Historically low interest rates, significant dry powder, and investors’ persistent hunt for yield have propelled the growth of the fund finance market. As we look ahead, 2024 is expected to continue witnessing this impressive growth trajectory, underpinned by a surge in demand for more innovative financing structures and increased diversification of lenders. Subscription lines of credit have been the most prevalent form of fund financing in Mauritius. However, as the market matures, alternative forms of fund finance such as NAV-based loans, hybrid facilities, and general partner (GP) financings are gaining traction. In 2023, we saw even more diversified and bespoke financial solutions being developed in response to evolving client requirements. Also, as more lenders enter the fund finance space, borrowers can anticipate more competitive financing terms. Geographically, the fund finance market has primarily been U.S. and European centric. However, as Asia has seen explosive growth in the private equity sector, the fund finance market has been expanding into new geographical areas. In 2024, we expect Asia and other emerging markets to become significant players in the fund finance world and contribute to global market expansion. The fund finance market is not static and is subject to the impacts of regulatory shifts. In 2024, potential regulatory changes across global jurisdictions could affect fund structures, leverage ratios, and disclosure requirements. Market participants will need to track these changes vigilantly and adapt accordingly. Investors are increasingly drawn to fund finance due to the relatively low risk and predictable returns, given the asset class’s overall performance during economic downturns. However, it is worth keeping an eye on potential obstacles such as unforeseen regulatory changes, macroeconomic factors or a significant decrease in commitment levels.
In conclusion, the fund finance market in 2024 looks set for another year of robust growth, enhanced by innovation in financial products and geographical expansion. Stakeholders should be prepared to navigate any regulatory challenges, continue innovating, and capitalise on the emerging opportunities worldwide. As the private equity industry continues to grow, so too will investment in the fund finance market.
Mauritius global funds (that is, investment funds and their intermediaries) in Mauritius are regulated by the Financial Services Commission (FSC). The FSC has, since 2001, developed a very flexible set of guidelines as well as a consolidated regulatory and supervisory framework for the regulation of such global funds, namely the Securities Act 2005 (Securities Act), the Securities (Licensing) Rules 2007, the Securities (Preferential Offer) Rules 2017 (as recently amended by the Securities (Preferential Offer) (Amendment No. 2) Rules 2021, the Financial Services Act 2007 (FSA 2007), the Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008 (Securities Regulations 2008), the Financial Services (Peer to Peer Lending) Rules 2020, the Securities (Solicitation) Rules 2020, the Securities (Real Estate Investment Trusts) Rules 2021, and the Securities (Exemption) Rules 2021.
Fund formation and finance
Global funds – overview
The present regulatory framework contemplates two main categories of global funds, namely: an open-ended fund, also known as a collective investment scheme (CIS); and a closed-end fund, commonly known as a private equity fund. Global funds can be structured as companies incorporated under the Companies Act 2001 or as limited partnerships (LPs), which came into force pursuant to the Limited Partnerships Act 2011 (Limited Partnerships Act), or licensed as companies or partnerships holding a Global Business Licence (GBL) under the FSA 2007.
Any CIS or closed-end fund wishing to be approved, registered with, recognised and/or licensed by the FSC, under the Securities Act, must first apply to the FSC for authorisation as a CIS or closed-end fund in the manner set out in the Securities Regulations 2008, and obtain a GBL under the FSA 2007. Funds usually take the form of companies, LPs, protected cell companies (PCCs) or trusts. The typical vehicle used to structure a closed-end fund is a private company limited by shares or an LP, while a CIS is commonly structured as a public or private company, unit trust or PCC.
The Mauritian LP combines features of both a company and a partnership, and acts as another preferred vehicle for foreign investors that may provide flexibility in structuring a CIS. It can have separate legal personality just like a company, while at the same time enabling some partners, known as limited partners, to contribute and participate in the returns of the LP without being engaged in its day-to-day management. The GP is responsible for managing the business and affairs of the LP and is personally liable for the debts of the partnership. The GPs in an LP can elect for the LP to have a legal personality or not. If they elect so at the time of registration, they must file with the registrar of LPs a declaration signed by one or more of the GPs stating that the LP shall have legal personality. The register of LPs and certificate of registration shall state whether the LP has legal personality or not.
The Limited Liability Partnerships Act 2016 (LLP Act) was introduced to further equip the economy’s financial sector with innovative tools, as well as alternative and attractive vehicles to investors – the Limited Liability Partnership (LLP). Similar to the LP, the LLP combines features of both a company (holder of a GBL) and a partnership, where the LLP is incorporated as a body corporate having separate legal personality from its partners, thus providing the flexibility of a partnership. The LLP Act applies to a person (a) offering professional or consultancy services, (b) holding a Global Legal Advisory Services licence, or (c) engaging in other prescribed activities. An LLP has a separate legal personality from its partners. Under an LLP, the partner is accountable and liable to the LLP only to the extent of its contributions (except in the event of insolvency). The LLP is required to have at least two partners and one manager. The relationship between the partners and the LLP is governed under a partnership agreement.
