Beyond Structuring: What African Investors Look for in Practice

As African fund managers seek to attract both domestic and international capital, understanding investor expectations is increasingly important. From demonstrating a credible track record and navigating liquidity challenges to establishing strong governance and operational frameworks, successful fund formation requires more than choosing the right structure.

Drawing on insights from a recent Jersey Finance roundtable in Cape Town, Dr Rufaro Nyakatawa, Director – Africa, Jersey Finance, explores the practical considerations shaping investment decisions and the role of experienced advisers and international finance centres, such as Jersey, in supporting African fund managers.

What investors look for depends on who they are. Family offices, high-net-worth individuals, fiduciaries, pension funds, development finance institutions and other institutional investors will each assess opportunities differently. Their requirements will be shaped by their objectives, risk appetite, existing portfolio and obligations to stakeholders.

“It depends on who your investor is when you start up a fund, and it’s very important to consider that because that takes you down very different paths.”Mike Capraro, Funds Client Director, ZEDRA

Managers therefore need to understand where their strategy sits within the target investor’s wider portfolio. A venture capital fund will not be assessed in the same way as a lower-risk listed strategy, but investors will still expect the potential return to reflect the risk involved.

Clarity is important. Managers should be able to explain what the fund will do, what distinguishes it and why it is relevant to the investors they are approaching. The structure, jurisdiction, governance, fees and liquidity terms must then support that proposition.

Participants encouraged managers to test these elements with prospective investors before proceeding with the full establishment process. This can identify areas of concern early and reduce the risk of creating a structure that does not meet the expectations of its intended market.

The group considered what track record means in practice, particularly for emerging managers.

Participants distinguished between a manager establishing an independent business for the first time and someone entering fund management without relevant experience. An emerging manager may have spent years selecting and managing investments within an established institution, even if they have not previously operated a fund under their own name.

Investors will want to understand that experience in detail. They are likely to examine the manager’s role in previous investment decisions, the results achieved and whether the team has experience of managing assets through a complete investment cycle.

One participant gave the example of a manager that had raised a R25 million first fund but was finding it difficult to secure support for a second. The experience demonstrated that deploying capital and reporting valuations may not, on their own, provide sufficient evidence for prospective investors.

For allocators considering private-market funds, realised returns can be particularly important.

As the participant told the group:

“Returning capital is so important.” They added: “We looked at businesses that have DPI. Like, have you returned money to investors?” 

Track record is therefore about more than headline performance. Investors want to understand whether managers have realised investments, made distributions and demonstrated that their strategy can work across a complete investment cycle.

Much of the discussion focussed on liquidity and the exit environment for South African venture capital and private equity investments.

Participants described gaps between different stages of the funding market. Seed-stage managers can find themselves supporting businesses for longer than originally anticipated because there are too few later-stage investors available to provide follow-on capital or acquire earlier holdings. One fund manager described how this is affecting investment horizons:

“You have to become a multi-stage investor because there’s not very many Series A funds that are willing to pay for seed funds to exit.” 

The participant added: “Liquidity is a big issue and there’s very few investors that want to buy secondaries.” 

Managers may therefore need to continue supporting portfolio companies beyond the point at which they had initially expected to exit. This can extend holding periods, require further capital and delay distributions to investors.

The roundtable considered the role of trade sales, private equity buyers, secondary transactions and search funds in creating additional routes to liquidity. Development finance institutions and corporate investors were also identified as important participants in parts of the market.

Permanent-capital vehicles were discussed as another possible response. One participant explained that this model had worked well for their business, while others noted the potential value of structures that are not constrained by a conventional closed-ended fund term.

No single model will be appropriate for every strategy. However, the discussion demonstrated the importance of considering liquidity from the beginning.

Investors will want to know how portfolio assets may ultimately be realised, whether proceeds from earlier exits will be distributed or reinvested and how any remaining assets will be managed as a fund approaches the end of its life.

These questions are particularly relevant to family offices. One family office adviser noted:

“For families, when we’re looking at protecting capital through generations, the bar to actually then allocate towards venture is very high.”

Governance, scale, track record and a credible route to liquidity all influence whether a family is prepared to make that allocation.

