Issue: Limiting the Legal Structure of Private Equity Funds to Joint Stock Companies

Cairo , July 22 , 2024

Position Paper by the Egyptian National Competitiveness Council (ENCC)
Issue: Limiting the Legal Structure of Private Equity Funds to Joint Stock Companies

Introduction
In light of the discussions held during the general session of the Egyptian Senate, where MP Hani Sarie-Eldin, Chairman of the Financial, Economic, and Investment Affairs Committee, presented the committee's report on the legislative impact of Article (35) of the Capital Market Law No. 95 of 1992, the Egyptian National Competitiveness Council (ENCC) wishes to express its views on this significant issue.

Definition of Private Equity Funds
Private equity funds are investment vehicles that pool capital from institutional investors and high-net-worth individuals to acquire stakes in private companies or take over entire companies. These funds are not listed on public stock exchanges, allowing for greater flexibility in managing investments compared to publicly traded companies. Private equity funds are an effective means of investing in companies that may not have access to public capital markets. These funds often invest in startups or underperforming companies with the goal of improving their performance and increasing their value over the long term. Private equity fund strategies include acquisitions, corporate restructuring, business expansion, and selling owned companies after performance improvements.

Role of Private Equity Funds in Economies
Private equity funds play a vital role in supporting economic growth and development through several aspects:

• Providing Capital: Private equity funds supply the necessary capital for companies to execute expansion plans and improve operational performance, thus stimulating economic growth.
• Improving Operational Efficiency: Private equity funds help enhance the operational efficiency of companies by implementing modern management practices and performance improvement strategies.
• Creating Job Opportunities: Investments by private equity funds in companies lead to the creation of new job opportunities and increased employment rates.
• Encouraging Innovation: Private equity funds often invest in companies operating in innovative sectors, supporting research and development and enhancing the competitive capacity of these companies.
• Promoting Local Growth: Private equity funds contribute to local economic growth by investing in small and medium-sized enterprises, supporting the local economy, and enhancing its productive capabilities.

Private equity funds are a crucial part of the global financing and investment ecosystem, significantly improving economic performance at both the macro and micro levels.

Current Challenges of the Legal Structure for Private Equity Funds

• Complex Regulatory Framework: The current legal framework for private equity funds in Egypt is complex and lacks the flexibility needed for these funds to operate efficiently. This complexity hinders the ability to attract necessary investments.
• Legislative Shortcomings: Restricting the legal structure of private equity funds to joint stock companies conflicts with the nature of these funds. The current law requires the fund to be a joint stock company, which does not align with the role and working style of private equity funds that rely on centralized and independent management.
• Negative Economic Impact: The absence of local private equity funds negatively affects the Egyptian economy, as investment managers are forced to establish funds outside Egypt, leading to missed investment opportunities and significant tax revenues.
• Oversight Difficulties: The current legal framework makes it nearly impossible to oversee the management of these funds, increasing the likelihood of violations or misconduct.

Benefits of Legislative and Legal Reform

• Attracting Investments: Amending the legal framework to allow for flexible legal structures for private equity funds will make the Egyptian market more attractive to local and international investors.
• Stimulating Economic Growth: The presence of local private equity funds will enhance economic growth opportunities and provide additional funding sources for small and medium-sized enterprises.
• Improving Oversight: Establishing a flexible and appropriate legal structure for private equity funds will offer better opportunities for oversight and regulation, ensuring efficient and safe achievement of investment objectives.
• Increasing Tax Revenues: Attracting private equity funds to operate within Egypt will boost tax revenues, enhancing the national budget and supporting sustainable development.

Anticipated Impact of the Reform

• Enhancing Competitiveness: This reform will significantly enhance the competitiveness of the Egyptian economy on an international level.
• Creating Job Opportunities: These funds are expected to contribute to creating new job opportunities by supporting and financing startup projects.
• Developing Infrastructure: These investments can support infrastructure development projects, improving the quality of life for citizens.

Conclusion
In conclusion, the Egyptian National Competitiveness Council (ENCC) emphasizes the importance of making these legislative amendments to maximize the benefits of private equity funds and promote economic growth and sustainable development in Egypt. We are ready to support these efforts by providing the necessary research and analysis and cooperating with relevant authorities to achieve these goals.