The alternative funds' industry constitutes one of the Egyptian economy's cornerstones. It has been continuously growing since 2018, especially following the significant amendments made to the Egyptian Capital Market Law and its Executive Regulations in that year.
Many alternative investment funds are operating in the Egyptian market, adopting a wide array of investment policies, patterns, models and sizes to enlarge both corporate and individual investors' growth, which positively impacts the Egyptian economy. The Egyptian pound's devaluation has been counted as a competitive incentive for foreign investors to invest and expand their business in Egypt.
Further, the Egyptian state has recently become involved in alternative investment funds activity, establishing its first sovereign wealth fund (ESWF), which is by far the largest alternative investment fund in Egypt. The primary aim of the ESWF is to sustainably develop the enormous state-owned assets and natural resources to maximise the outgrowth of the value of such assets. The SWF's primary strategy is to use the Egyptian state's utilised and unutilised assets to co-develop, with private investors, to achieve high growth of returns. To this end, the ESWF adopts various investment models and patterns, mainly aiming at operating through sub-funds and affiliate companies to invest in specific/specialised sectors or projects, with private investors. The ESWF primarily targets domestic investment by establishing sub-funds with specialised purposes/activities. The prioritised sectors for investment by the ESWF are food and pharmaceutical manufacturing, healthcare services and financial services and financial inclusion sectors.
Accordingly, a sub-fund of ESWF has been recently established with the purpose of investing in non-banking financial services, digital transformation, financial inclusion, financial technology, including insurance and reinsurance services, real estate financing, financial leasing, commercial factoring, microfinancing and securitisation.
The primary legal and regulatory framework governing the alternative funds' industry (including all the relevant parties) is the Egyptian Capital Market Law (ECML), its Executive Regulations, the Egyptian Financial Regulatory Authority (FRA) and its decrees/circulars issued in this regard.
The recent amendments to the ECML and its Executive Regulations have facilitated and provided for multiple funding mechanisms. The legislator entitled the FRA to manage the entire regulatory process governing the private equity funds' activity in the Egyptian market. It is worth highlighting that private equity funds can also undertake venture capital activity, subject to compliance with the FRA requirements in this regard. Further, the FRA has taken an unprecedented step of qualifying the financial institutions, including alternative investments funds, to utilise their assets in several projects, granting the ability to list the shares of these projects on the Egyptian Stock Exchange (EGX) as an additional funding platform for their future projects.
We anticipate that the recent amendments will lead to a flourishing of private equity practice in the Egyptian market, and will generally benefit alternative investment funds' activities at all levels.
The Executive Regulations of the ECML lists various types/categories of the alternative funds that can be established in Egypt – such open-end funds, closed-end funds, index funds, real estate investment funds, income funds, money market funds, charitable funds and Sharia-compliant funds. All these alternative funds are common and operative in Egypt. Such alternative funds are atypical in various aspects – for example, prospectus/disclosure memorandum, target investor and investment policy.
According to Article 142 of the Executive Regulations of the ECML, an investment fund shall be in the form of a joint-stock company (JSC), with a minimum paid-in capital of EGP5 million to be paid by the founders of the fund pro rata their ownership percentage in said fund. Aside from the said rule, banks, subject to the prior approval of the Central Bank of Egypt (CBE), as well as insurance companies, subject to the FRA's prior licensing, may undertake investment fund activities, solely or with a third party.
The Articles of Association of the funds shall contain certain data/information to be provided into the templates pre-set by the FRA. This data/information includes the fund's name, type, duration, address, founders and their respective shareholding percentage, board members and their respective authority, capital and its increase events together with its maximum ratio relative to the money for which the securities will be issued, auditors, disclosure requirements of the related parties, investment manager's obligations, liquidation events and manner, custodian's obligations and secondary offering procedures as to the closed-end funds.
Principally, all types of funds are governed by the ECML together with its Executive Regulations, and regulated by the FRA and its decrees issued in this regard.
Generally, the ECML requires the fund’s disclosure/prospectus memorandum to allocate the investment ratios, subject to the minimum and maximum investment ratios provided under said regulations, and subject to the FRA approval, depending on the type of the invested asset(s). For instance, the fund’s invested ratio in purchasing securities of one company shall not exceed 15% of the fund’s net assets, as well as 20% of the total securities of such company.