Although cost and performance remain important, governance was repeatedly identified as a determining factor in investment decisions.

Investors need confidence in how decisions will be made, who will oversee the fund and what safeguards are in place around their capital. The quality of the jurisdiction, regulatory framework and appointed service providers all contribute to that assessment.

Governance cannot therefore be treated as a secondary consideration or addressed only once an investment strategy has been finalised. It forms part of the proposition that investors and their advisers will assess.

Operational decisions cannot be separated from the investment proposition.

Managers need administrators and other providers with appropriate experience, resources and systems. The requirements of an open-ended listed fund can differ considerably from those of a closed-ended private equity or venture capital structure, so relevant asset-class expertise matters.

Participants often encourage managers to look beyond a provider’s name and examine its practical capabilities, including the information its systems can produce and how that data will support investor reporting.

Mike Capraro described the administrator as a particularly important relationship:

“Your administrator, that relationship, is your most vital partnership. Go and kick the tires. Go look under the bonnet.” 

Customer due diligence requirements should also be understood early. Where investors come from several markets, their expectations of the onboarding process may differ from those of the jurisdiction in which the fund is established.

Banking was another practical consideration raised during the discussion. He recalled a period when crypto strategies were gaining wider attention and managers could secure regulatory and administrative support but still encounter difficulties opening an appropriate bank account:

“The regulator was happy with crypto funds. Administrators, in terms of their risk appetite, were happy with administering crypto funds, but lo and behold, the big banks didn’t have crypto in their risk appetite.” 

The example demonstrated why managers need to consider the complete operating model before establishing a structure. A strategy may be acceptable to the regulator and administrator but sit outside a bank’s risk appetite.

Early coordination between the manager, administrator, legal advisers, bank and other specialists can help identify these issues before they become barriers to launch.

The conversation highlighted the importance of seeking advice while a fund proposition is still being developed.

A fund brings together investment, legal, regulatory, tax, administrative and commercial considerations. Each adviser sees the proposition from a different perspective, and decisions taken in one area can have consequences elsewhere.

Fund administrators can provide practical insight into incorporation, investor onboarding, accounting, transactions, reporting and regulatory obligations. Legal and tax advice remains essential to ensuring that the structure is appropriate and properly documented.

The strongest outcomes are achieved when these different areas of expertise are considered together and in the context of the manager’s commercial objectives.

This support can be especially valuable for emerging managers, which may be operating with limited resources while raising capital, building a team and developing an investment pipeline.

The roundtable also considered how jurisdictional choice fits within the wider fund proposition.
The appropriate jurisdiction will depend on the intended investors, where capital will be deployed, the chosen structure and the cost of operating it. In some cases, a co-investor or development finance institution may also have a jurisdictional preference.

Rufaro recalled speaking to a South African manager establishing a second fund where investor requirements had directly influenced that decision:

“One of the co-investors is a DFI, and the DFI specified to say we want you to set up in Jersey.” 

Jersey Finance was able to connect the manager with other fund managers that had experience of operating Jersey structures with investment from development finance institutions.

Other participants with experience of Jersey highlighted its governance standards, forward-looking regulatory environment and established professional network.

For African managers seeking international capital, Jersey offers an established funds platform supported by administrators, lawyers, accountants, directors and compliance professionals with cross-border experience.

This expertise can help managers assess whether a Jersey structure is suitable, understand its operational and regulatory requirements and develop arrangements that meet the expectations of international investors.

Jersey’s role is to provide the governance, expertise and international framework through which a credible investment proposition can be structured and administered. The strategy, investor demand and route to returns must come from the manager, but the right jurisdiction and advisory network can provide investors with greater confidence in how the fund will operate.

The conversation in Cape Town showed that structuring is one part of a much broader process.
A successful fund must respond to the needs of its intended investors, demonstrate how value will be created and returned, and provide confidence in its governance and operation.

For advisers and service providers, the role is to help managers address these considerations early and select arrangements that reflect the capital available, the strategy being pursued and the markets involved.

Jersey Finance will continue to bring together fund managers, investors and advisers across Africa and Jersey, creating opportunities to exchange perspectives and strengthen connections across the international funds community.

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