On 1 January 2000, the Protected Cell Companies Act 1999 came into force, which created an incorporation and registration regime whereby a Mauritian company carrying out global business would be able to register as a PCC. A protected cell (known in some jurisdictions as a ‘segregated account’ or ‘segregated portfolio’) is an account containing assets and liabilities (known as ‘cellular assets’) that are legally separated from the assets of the company’s ordinary account, called its ‘non-cellular assets’, and also separate from assets and liabilities allocated to the company’s other protected cells (if any).
A trust, established under the Trusts Act 2001, is a legal relationship created by the beneficial owner creating the trust (the settlor) and the persons willing to undertake the office of trustee (the trustees). As part of this relationship, property (the trust fund) is declared held by the trustees for the benefit of certain parties (the beneficiaries) or for certain purposes, creating a binding obligation on the part of the trustees to act in accordance with the terms of the trust. Trusts are normally liable to income tax on its chargeable income. Chargeable income is calculated as the difference between the net income derived by the trust and the aggregate income distributed to the beneficiaries under the terms of the trust.
The regulatory and supervisory framework for global funds is in line with international principles and practices as laid down by the International Organization of Securities Commissions. Intermediaries ensure the proper functioning of investment funds and hence protect the best interests of investors. All global funds are therefore subject to ongoing reporting obligations, as imposed by the FSC under the Securities Act and the FSA 2007. Reporting obligations include submission of Audited Financial Statements and Quarterly Statutory Returns (Interim Financial Statements), in accordance with the FSA 2007. A fund is required to be managed by an investment manager licensed in Mauritius. A foreign regulated investment manager may alternatively be appointed, subject to the prior approval of the FSC.
As the private funds sector grows and matures in Mauritius, financing solutions are increasingly required by funds and fund managers. The need for finance can vary, from equity bridge or capital call facilities used to assist liquidity and speed of execution for private equity funds, to more esoteric products used by hedge funds in addition to their prime brokerage agreements, such as NAV-based margin loans to provide liquidity or leverage, and equity or fund-linked derivative solutions. Also, as more investors look to limit their investments to a smaller group of preferred sponsors, sponsors are also diversifying their product offerings. We have, for instance, noticed a trend involving a number of sponsors leveraging their existing investor relationships by creating funds focused on sectors in which they have not traditionally participated (i.e., buyout shops creating direct-lending funds).
General security structure for Mauritius transactions
Historically, funds have predominantly been incorporated as corporate structures. Some companies may have more than one class of shares, which denote various fee structures and/or limitations on the types of investments some shareholders can make. There may also exist multiple series within each class of shares. In order to widen its array of financial products, Mauritius introduced its Limited Partnerships Act, adding a new dimension to the international investment community. This investment vehicle enables global funds to be structured as partnerships in Mauritius, reducing the need for complex master-feeder structures and ensuring tax-efficient structures.
Mauritius has become a central hub for foreign direct investment into India and Africa due to its network of double taxation avoidance agreements and investment protection and promotion agreements with various African countries. However, while investors have been able to form global business companies for foreign direct investment, the more rigid structure of companies means they are not always perfectly suited for these investment projects. For example, for funds structured as a Mauritius corporation, a shareholders’ agreement governs the relationship with the shareholders rather than a partnership agreement. The obligation of shareholders to pay in capital contributions is contingent upon the issuance of further shares, and a corporation’s ability to issue shares is generally not delegable under Mauritius law, thus limiting the ability to make capital calls on investors in an event of default under the fund financing facility.
Security for the fund finance consists of: (a) a security assignment by the fund of the capital commitments, right to make capital calls, right to receive and enforce the foregoing, and the account into which the capital commitments are to be funded; and (b) a charge on the bulk of its other assets including its accounts, investments compensation from various of its assets including bonds, guarantees, negotiable instruments and the like. The security package relating to the capital calls is tailored in order to account for specifics of Mauritius law and the structure of the fund as a corporation (rather than an LP, as most funds in Mauritius are structured as corporations). In particular, various rights in respect of the fund are vested in the board of directors and cannot be easily delegated. Mauritius law requires that shares be issued in exchange for capital calls.