The FRA has been recently inducing investors towards the incorporation of alternative investment funds as it attempts further to facilitate the licensing procedures of alternative investment funds. To this effect, the FRA has introduced several amendments to the regulations governing alternative investment funds. For instance, the amendments now permit Egyptian private legal entities, aside from those are subject to the FRA’s supervision, to undertake investment funds activity. Accordingly, banks can engage in investment fund activity, whether directly or indirectly and whether solely or with a third party, subject to (i) the approval of the CBE together with the FRA, and (ii) the purpose of the bank under its statutes, where the investment funds activity shall be explicitly provided amongst other activities. Also, the amendments provide a set of rules that shall be considered and satisfied by a legal entity to obtain the FRA’s investment fund licensing, inter alia, as follows:
Further, a legal entity licensed to undertake investment funds’ activity is committed to appointing a supervising committee, monitoring the investment fund. The members of such committee shall not exceed five members, including one representative of each entity. In contrast, the remaining members shall be independent and experienced per the rules of expertise and competence, as issued by the FRA. Moreover, alternative investment funds are now permitted to invest in various financial instruments (eg, assignment of futures), subject to specific legal and financial requirements, inter alia, as follows:
With respect to the characteristics of an investment, the FRA further allows alternative investment funds to engage in some activities related to the development of specialised investment sectors, inter alia, agricultural and industrial development sectors, and any related or supplementary activities, in accordance with the investment policy of the alternative investment fund. The engagement in such activities can be undertaken through either direct investment in the assets of the target projects or indirectly via purchasing the shares issued by the companies operating in such target projects. Accordingly, the investment policy of such alternative funds investing in specialised sectors shall disclose in its relevant disclosure memorandum certain matters, inter alia:
Moreover, the board of directors of the alternative fund, or its supervising committee, as the case may be, shall undertake approval on all related party contracts or resolutions, to which the alternative fund is a party.
Further to the above limitations, there are additional limitations set out by the FRA with respect to the alternative investment funds specialised in financing the microfinance activity in dealing with fungible assets, financial instruments, securities via purchasing microfinance portfolios from the entities first licensed by the FRA to undertake microfinance activities. The licensing of dealing with financial instruments is only granted to closed-end alternative investment funds, whose securities were offered in a private placement, provided that the principal fund shall have the purpose of dealing in the financial instruments through financing the entities licensed by the FRA to undertake microfinance activities. For that purpose, the alternative fund’s investment policy enclosed in the prospectus/disclosure memorandum, as the case may be, by virtue of which the investment manager may purchase microfinance portfolios from the entities licensed by the FRA, shall in particular entail:
The alternative investment fund is also allowed to direct a portion of its funding, not exceeding 10% of its net assets for investment, to the other financial instruments for cash flow purposes, provided that such other financial instruments shall be disclosed under the disclosure memorandum along with the relevant maximum limits.
As for the investment limitation of real estate alternative investment funds (REIFs), investment in the earning assets – whether real estate assets or financial assets related to the real estate activity – in ratio to the REIF’s total assets shall be 70%, not exceeding 95%, as imposed by the FRA. The latter also defines the earning assets that generate recurrent revenue, as follows:
In all cases, the REIF’s investments in deposits at call and treasury bills shall not exceed 30% of the total REIF’s assets.
According to Article 160 of the Executive Regulations of the ECML, the open-end funds and the alternative investment funds that invest in money markets are prohibited from borrowing loans except for encountering the requests of return, subject to the following conditions:
The aforesaid Article provides for an exception for private equity funds, real estate investment funds and venture capital funds; these funds can borrow up to 100% of the paid-in amount of the total securities or the book value of the fund, whichever is lesser, and within the parameters stated under the prospectus memorandum or the disclosure memorandum. On a related front, it is worth noting that private equity funds can provide financing for non-banking financial services companies, constituting a new financial mechanism for investors through subscribing to investment securities issued by funds engaging in other financial instruments(s).
The new CBE Law No 194 of 2020 has recently been enacted, repealing the old CBE Law No 88 of 2003. Under the new CBE Law, a new chapter has been added addressing financial technology, including cryptocurrencies and digital finance. The law is consistent with the Egyptian state vision of cashless transactions in the country. As such, the investment rules for alternative funds to invest in such non-traditional assets are yet to be observed.
In case a bank will establish the fund, the following documentation shall be satisfied:
In case the fund is to take the form of a JSC, the latter being first established, the following documentation shall be satisfied:
Once all documentation is satisfied, the FRA further scrutinises the documents and approves the prospectus memorandum within five business days as of the documents' collection date, unless the FRA requires further clarification.
An investment manager shall be an Egyptian capital corporation (ie, a company limited by shares or a JSC), with a minimum paid-in capital of EGP5 million. An investment manager shall be licensed by the FRA to operate an investment manager.
