Private Equity (Transactions)

Egypt’s status as a target for private equity (PE) can be traced back to 2001, when the country was included in the MSCI Emerging Markets Index. This was followed by rapid PE growth in the Egyptian economy, particularly between 2005 and 2009, with Egypt being the primary destination for PE investments in the Middle East and North Africa region, attracting an estimated US$2.5 billion in that period. However, following the uprisings and political changes during the period from 2011 to 2013, the PE market in Egypt temporarily slumped before witnessing a gradual progress and strengthening owing to recent legal, regulatory and economic reforms.

At the moment, few onshore PE funds operate in Egypt and these are often atypical in their structures and funding models, as noted by the Egyptian Private Equity Association. As such, the main players in the PE market in Egypt are not only family offices and investment holding companies, but also angel investors, venture capitalists and investors from small and medium-sized enterprises (SMEs) to a certain extent. Although the regulatory framework now allows the possibility of local PE companies to take the form of companies limited by shares, which is the equivalent of the famous GP-LP model elsewhere, this has been slow in practice and most PE transactions occur through joint ventures, purchasing shares and subsequently injecting capital, or other arrangements.

Back to top

Recently, several corporate governance regulations were passed for companies that are supervised by the Financial Regulatory Authority and the General Authority for Investment and Free Zones. These include rules on the terms of board of directors, the usage of electronic systems, cumulative voting, proportional representation, preferred shares, independent directors and disclosure and access to information on related-party transactions. Thus, while traditionally governance rules were more rigorous and enforceable on listed companies as opposed to being non-mandatory and lax in non-listed companies, the recent regulatory efforts worked towards extending the governance codes to all companies. Yet going-private and delisting might not yet be advantageous because the regulations that used to apply to the company when listed still apply to the company after delisting, in practice if not in theory.

Back to top

Generally speaking, public companies must have at least two independent board members. This is not a requirement for non-listed companies (with limited exceptions). There are also rules governing related-party transactions that are applicable to both public and private companies, including rules on conflicts of interest. Additionally, for public companies and other non-listed companies falling under the umbrella of the Capital Markets Law No. 95 of 1992, there are more detailed and specific related-party rules that require the pre-approval of the ordinary general assembly. In contrast, related-party rules in private non-Capital Markets Law companies are not addressed in such detail.

Back to top

A distinction must be made between public companies going private (delisting) and private equity transactions. The former must adhere to the rules of disclosure applicable to any other public company. As for other private equity transactions, if neither party is a public company, the disclosure rules of public companies are not applicable.

Back to top

The process for obtaining the necessary licences, permits, and approvals is lengthy and bureaucratic, but there have been recent efforts at streamlining it. However, overall, it depends on whether it is a private sale or a public company, as more regulations and thus a more scrutinised process is involved in the latter.

Back to top

The articles of association of a public company could contain provisions restricting the disposal of shares, such as offering to sell the shares to other shareholders first. These provisions, however, cannot prohibit the selling of shares.

Back to top

No particularly notable purchase agreement provisions are specific to private equity transactions other than a focus on provisions related to exit, such as call options, put options, tag-along, drag-along, vesting, listing, trade sales through going public and convertible notes.

Back to top

The management of the target company could be allowed to participate in a share option plan whereby the management is given shares in the target company following completion of the going-private transaction or in a parent company onshore or offshore. While negotiating these arrangements, legal requirements pertaining to disclosure and market manipulation must be taken into consideration in order to avoid leakage of information to the market and consequent actions by the regulator.

Back to top

The main issue to be taken into consideration is capital gains tax and stamp duty tax payable upon the acquisition and disposal of the target. The application of capital gains tax is currently suspended with respect to listed shares but is applicable at the rate of 22.5 per cent with respect to non-listed shares.

Back to top

There are acquisition financing options in Egypt, but these come with their own limitations.

Back to top

Going-private transaction purchase agreements do not typically include provisions pertaining to debt financing. They could, however, include provisions regarding the purchase schedule and provisions related to the submission and execution of a mandatory tender offer if its application is triggered. The debt financing of the purchase trans­action will be typically handled separately.

Back to top

Not particularly. The general rules pertaining to fraudulent conveyance apply to all transactions undertaken by businesses; private equity transactions are neither an exception nor do they attract application of additional rules. In brief, in the event that a company is found to be bankrupt by a court, then all transactions undertaken thereby during the period between the date on which it is considered to have ceased payment of its debts until the date on which it was found bankrupt by a court can be annulled. This is in addition to other actions that may be taken against the board members and shareholders in the event that the company is found bankrupt. Such rules are considered mandatory and may not be contracted out of.

