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Opinion

New PE framework in Francophone West Africa: Could this be a game changer?

Johanna Monthe, Partner, Epena Law
Aug. 7, 2020, 1:52 a.m.
328

Word count: 797

With the various threats to the Mauritius model caused by negative FATF and OECD listings, the question of “if not Mauritius, then where?” has been raised by many investors and managers in Africa. It is in this context that at the end of 2019, the World Bank and the CREPMF published proposed rules to create a legal framework for PE/VC funds and asset managers in the West African Economic Monetary Union region (WAEMU). WAEMU covers eight countries of West Africa, including the fast growing economies of Cote d’Ivoire and Senegal.

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With the various threats to the Mauritius model caused by negative FATF and OECD listings, the question of “if not Mauritius, then where?” has been raised by many investors and managers in Africa. It is in this context that at the end of 2019, the World Bank and the CREPMF published proposed rules to create a legal framework for PE/VC funds and asset managers in the West African Economic Monetary Union region (WAEMU). WAEMU covers eight countries of West Africa, including the fast growing economies of Cote d’Ivoire and Senegal.

The proposition came from the observation that out of the 26 VC and PE funds operating in the WAEMU region, only five were based in the region as of 2018, with most of the funds incorporated in Mauritius. There currently exists a framework for PE funds in the WAEMU. However, using this framework is hindered by a host of reasons, including:

  • uneven and incomplete implementation of such texts in member countries (for instance, Ivory Coast did not implement the tax regulation offering a preferable tax regime to PE funds);
  • difficult readability;
  • lack of alignment with international standards; and
  • absence of industry specific vehicles such as limited partnerships. 

In addition, the authorization process under the current framework is unclear and incomplete. The lack of implementation instructions on modalities for obtaining the investment fund licence has forced the few asset managers that have decided to establish their structures locally to go through a long and iterative process.

In order to remedy these inefficiencies and increase the competitiveness of the local framework for asset managers, the proposed new rules align with many international standards. These rules also introduce key changes such as the establishment of a limited partnership vehicle and the establishment of a special fund regime known as the simplified specialised investment fund (SSIF) regime. The SSIF is expected to follow the Luxembourg flagship specialised investment fund (SIF) framework, where funds that comply with risk diversification rules can avail themselves of this status.

Advantages of new regime

This new framework brings about several key advantages, such as an increased ability for managers to raise more money locally from investors with geographical investment restrictions (such as local insurers and pension funds) as well as presumably lower management costs, by simple virtue of being local. The new framework is also more readable for international investors as it follows the well tested Luxembourg model, while simplifying it since only two legal forms – both with features vary similar to limited partnerships (which are presumably the most common structures in a PE context). In addition, this framework now allows for the possibility to create structures with compartments and provides clear tax incentives such as no VAT on management services and exemptions and low rates on capital gains made on investments within the framework.

We have however noted some limits to the proposed rules. Some of these are:

Requirement to appoint a depositary. This requirement may be considered too burdensome by small managers. By way of context, many European jurisdictions make the appointment of a depositary optional if the asset under management are below a certain threshold, and Mauritius for instance, which is the most significant jurisdiction for Africa focused funds does not require the appointment of a depositary.

Limited legal forms are available - while this makes the framework more readable, it also restricts the use of standard forms of companies such as private limited companies, whereas those may be preferred by some managers, especially in a context where these are the most common form of companies in the region - and therefore forms that local investors making their first investments in funds may be more comfortable with. 

the new framework establishes a framework that follow the Luxembourg SIF model by enlarge. An important difference is that while the criteria to establish the WAEMU vehicle seem onerous, this vehicle does not seem to give guarantees that would be welcome by investors such as the prior (even optional) approval of the vehicles by the local financial supervisory authorities. In addition, the WAEMU SSIF includes certain peculiarities such as the requirement for each such funds to sign up to the UNPRI - which in other markets is an option to be elected by the manager based on the investment policy of the fund rather than a requirement deriving from the legal regime of the fund.

Conclusion: While the new framework constitutes a significant progress and should certainly attract more investment fund projects in the WAEMU region, it seems that some features of the project may be considered onerous for small size funds. It is also interesting to note that the new framework seems to be gearing the industry towards a particular type of impact investors and managers by imposing adherence to standards such as UNPRI.

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