The fund must have a legal presence in Egypt. The Executive Regulations of the ECML require the minimum number of board members of the board of directors of the fund to be three, with the maximum being 11. The majority of the board members shall be independent (eg, a natural person who is not an executive, a shareholder of the fund, the fund’s related parties, a service provider – directly or indirectly – etc). As to the private equity funds, the investment manager shall be the general partner.
According to the ECML, its Executive Regulations and FRA decrees, the service provider (eg, custodian) shall be Egyptian and licensed by the FRA. As for the money laundering reporting and compliance, the manager must maintain certain internal committees emanating from the manager’s board of directors, such as audit, risk and governance committees. Furthermore, generally, the fund shall enter into an agreement with a management services company, whereby the latter shall be obliged to undertake a set of tasks and responsibilities, including periodical evaluation of the alternative fund’s security, as well as retaining all documents/securities related to the alternative fund’s assets, in particular:
Non-local service providers (eg, administrators, custodians) are not allowed to operate in Egypt unless they have a legal presence in Egypt. Accordingly, the legal presence will trigger the obligation of registration before the FRA.
The alternative funds' tax regime lies in the Egyptian Income Tax Law No 91 of 2005 and its Executive Regulations (collectively, EITL). The EITL exempts certain investment funds incorporated under the ECML from taxation. This exemption applies to specific return on investments, as follows:
Other return/profits will be subject to ordinary taxation, as applicable under the EITL. In all cases, it is highly advisable for the investor to consult with a tax adviser on the tax implications with respect to the establishment of an alternative investment fund.
The question as to whether alternative funds qualify for benefits under double-taxation treaties would depend on the terms of the double-tax treaty entered into between Egypt and any other country, subject to the eligibility criteria under such treaty if it provides for benefits for the alternative funds.
Double-tax treaties are various in terms of the range of the applicable level of exemption. Hence, the investors are always encouraged to consult their tax adviser to obtain detailed advice on the alternative investment fund's structure and operation.
The ECML's Executive Regulations allow diversification of the fund's assets, subject to its type and its investment policy as approved by the FRA. To this end, the use of subsidiaries for investment purposes is commonly used in the case of private equity funds models, as the PE fund can use a special purpose vehicle for a specific industry.
Besides Egyptian promoters/sponsors – who represent the majority in Egypt's alternative funds market – sponsors/promoters come from Gulf Cooperation Council (GCC) countries.
Please refer to 2.14 Origin of Promoters/Sponsors of Alternative Funds.
Generally, most of the investments carried out by alternative funds are in Egypt. While the ECML and its Executive Regulations heavily regulate the permitted threshold/investment ratio to be invested outside of Egypt, the law and regulations entitle the FRA to review and approve the investment policy/ratio of the funds whether in Egypt or outside of Egypt, which means that the FRA may approve an outsider investment of the alternative fund, subject to its sole discretion. To this effect, the Executive Regulation of the ECML Article 183 (bis 20), prohibits the investment manager from buying unlisted securities, whether in Egypt or abroad, or listed in a stock exchange that is not subject to a supervisory authority similar to the FRA.
Index funds, money market funds, income funds and income funds remain dominant in the Egyptian market. Due to the Egyptian state's tendency to financial inclusion, we anticipate more mobility of alternative funds towards the investment in such industry.
Disclosure requirements under the EMCL, its Executive Regulations, or FRA decrees, are extensive and depend on the disclosing entity (eg, the alternative fund, its investment manager and related party) and phase of the disclosure. There follows a brief summary of the critical disclosure requirements and reporting.
Firstly, in case of an initial public offering or private placement, the prospectus memorandum shall contain, for example:
Secondly, the fund’s board of directors or the founding entity (as the case may be) shall update the disclosure memorandum on an annual basis, in case of listing the securities at the EGX, or in the event of changing any of the disclosure memorandum’s articles, which shall ultimately be approved by the FRA, and then disclosed to the securities holders and the EGX.
Two recent significant events have taken place: (i) establishment of the Egyptian Commodity Market; and (ii) enactment of the new CBE Law, introducing a set of rules governing financial technology. As such, we anticipate a reflective response of the FRA, imposing further regulations of the funds’ investments in both industries.
An investment manager shall be a capital corporation (ie, a company limited by shares or a JSC), with a minimum paid-in capital of EGP5 million. An investment manager shall be licensed by the FRA to operate as an investment manager. Most investment managers in Egypt adopts the JSC structure.
