EA shielded from new EU rules on hedge funds, private equity

Though Africa is unlikely to feel the effects of the rules on private equity and hedge funds that were recently approved by the European Parliament, players are hoping that the region will not go down that road soon.

The local investment scene in sub-Saharan Africa, they say, is still in infancy, and such regulations could only jolt the promising future outlook.

“The private equity industry in East Africa does not need stringent rules like those imposed by the European Union,” says Messu Mwaniki, who heads Bedrock Capital, a Kenyan investment banking outfit.
“The market should be left free to facilitate quick flow of capital,” concurs Luke Kinoti, chief executive officer of Fusion Capital.

The regulations for the European Union (EU), which will come into effect in 2013, will introduce requirements that alternative investment funds that include private equity funds, register to operate in the EU, report data and meet capital requirements.

Analysts say the rules are an attempt to forestall future financial crises such as the recent one which was blamed on unregulated hedge funds.

“These laws were mooted at the height of the financial crisis, and the accusing finger was largely pointed at the hedge fund industry,” says a senior executive in a local fund.

Popular opinion among East African players is that there is no reason to justify introduction of such laws.

They say the hedge fund segment has not taken off yet in East Africa, given that most of the tools needed, such as a derivatives market, are not yet prevalent.

Besides, Mr Mwaniki says the move by the EU is also geared towards limiting the power of private equity funds to stage hostile takeovers, which have been known to destroy long established companies yet don’t address the unemployment rate.  

“We in East Africa have yet to practice hostile takeovers, derivative trading of hedge funds and other complexities. We have not even started entering the mature stage of private equity,” he says.

In addition, before the recession, there were cases in the western world where private equity would purchase large businesses on debt through ‘Leverage Buyout’, and the cash flows from the target company would service the debt, as a way of cutting on costs.

With time, the firm would be stripped into smaller business units, unbundled and each unit sold for a profit, of which the amalgamated target company would never have reached had it sold as an entity.

Besides affecting the management and workers, this does not add value in terms of job creation.
The insistence on lack of rationale for such regulations in the region at the moment notwithstanding, fears abound from a section of players that the local authorities, inspired by the European Parliament, might follow suit.

Sources say there are no regulations that are aimed at the industry beyond those required of other investment industry players.

Mr Messu says private equity is still done in a traditional way in East Africa, where a balance sheet is sought by some investors, funds are put in a pool, with a criteria of a segment or industry and/ or deal size, and the management is given the responsibility to invest in profitable deals on behalf of the pooled shareholders.

“You may find limited third party funds or funds of funds coming into the kitty, with the exception of the international players who have set up shop in the region,” he says.