By Lance Lawson, Business Development Consultant at Sovereign Trust SA

As investment strategies, asset classes and investor bases become increasingly international, purely domestic fund structures can place South African investment managers at a competitive disadvantage. For this reason, offshore fund formation is no longer a niche activity. Rather, it has stepped into the spotlight as a strategic response to the realities of operating in global capital markets.

At its core, an offshore fund offers credibility, scalability, and access. Global allocators, including institutional investors, development finance institutions, and high-net-worth individuals, are far more comfortable deploying capital into structures domiciled in established international financial centres, and jurisdictions such as Mauritius, Luxembourg, Malta, and the Cayman Islands offer legal and regulatory frameworks that are well understood, predictable, and aligned with global investment norms.

Tax efficiency is another important driver. Many offshore jurisdictions operate on a low or neutral tax basis at the fund level, while also having extensive double taxation agreement networks to prevent unnecessary tax leakage on cross-border investments. Crucially, these benefits sit firmly within the bounds of international best practice and South African tax compliance, including economic substance requirements and anti-avoidance rules.

Offshore structures also offer a degree of flexibility that is difficult to replicate domestically. They accommodate global standards in fund mechanics – limited partnerships, carried interest arrangements, co-investment vehicles, and multiple share classes – making it easier to align investor expectations, fee models, and governance frameworks.

Importantly, going offshore does not mean disengaging from South Africa. In many structures, the investment management or advisory function remains local, earning fees and retaining skills, employment, and value creation onshore, while the fund itself is domiciled in an internationally competitive jurisdiction.

When establishing an offshore fund, the following four critical steps must be approached correctly and in the right sequence:

Step 1: Define the strategy and structure

Every offshore fund journey starts with clarity. Investment strategy, target investor profile and geographic focus all influence the choice of jurisdiction and vehicle.

At this stage, managers need to be clear on exactly what they are building. This includes deciding what type of fund to  establish (private equity, venture capital, hedge, credit or property) and whether it will be open or closed-ended, who the target investors are, and what they expect in terms of returns, liquidity and reporting, as well as how governance structures and fee arrangements will be set up. Getting these fundamentals right early on is critical, as they inform the choice of jurisdiction and vehicle and ultimately shape every step that follows.

Step 2: Jurisdiction selection and tax planning

Choosing the right jurisdiction is a balancing act. Tax efficiency matters, but so does regulatory credibility, treaty access, and investor familiarity. Increasingly, economic substance requirements and international transparency standards play a central role in this decision.

All of this makes early, well-considered tax planning essential. It ensures compliance with South African rules around controlled foreign companies and place of effective management, while avoiding the need for costly restructuring once capital has been raised.

Step 3: Regulatory licensing and fund formation

With the structure agreed, attention turns to formal establishment. This phase is often the most technically complex, involving multiple stakeholders and workstreams.

It typically includes drafting offering memorandum and constitutional documents, appointing directors and service providers, securing regulatory approvals, and establishing banking and custody arrangements. Coordination is key; misalignment at this stage can delay launch timelines and undermine investor confidence.

Step 4: Substance, operations, and ongoing compliance

Modern offshore funds are expected to demonstrate real substance. This goes beyond having a registered address. It requires meaningful governance, decision-making, and operational oversight.

Ongoing obligations include regulatory filings, audits, investor reporting, and compliance monitoring. Offshore fund formation is not a once-off event, but the beginning of a long-term operational commitment that must stand up to scrutiny from regulators and investors alike.

In an environment where capital is increasingly selective, offshore fund structures can provide South African investment managers with the platform they need to compete globally.

But, the most important decision is not where to domicile a fund – it is who you partner with. Working alongside professionals with deep international legal, tax and operational expertise can mean the difference between a structure that merely exists and one that truly enables sustainable growth.

Contact Lance Lawson at the Sovereign Group to learn more.