One would expect security to be taken over bank accounts of the fund and assignment of rights to make capital calls, accompanied by a power of attorney in favour of the lender to exercise such rights on behalf of the fund/GP and/or manager (as the case may be) in a typical fund financing security transaction. So, while one would have a pledge over the security provided above, the ability for a lender to make a capital call on its own would be complicated by the foregoing. In a worst-case scenario, the preferred enforcement mechanism would have the lender appoint a receiver (and, if necessary, a liquidator), as each have statutory authority to make capital calls and issue shares in order to satisfy creditors to whom such security is pledged. Indeed, after an event of default, a lender is entitled to appoint a receiver under the Insolvency Act 2009. Security documents, such as fixed and floating charge documents, would need to provide that if a receiver were appointed, it would have full management powers to the exclusion of the board of directors. Under the Insolvency Act 2009, the receiver would have the power to make calls of unfunded capital to the extent such assets are included in the charge granted to a lender and issue shares.
It is also recommended that a liquidator be appointed in order to avoid certain issues relating to the set-off of claims by shareholders against the called capital (described further below). The liquidator would also be permitted to call capital. For example, various contract law defences may be waived in Mauritius by contract in the situation where the fund is not in insolvency (including non-performance by the fund). Generally, such language is sought for three reasons: (a) to waive contract law defences such as lack of consideration, mutual mistake, impracticability, etc.; (b) to prevent LPs from claiming that they may set off amounts owed to them by the fund against what is due to the lender; and (c) claims that an issuance of shares or some other action by the fund is required as a condition for payment of capital contributions.
We recommend that such language be included in this transaction since, in the event of insolvency of the fund, the language may prove helpful and could avoid other defences raised by shareholders that their commitment to contribute capital is a ‘financial accommodation’ or otherwise avoidable under insolvency laws. Such ability to waive in advance the right to raise the defence above and other defences by contract could be inserted in the contract (presumably by amendment to the shareholders’ agreement or by an investor letter); however, general waivers are not effective, so specific waivers would be required as to each of the possible defences.
Moreover, such contractual waivers would not be effective in a number of circumstances, including rights to set-off pursuant to the Insolvency Act 2009. By statute, under the Insolvency Act 2009, while a receiver is in place, principles of contractual, legal and equitable set-off apply that would permit set-off by shareholders, and such set-off is available to the extent that claims have been incurred prior to the commencement of the liquidation (subject to other limitations). To avoid such risk, we normally recommend the initiation of winding-up by a lender by appointment of a liquidator, as such appointment would crystallise the liability of shareholders as a statutory liability that cannot be set off against amounts owing to the shareholder.
Some of the salient amendments made to the present regulatory framework are as follows.
Introducing the Variable Capital Companies Act 2022
The Variable Capital Company (VCC) is a highly versatile fund scheme designed to encompass a wide range of investment activities. It achieves this through the organisation of investment portfolios into segmented sub-funds and special purpose vehicles, which effectively segregate and protect assets and liabilities. The VCC structure is applicable to various investment funds, including mutual funds, hedge funds, private funds, private equity funds, and real estate funds. One key feature of the VCC is that the winding-up of any sub-fund does not automatically trigger the winding-up of the entire VCC. Key features of the VCC include:
- The VCC is a separate legal entity with full corporate rights.
- The name of the VCC must contain either the phrase ‘Variable Capital Company’ or the term ‘VCC’.
- The VCC must be incorporated with the Registrar of Companies (ROC) as a VCC.
- A licence must be obtained from the FSC for the VCC to operate as a VCC fund.
- The VCC can operate through sub-funds or special purpose vehicles, which must also be licensed by the FSC.
- The VCC and its sub-funds or special purpose vehicles share the same directors and registered address.
- A written constitution is mandatory for the VCC.
The constitution of a VCC should clearly state its main objective as a fund and address important matters such as the establishment policy for sub-funds or special purpose vehicles, fair valuation of assets and liabilities, rights attached to each class of shares, and issuance, redemption, or repurchase of shares.
A VCC can be:
- Incorporated specifically as a VCC by the ROC.
- An existing company converted into a VCC.
- A foreign entity registered with the ROC to operate as a VCC.
Status of sub-funds and special purpose vehicles
Sub-funds or special purpose vehicles within the VCC structure are not automatically considered subsidiaries of the VCC. However, each sub-fund or special purpose vehicle is entitled to have a separate name and legal entity from the VCC, with distinct investments. They are required to be licensed by the FSC and file financial statements separately. This separation also extends to legal proceedings, where any judgment or order is limited to the specific sub-fund or special purpose vehicle. A sub-fund can operate as either a CIS or a closed-end fund. Its name must indicate that it is an ‘incorporated VCC sub-fund’. On the other hand, a special purpose vehicle functions solely as an ancillary vehicle to the VCC or a sub-fund and cannot operate as a fund. Its name should include the phrase ‘VCC special purpose vehicle’.
Amendments to the Securities (Preferential Offer) Rules 2017
The FSC has introduced the Securities (Preferential Offer) (Amendment) Rules 2023 to clarify and align regulations regarding the issuance of debt securities with current market practices. These amendments bring significant changes in the following areas.