The regulatory regime of investment managers does not vary from the legal regime governing alternative investment funds, as all are governed by the ECML, its Executive Regulations, as well as the FRA decrees/circulars issued in this regard.
Under the ECML and the FRA decrees issued with respect to the obligations of the investment manager(s), the latter has certain obligations to perform, such as concluding technical service agreement with a specialised company in the target investment/project, where such a company undertakes management and execution of the technical aspects related to the alternative fund’s projects. Furthermore, the FRA obliges the investment manager(s) to retain all documents related to the assignment of the financial portfolio in a bank licensed to act as a custodian for the purpose of protecting the rights of securities holders. Further, the investment manager(s) is obliged to:
With respect to investment in microfinance portfolios, the investment manager, when purchasing the microfinance portfolios from the entities licensed by the FRA to undertake microfinance activities, the investment manager shall:
Similar to the alternative investment funds, the tax regimes applicable to the alternative investment fund manager are mainly provided under the EITL. As such, the investment manager shall be subject to the corporate income tax regime under the said law.
The EITL provides for certain cases, where the "permanent establishment" of the manager will be taxable under the said law, as follows:
The carried interest is subject to the corporate income tax imposed by the EITL. To this effect, the carried interest is taxable under the EITL at a fixed rate of 22.5%.
In principle, all alternative investment funds are required to appoint a management service company, licensed by the FRA. Further, and depending on the alternative fund's purpose, and subject to the FRA's approval, the investment functions/operation can be outsourced. For instance, in the case of real estate investment funds, a real estate developer is required, and hence can be outsourced. The FRA allows the investment manager(s) to seek the assistance of specialised expertise, including the periodic evaluation of investment security, to determine the indicative price of such investment security.
The investment manager shall be an Egyptian juristic person. Please refer to 3.1 Legal Structures Used by Fund Managers.
Non-local manager(s) cannot operate in Egypt. In the event that a non-local manager opts to operate in Egypt, such manager will have to secure a legal presence satisfying the requirements mentioned under 3.1 Legal Structures Used by Fund Managers.
The investors of the funds depend on whether the fund is closed-end or open-end. In the case of a closed-end fund, the investors shall be “qualified investors” (ie, financial institutional and individual investors who shall meet specific financial solvency and technical criteria). In the case of an open-end fund, the investors can be ordinary individuals and institutional financial investors.
As previously stated, the alternative fund's marketing depends on such funds' type and purpose; it can be marketed to "qualified investors" (whether institutional or individual investors) or to the public.
Generally, any marketing process of alternative funds shall be through a licensed company, at the FRA, for such purpose. While there are no specific guidelines for the rules of marketing alternative funds, the marketing company shall undertake marketing for the alternative fund consistent with the fund's investment policy, subject to the FRA's approval, which is monitoring and supervising the marketing materials/information. To this effect, it is worth highlighting that the FRA's prior approval shall be procured in case of a private placement, while subsequent approval may be obtained in case of a public offering.
In principle, no restrictions are imposed over local investors in Egypt. However, for certain funds (ie, closed funds), the investors (whether financial institutions or individual) shall satisfy specific solvency criteria imposed by the FRA to qualify as “qualified investors” and hence be eligible to invest in closed-end alternative funds.
Aside from the disclosure requirements imposed on the listed companies' shareholders, Article 145 of the Executive Regulations of the ECML requires certain information to be clearly stated and disclosed under the prospectus memorandum or disclosure memorandum, as the case may be. Such information includes the following:
If any change occurs in the above information, the FRA shall be notified and the disclosure/prospectus memorandum shall be amended. Further, it is worth mentioning that in case the alternative fund itself is a shareholder in a listed company, the relevant disclosure requirements issued by the FRA will also apply.
Aside from the disclosure requirements imposed by the ECML and its Executive Regulations with respect to ownership of the listed companies on the EGX, the alternative fund’s manager is required under the ECML and its Executive Regulations to disclose particular items to the investors, including the following:
Both corporate and individual investors are subject to the EITL. Aside from the tax exemption mentioned in 2.11 Tax Regime, the applied tax varies depending on whether the investor is an individual or corporate entity. According to the EITL, the applicable tax on individual investors ranges from 2.5% up to 25%. For corporate entities, the applicable tax rate is 22.5%. Nonetheless, either the corporate or individual investor may benefit from a preferential tax regime (ie, double-tax treaty) if such treaty provides for any particular exemption.
The FRA has issued a circular, whereby Egyptian non-banking financial institutions (including alternative funds' managers) are required to be compliant with FATCA provisions. In this respect, the alternative fund's manager is required to take a set of actions, including the following: