Trends in fund domiciliation and capital raising

Jersey Finance has commissioned a report from African Business magazine to discover the emerging trends for fund domiciliation and capital raising among worldwide investors and fund mangers with a connection to South African fund managers.

In our rapidly-evolving global market, the choice of fund domiciliation has become an increasingly salient issue for both investors and fund managers looking for efficiency, stability and transparency.

Jersey Finance has therefore commissioned an independent research report from African Business magazine surveying more than 60 investors and fund managers operating in jurisdictions worldwide and with a connection to South African managers to discover the emerging trends for fund domiciliation and capital raising, particularly as a route for private equity impact investing into the wider African continent.

The African opportunity

With its young and growing population, rising middle class and rapidly deepening capital markets, Africa presents an exponential opportunity.

The past two years have seen unprecedented capital commitments to Africa in foreign direct investment as the region becomes more economically and politically strategic. Over $200bn in foreign direct investment have been committed by China, Russia, the EU, Japan and UK during this period.

South African funds are facilitating flows into the wider African continent, and they are raising these funds across international capital markets, from America to Asia.

There is a role for international financial centres (IFCs) to play in extending their financial expertise into these investments alongside private and institutional investors in a cost and tax-neutral setting with support from DFIs.

The shifting geopolitics introduced by Brexit, Trumpism and now also Covid-19 are reconfiguring Africa’s place in the world and driving its rapid ascendency as investors realise that political risk is not confined to Africa and so-called “emerging markets” but are features of markets everywhere.

With increasingly stable African political economies, and low to negative interest rates prevalent in the developed world, suddenly Africa’s high-yielding opportunities don’t look so risky anymore.

South African fund managers are ahead of the curve with these opportunities and the past two decades have seen South African private equity expertise facilitate investment into retail, consumer, real estate and infrastructure across the wider African continent, typically partnering with DFIs from the UK and Northern Europe to drive economic development with often spectacular returns.

These days, it is more risky to be outside the African opportunity than to be inside it, actively participating in its economic acceleration.

Overview of findings

Our survey looked at the drivers of domiciliation and capital raising from many perspectives.

First, we find that the choice of jurisdiction ultimately rests with investors. Among investors, and the DFIs – situated in the US, UK and EU – in particular, 100% of capital is invested internationally, and given the substantial war chest of such investors, their portfolios are not limited to Africa.

They have no particular preference to using a particular jurisdiction, provided the level of governance and regulation is sound, with no major red flags. That said, EU investors retain some resistance to IFCs, particularly with the push for sustainable finance.

Many SA private equity funds investing into Africa use Mauritius because of its geographical context and this has been the status quo for many years. This will, however, be complicated by Mauritius still being on the EU blacklist at the time of writing.

Ultimate factors leading to the choice of jurisdiction are hence also investor-led and this is determined by some key factors. On pages 10-11 of the report, which looks at drivers of domiciliation: familiarity, cost, tax neutrality, regulation and governance, and the quality of local service providers and non-executive fund directors.

We find that, of these, top of mind for investors is the quality of the legal and regulatory framework, given the industry trend focused on transparency through anti-money laundering (AML), know-your-customer (KYC) and substance provisions resulting in increased regulatory reporting and costs only further exponentialised by the recent push for environmental, social and governance factors (ESG) to be incorporated into investment decision-making.

Political and fiscal stability is also an increasing factor, given the aforementioned geopolitical tumult due to Brexit, Covid-19, and the US-China trade war.

Apart from these frictions, we found managers and investors remain wildly optimistic about the African opportunity.

The report can be downloaded from the Jersey Finance website.