Expansion in the definition of ‘issuer’
The definition of ‘issuer’ has been expanded to include issuers of various debt securities such as debentures, debenture stock, loan stock, bonds, convertible bonds, or analogous instruments. This broader scope ensures that a wider range of financial transactions falls under the rules.
Clarification on the application of the 2017 Rules
The amendments provide clear guidelines on the application of the 2017 Rules. The rules will not apply to debt securities issued through privately negotiated agreements without solicitation or public offerings governed by the Securities (Public Offers) Rules 2007.
Notification requirements to the FSC
Issuers of debt securities are no longer required to notify the FSC within 10 days of making a preferential offer.
The registration procedure for issuers of debt securities is as follows:
- Rule 9A mandates anyone issuing debt securities to register the offer with the FSC at least 14 days prior to its launch, providing the required information outlined in the First Schedule of the 2017 Rules.
- Issuers who have issued debt securities from 31 August 2016 to 31 October 2023 must additionally submit details specified in the Second Schedule to the FSC within 30 days from 16 October 2023.
Amendments to the Companies Act 2001
Key changes have been made to the Companies Act 2001:
- Public listed companies must have a minimum of 25% women on their boards of directors.
- When the last remaining director of a company resigns or passes away, shareholders must hold a meeting within one month. Failure to do so may result in the ROC removing the company from the register.
- Financial statements and auditors’ reports for the most recent accounting period must be sent to each shareholder at least 21 days before the annual meeting. Shareholders can request printed copies within a reasonable time.
Amendments to the FSA 2007
Licensees of the FSC must submit an independent compliance report based on terms and conditions set by the FSC. The FSC is empowered to determine the form and manner of filing and submitting documents, and the FSC’s recovery of outstanding fees and charges under the FSA 2007 is not hindered by any limitation provisions.
Amendments to the Securities Act
The definitions of ‘closed-end fund’ and ‘collective investment scheme’ have been expanded to include ‘money market instruments and debt instruments’. These terms now encompass arrangements and schemes that diversify risks and invest funds in portfolios of securities, money market instruments, debt obligations, other financial or non-financial assets, or real property, as approved by the FSC. Closed-end funds listed on a securities exchange are also covered.
Amendments to the Virtual Asset and Initial Token Offering Services Act 2021
The custodian of a virtual asset can hold securities tokens or other approved instruments, despite any contrary provisions in the Virtual Asset and Initial Token Offering Services Act. A person licensed as a custodian for digital assets by the FSC is considered licensed as a Class R Virtual Asset Custodian from 6 August 2023, following terms and conditions set by the FSC.
The year ahead
Looking ahead, the fund finance market is poised to continue its trajectory of evolution and innovation. Fund managers, finance providers, and industry stakeholders must remain vigilant and adaptable in the face of ongoing changes, leveraging emerging trends and opportunities to drive sustainable growth and value creation.
In conclusion, the fund finance market in 2023 was characterised by its dynamism, adaptability, and commitment to addressing the evolving needs of the global financial ecosystem. Alternative lending models are reshaping the fund finance market, offering new avenues for funds to access capital. Peer-to-peer lending, crowdfunding, and other non-traditional financing platforms are providing additional options for fund managers seeking flexible and tailored funding solutions, contributing to the diversification of the fund finance ecosystem. The fund finance market has demonstrated remarkable resilience and adaptability in the face of unprecedented disruptions. As the world grappled with the effects of the global pandemic and ongoing geopolitical changes, fund finance has shown its ability to adjust to new realities and deliver innovative solutions to meet the diverse needs of fund managers and investors. In 2023, sustainable finance played an increasingly pivotal role in the fund finance landscape. With environmental, social, and governance (ESG) considerations gaining prominence across industries, fund finance providers are incorporating sustainability criteria into their lending and investment decisions.
This trend reflects a broader shift towards responsible and impactful financing practices within the fund finance market. The integration of technology and digitisation is revolutionising fund finance operations. From digital platforms streamlining lending processes to the implementation of advanced data analytics for risk assessment and portfolio monitoring, technology is empowering fund finance players to enhance efficiency, transparency, and operational resilience. As the industry embraces technological advancements, sustainable finance practices, and innovative funding models, it stands ready to navigate the challenges and opportunities that lie ahead, fostering a resilient and progressive fund finance landscape.
Our leading Mauritius Fund Finance Team has collaborated extensively with key market participants in the past 18 months. Despite ongoing economic uncertainties and potential market volatility, our outlook for a resilient fund finance market in 2024 remains cautiously optimistic. While investor focus on central bank actions and inflation control persists, our expertise positions us at the forefront of Mauritius’ fund finance landscape.