Back to top

Shareholders’ agreements can include provisions to ensure the approval of certain shareholders or their representatives on the board on key decisions; however, such clauses may not necessarily be upheld by the regulator, leaving the minority shareholder with a right to claim damages rather than a power to stop the majority shareholders from proceeding with their actions. Other provisions that are of interest to minority shareholders and that are commonly inserted in private equity transactions include tag-along rights and the put option. In addition to these contractual provisions, the law provides for a number of rules aimed at protecting the minority shareholders, such as the power to request the annulment of actions undertaken to serve the interests of the majority shareholders to the detriment of minority shareholders and the right to request from the regulator to force a 90 per cent shareholder to submit a mandatory tender offer to the minority shareholder. This is in addition to many disclosure requirements designed to keep the minority shareholders informed of the company’s financials.

Back to top

If a buyer, solely or along with related parties, exceeds certain thresholds, commencing at 33 per cent of shares or voting rights, of a publicly listed company, said buyer (and related parties) must submit a tender offer for the purchase of 100 per cent of the shares of the company.

Back to top

There are limitations depending on the type of portfolio company. For example, there are regulatory requirements with regards to certain types of companies such as brokerage firms and insurance firms. In addition, a change of entity itself might be a prerequisite for taking the company public. For non-listed entities, restrictions of sale might be present under the portfolio company’s articles of association. Generally, for a conduct of an IPO, a company would need to obtain the approval of an extraordinary general assembly (typically representing 66 per cent of the shares represented at the meeting) of the listing, in addition to other regulations. There are also post-IPO restrictions on the disposal of shares.

Back to top

Governance and shareholder rights may survive following an IPO to the extent that they are included in the target’s articles of association. Other shareholder rights, which are not included in the articles (such as call and put options and tag-along and drag-along rights) may continue to survive contractually. Restrictions on the sale of shares will in all cases have to be removed prior to the IPO. Disposal of shares following the IPO is required to be done through the stock exchange using its regular mechanisms or through an offer to sell shares that is supervised by the regulator.

Back to top

Most PE transactions in Egypt occur in the food, healthcare, education, fast-moving consumer goods, real estate and tourism sectors. The focus on education, whether secondary or higher education, has been an emerging trend, and in 2018 EFG Hermes Private Equity acquired four international schools in Egypt for US$56 million. In addition, 2018 witnessed an increased activity in PE markets with relation to tourism. In April 2018, the Ministry of Tourism announced the relaunching of the Papyrus Private Equity Tourism fund, and in November it announced its plans for a new PE fund to upgrade Egypt’s hotels and other travel-related infrastructure.

Back to top

Most of the transactions in the PE market in Egypt occur from offshore PE funds, including quite a few regional ones. This is facilitated by the fact that the 2017 Investment Law grants the same treatment to local and foreign investors. Various challenges existed in recent years owing to Egypt’s foreign currency shortages and fluctuations in the exchange rate, which increased foreign investors’ fears regarding the repatriation of their profits and local investors’ inability to exchange their funds to foreign currency. However, the situation has improved since the flotation of the Egyptian pound and the Central Bank of Egypt’s implementation of the short-term foreign exchange repatriation mechanism in November 2016. However, certain sectors continue to have sector-specific foreign investment restrictions.

Back to top

In the case of an acquisition of a public company, and depending on the relationship between the different investors (whether private equity firms, co-investors or strategic partners), the transactions may be considered by the regulator as related transactions and hence could trigger the requirement to submit a mandatory tender offer.

Back to top

Issues relating to certainty of closing include confidentiality issues and the cost incurred by both parties in relation to the transaction. Typically, a confidentiality agreement is entered into between the seller and the private equity acquirer with a duration of two to five years. As to the cost of the transaction, it is typically agreed that each party will incur its own cost. If, however, following execution of binding agreements, the transaction did not close, each party is entitled to request damages even if such right is not explicitly stated in the contracts.

Back to top

Egypt’s rank on the World Bank’s ‘Ease of Doing Business Index’ rose to 120 in 2018, from 128 in 2017, with progress achieved in the protection of minority investors in related-party transactions and in corporate governance, the payment of taxes and the resolving of insolvency. This was also reflected in the PE market and according to Rand Merchant Bank’s 2018 ‘Where to Invest in Africa’ report, Egypt surpassed South Africa as the most attractive investment destination on the continent. Private equity buyouts have significantly risen in Egypt since 2017, which was a year of almost total inactivity: by November 2018, there were four main buyout deals worth a combined US$110 million.

In November 2018, a prime ministerial decree moved the Micro, Small, and Medium Enterprise Development Agency under the direct supervision of the Cabinet, to be headed by the Prime Minister instead of the Minister of Trade and Industry. The agency now has a special independent budget and a special account in the Central Bank of Egypt. Such changes could potentially be aimed at strengthening the agency’s decision-making process and subsequently the activities of SMEs in Egypt’s PE market.

Back to top