Private equity haven in the economic storm

With funding options declining in other parts of the world, a small but growing private equity community has emerged in Monaco, where government policies have opened competition, writes Zsolt Lavotha.

As concerns for the future of the Eurozone dominate international headlines, private equity fund managers and investors are increasingly focused on the value of stability in the tax and regulatory environment in which they operate.

The Principality of Monaco is famous for its casino, lifestyle, Grand Prix and yacht show. What may come as surprise is that this nation of less than 40,000 residents has been quietly growing as a hub for private equity.

The Monegasque financial industry has diversified from its traditional staple of private banking and is slowly beginning to make a name for itself as a serious and internationally attractive jurisdiction for investment funds, with 3,000 individuals working for nearly 80 companies in the Principality’s financial services industry.

Since the beginning of the crisis, deposits held in financial institutions in the Principality including in private equity funds have significantly increased, with nearly €80 billion deposited with credit institutions in 2010. While still limited in size, the trend is clearly established; and, since the passing of new legislation in 2007 introducing international standards in fund regulation, growing numbers of managers and advisors of foreign funds have chosen to base their operations in Monaco.

Zsolt
Lavotha

With the world’s highest GDP per capita and longest life expectancy, Monaco’s demographics lend themselves well to firms. An active and activist investment community of entrepreneurs, many from abroad and wishing to play the role of investor, is being encouraged and serviced by organisations such as the Monaco Private Equity and Venture Capital Association, whose board comprises several notable entrepreneurs in their own right.

At the same time, the government has created policies and bolstered competitiveness to nurture a nascent investment industry with private equity and local fund management at its heart.

These reforms have guaranteed that Monaco remains a domicile for funds in an environment of strict conditions that ensure funds preserve investors' interests.

Foreign funds can be also managed in the Principality while at the same time benefiting from Monaco’s reputation, highly attractive regulation and a favourable taxation environment. Additionally, just as income tax is not levied in Monaco, private equity funds themselves are not subject to taxation.

These structural and regulatory opportunities have led to the creation of a growing advisory and audit industry with ever increasing sophistication and expertise in the Principality, able to assist with relocation of existing funds and management from other locations, as well as helping to register and then service new funds.

These reforms and regulatory arrangements are successfully drawing funds, asset management activities and investors as well as those seeking capital to the sunny shores of the Mediterranean. As an example, in 2010 there were 64 Monegasque funds active in Monaco representing assets of €5.2 billion; €8.5 billion under discretionary management; €9.2 billion corresponded to advised/controlled activity by regulated entities, and management of foreign funds reached €7.2 billion. These numbers illustrate the growing importance of financial activities in Monaco, at least in terms of assets under management, since the adoption of the new legislation in 2007. 

The Monaco Private Equity and Venture Capital Association is seeing an increasing interest from those seeking venture capital funding. With banks across the EU under pressure to increase lending to start-ups and small businesses but often failing to do so, the flight to locations where individual investors can provide the necessary injection of capital has increased.

Monaco’s tax regime is attractive to entrepreneurs and with funding options declining elsewhere in Europe, Monaco has become an increasingly attractive centre for investment sourcing and with it, a burgeoning hub of innovation in cutting-edge sectors, particularly technology and shipping.

Monaco’s private equity and venture capital industries may be small in comparison to those of the major financial centres of Europe, but as funds, investors and those seeking capital seek refuge from the financial troubles across Europe and the world, the harbours of politically stable Monaco appear safer than ever during this financial storm.

Zsolt Lavotha is the Chairman of the Monaco Private Equity and Venture Capital Association (MVCA).