets market needs.
Operational: Cost is critical for such jurisdiction to have low operational costs with reasonable licensing fees and charges. Flexibility comes next: speedy and straightforward authorization of new funds without excessive bureaucratic complexities. Third are support services most essential to enable fund administration companies, custodians, trustees, internationally recognized law firms and auditors. Last but not least is workforce skills. A good supply of personnel with solid accounting, financial services and administrative competence is what will cement the working relationship between the jurisdiction and the global markets.
Taxation: First and foremost, a clear and consistent tax policy agreed by all political parties is an ingredient such jurisdiction cannot do without. Secondly, Transparency -- taxation of a fund or partnership is at the point of the investors not the fund. Thirdly, the jurisdiction should be crisp in its Distinction between capital and income on distribution. Finally, an extensive network of Double Tax Avoidance Agreements (DTAAs) is the ultimate distinctive competitive advantage.
All in all, the most important criteria are those which shape the reputation of a country as a place to do business. They are what might be called soft or intangible criteria. It takes some years and a continuous effort to achieve that reputation.
It is worth remembering that it is not just the fund managers' choice of domicile that determines where a fund is domiciled, but also the investors' preference. One reason of "why Switzerland" is that investors have a sense that if they leave their assets in Switzerland and go away for five years, their assets will still be there when they return.
Continental Early Movers
In contrast to the increasing regulatory and legal burden on private equity funds in the United States and European Union, recent regulatory developments in South Africa are designed to make it a more attractive jurisdiction for local and foreign private equity funds looking to invest into Africa. Other potential players could be Botswana, Seychelles and most likely Rwanda as the country looks towards creating a financial services hub.
Mauritius remains the undisputed market leader. As the continent continues to attract global interest, Mauritius has become the natural gateway for investing in Africa. Risk mitigation and investment protection in the region through its wide network of Investment Promotion and Protection Agreements (IPPAs), fiscal efficiency through its growing network of Double Taxation Avoidance Agreements (DTAAs), preferential market access through regional trading blocs, a hybrid legal system, state-of-the-art infrastructure, the presence of international players and a readily available pool of professionals are just some of the key benefits that Mauritius offers as the financial and investment Centre of Africa. As a result, today the country is home to some of the leading actors in the African private equity space including Helios, Actis and many funds backed by the African Development Bank, the IFC or FMO to mention but a few. The African Development Bank currently houses more than 50 % of its African private equity structures in Mauritius.
The Likely Path Forward ...
Mauritius has already established itself an African PE jurisdiction of choice and has effectively become a hub. Unfortunately Mauritius is not physically based on the continent and as a hub; it does need a spoke -- ideally based inside the continent. Mauritian financial services companies are looking to do business in the region with companies who have real experience in Africa. Companies in the SSA can then become partners to Mauritian companies with businesses in Africa or hoping to expand their business activities in the region.
Rwanda has been making progress in this direction (Disclosure: Hubert Ruzibiza is head of Services Development at the Rwanda Development Board (RDB)). As such Rwanda can position itself as a privileged partner of Mauritius and as the jurisdiction matures, become a jurisdiction of choice. Its proximity to growing markets, its political and economic stability as well as its safe and pleasant working environment are all very attractive attributes. Rwanda, among its peers, stands a great chance at being recognized as a haven of reliability and stability in a turbulent region, a place where there will be sound stewardship of assets and ownership rights will be respected even if the investments themselves are in other countries that are less stable; the country's path to economic success lies in the services sector.
A few other SSA nations are planning to position themselves. Botswana has been capitalizing on the nation's stability and proximity to SA to position itself. The result is so far mixed for many reasons -- partly because of the shadow of its big neighbor SA, also maybe because of the reliance of the local economy on a bursting diamond industry, and possibly because it did not exploit to the fullest the benefits of working closely with Mauritius. Otherwise, both SA and Kenya are also often mentioned as part of this jurisdictional race. Both economies given their scale and wealth of industries could with the right determination achieve such feat. Their actual PE activity at their respective local level is already drastically larger than either Mauritius or Rwanda. However, both the economic diversification and their natural endowment tend to serve as distraction with regards to their active participation in this race to become a preferred PE jurisdiction.
In the end, the key success factor will reside essentially in each nation's determination, approach and ability to implement. What is for sure is that the need for a continental alternative to complement Mauritius is there, and at least one other nation will soon effectively fill that void, for not only its own benefit, but also for the continent and its growing base of investors.
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