Private equity firms face EU curbs

Private equity and venture capital firms are set to run into headwinds as Europe, the main source of funds, seeks to restrict their borrowing through reciprocal arrangement.

The proposal in the European Parliament seeks to entrench the tool where recipient countries should allow for unfettered access by European fund managers.

“The passage of this regulation will impact heavily on the ability of PEs and VCs to raise funds from the European market which is the main source due to ease of access and availability of willing investors,” said Martin Lore the CEO of Africa Venture Capital Association (AVCA).

What is likely to raise eyebrows is the drive to have a reciprocal arrangement for fund managers, a situation spelt out in the Economic Partnership Agreement (EPAs) but have been opposed by the Africa, Caribbean and Pacific (ACP) countries.

EPAs are a set of trade scheme meant to create a Free Trade Area (FTA) between the European Union and ACP countries.

The scheme is expected to replace the current preferential trade agreement (PTA) offered by EU to the ACP nations in line with the new requirements of non-preferential treatment under the world Trade Organisation (WTO) rules.

ACP countries have strongly objected to the scrapping of preferential agreement to be replaced by the EPAs, saying it would render their economies uncompetitive to the more developed regions.

With Africa becoming the preferred choice for large-scale investments and refusal to implement EPAs, the legislation in the EU Parliament is seen as a way of circumventing the blockade to allow fund managers easy access to Africa.

If this new arrangement is enacted PEs and VCs, which have been tapping the Europe markets for funds will be faced with a strong challenge to raise funds at a time they are gaining a foothold in Sub Saharan Africa.

According to Mr Lore, the new requirement is likely to constrain private equity and venture capital firms domiciled in Africa as they may be unable to access funds without reciprocal instruments in place.

Favourable destination

Other fund managers are not expecting a major shift.

“The impact on fund managers is likely to be minimal as there is a significant interest in Africa ... as a favourable investment destination,” said Shakir Merali, the investment principal at Aureos Capital, a PE firm that has raised funds in Europe.

The strong interest in Africa has led to the creation of a number of funds to finance the growing deal pipeline.

The European Investment Bank (EIB) is actively involved in the PE industry in Africa, said the EIB vice president for Africa Plutarchos Sakellaris.