South African fund managers: Trends in fund domiciliation and capital raising
Jersey Finance recently commissioned African Business magazine to produce an independent research report on the developing trends for South African fund managers regarding fund domiciliation and capital raising.
We caught up with Allan Wood, Global Head of Business Development at Jersey Finance, to discuss the rationale and outcomes of this pioneering research.
Allan, why did you decide to explore the issue of fund domiciliation for South African managers now?
The choice of fund domiciliation has become one of the most important issues for both investors and fund managers looking for efficiency, stability and transparency. From Jersey, we are able to provide a clear regulatory framework supported by good governance and the international networks to support capital raising worldwide. Within this setting, Jersey has a very strong commitment to supporting capital flows into Africa. This research follows on from our 2014 report, ‘Jersey’s Value for Africa’. Since then, we have been building our relationships on the continent and are aiming to become a global centre of excellence for capital raising in the global market for South African funds, which support investment into infrastructure and wider economic development on the continent. The African opportunity, with its young and growing population, rising middle class and rapidly deepening capital markets, has seen unprecedented capital flows being committed to the continent in recent years. We thought it would therefore be useful to explore these issues with funds and their investors.
Tell us a little bit more about the report itself…
More than 60 investors, fund managers and lawyers operating in jurisdictions worldwide and with a connection to South African managers were surveyed 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. Our survey looked at the drivers of domiciliation and capital raising from many perspectives. First, we found that the choice of jurisdiction still ultimately rests with investors, although funds are now becoming more mindful of their investors’ mindsets in their pitches. In terms of the spread of assets, among investors, and the Development Finance Institutions (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. This means they have no preference for any particular jurisdiction, provided governance and regulation is sound.
Did you discover any insights on what could tip the balance towards a jurisdiction from the investor perspective?
Ultimate factors leading to the choice of jurisdiction are also investor-led, and this is determined by some key factors. In the report, we look at drivers of domiciliation: familiarity, cost, tax neutrality, regulation and governance, and the quality of local service providers and non-executive fund directors. We found 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 – something only to be further increased by the recent push for environmental, social and governance (ESG) factors to be incorporated into investment decision making. We also find, given the turbulence in the international political economy such as Brexit, Trump and COVID-19, that increasingly, political and fiscal stability are also increasing factors for jurisdictional choice.
Mauritius has normally been the main location for South African funds, or global private equity funds investing into Africa. Did your respondents have anything to say about how Mauritius being on the blacklist will affect their operations?
Many South African private equity funds investing into Africa use Mauritius because of its geographical context and this has been the status quo for many years. This has, as you point out, been complicated by Mauritius still being on the EU blacklist when we completed the survey. We started work on the survey in February, and Mauritius was blacklisted by May. As you can imagine, this made the research very timely and dynamic. Many funds we spoke to said they were already thinking of restructuring and redomiciling, while others were taking a wait and see approach. The issues may take some time to sort out, and obviously present an opportunity for jurisdictions, like Jersey, that can offer stability and peace of mind for fund managers.
Are there any other findings you would like to leave us with?
Managers and investors remain wildly optimistic about the African opportunity. This research confirmed our belief that there is a vital 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 development finance institutions (DFIs), which are the main source of capital for South African managers. The increased interest in sustainable finance and ESG will only drive more capital towards Africa.
The report, ‘South African Fund Managers: Trends in Fund Domiciliation and Capital Raising’ can be downloaded here. Alternatively, for more information on the vital role Jersey can play in supporting capital raising, visit www.jerseyfinance.je