A Closed-End Fund (CEF) is a type of investment fund with a fixed number of shares. Unlike open-end funds, which continuously issue new shares and redeem existing ones, CEFs raise capital through private placement through one or several closings or by way of a prospectus on a Stock Exchange. In Mauritius, CEFs are regulated by the Financial Services Commission under the Securities Act 2005 and the relevant rules and guidelines.
A CEF Single Fund in Mauritius operates as a stand-alone entity with a fixed pool of capital and a defined investment strategy.
CEF approval is usually granted to a Professional CIS who has less than 100 shareholders and cannot be a Reporting Issuer or where listing is envisaged on a securities exchange.
Where a CEF has made a public takeover offer by way of an exchange of securities or similar procedures, it will be considered to have done a reverse listing and thereby subject to the Reporting Issuer rules and regulations.
Regulatory Framework in Mauritius
The regulatory environment in Mauritius provides a robust framework for the establishment and operation of CEFs. Key aspects include:
- Licensing and Compliance: CEFs must obtain an approval from the FSC. The application process involves submitting detailed documentation, including the fund’s constitutive documents, risk management policies, and the credentials of the fund manager and other key personnel.
- Corporate Governance: CEFs must adhere to corporate governance standards, ensuring transparency, accountability, and protection of investors’ interests. This includes regular financial reporting, independent audits, and compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulations.
- Taxation: Mauritius offers attractive tax incentives to investment funds, including a low corporate tax rate, exemption from capital gains tax, and access to a wide network of double taxation avoidance agreements (DTAAs). This favourable tax regime enhances the net returns for investors.
Establishing a CEF in Mauritius: When and Why?
Fund managers may consider establishing a Closed-End Fund in Mauritius under various circumstances:
- Targeting Long-Term and Illiquid Investments: For managers looking to invest in assets that require a longer time horizon to mature, such as infrastructure projects, real estate developments, or private equity, a CEF provides a stable capital base without the pressure of redemptions.
- Pursuing Specialised Investment Strategies: CEFs are well suited for niche investment strategies that may involve illiquid or less traditional assets. Examples include distressed asset investing, sector-specific strategies (e.g., renewable energy), and regional focus (e.g., African markets).
- Enhancing Investor Returns through Leverage: CEFs can use leverage to enhance returns, as the fixed capital structure allows for better management of borrowing. However, this also introduces higher risk, which may be managed prudently.
- Providing Income to Investors: Managers aiming to provide regular income to investors can benefit from the CEF structure. By investing in high-yield securities and distributing earnings as dividends, CEFs can attract income-focused investors.
- Using Mauritius’s strategic advantages: Establishing a CEF in Mauritius allows fund managers to leverage the country’s strategic advantages, including its favourable tax regime, robust regulatory framework, and strategic position as a gateway to African and Asian markets.
Successful CEF in Mauritius
To illustrate the practical application of a CEF in Mauritius, consider the case of a fund manager establishing a CEF to invest in renewable energy projects across Africa. The fund raises capital through an IPO and lists its shares on the Stock Exchange of Mauritius and a dual listing with JSE. The fixed capital structure allows the manager to invest in long-term projects, such as solar and wind farms, without worrying about liquidity pressures. The fund benefits from Mauritius’s favourable tax regime and strategic location, providing investors with security comfort through Bilateral Investment Treaties with African countries, attractive returns and exposure to high-growth markets.
To sum up, Closed-End Funds (CEFs) offer a flexible and robust investment structure for fund managers seeking to implement long-term, specialised, or income-generating investment strategies. Mauritius provides an attractive jurisdiction for establishing CEFs, with its favourable regulatory environment, strategic location, and tax incentives. Fund managers should carefully consider the regulatory, operational, and strategic aspects when establishing a CEF in Mauritius to maximise the benefits for their investors and ensure the fund’s success.
