This country-specific Q&A provides an overview of Alternative Investment Funds laws and regulations applicable in Egypt.
What are the principal legal structures used for Alternative Investment Funds?
According to the Egyptian Capital Market Law (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 Financial Regulatory Authority (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.
Does a structure provide limited liability to the sponsor and/or manager vis-a-vis investors?
Yes, according to the Egyptian law, the investors’ liability is confined to the value of their contribution, and they are permitted to participate in the liquidation proceeds of the fund pro-rata the value of their participation in the fund. Investors are required to be part of a ‘certificate-holders’ assembly’ that is granted veto powers over certain material decisions made by the fund.
Is there a market preference and/or most preferred structure? Does it depend on asset class?
Yes, the JSC structure is the most appetite legal structure for the funds in the Egyptian market irrespective of the asset class or the investment strategy which varies from fund to another.
Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity vs. hedge)) and, if so, how?
Yes. the ECML lists various types/categories of the alternative funds that can be established in Egypt, such as 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 investors and investment policy.
Are there any limits on the manager’s ability to restrict redemptions? What factors determine the degree of liquidity that a manager offers investor of an Alternative Investment Fund?
The ability of the manager to restrict redemption is obvious in the closed-end AIF, as the redemption shall take place at the end of the AIF’s cycle. Usually, for the closed-end funds the redemption can take place either after listing the fund in the stock exchange or at the end of the AIF’s cycle.
What are potential tools that a manager may use to manage illiquidity risks regarding the portfolio of its Alternative Investment Fund?
This usually is determined based on the constitution and prospectus of the AIF as agreed by the investors. In practice and by law, the AIF manager has the duty to exert best efforts to ensure sufficient liquidity to meet anticipated demand of redemptions requests.
Further, the AIF is allowed to borrow loans to meet redemption requests. However, the loan value shall not exceed 10% of the net AIF’s asset value. Eventually, the AIF is allowed, in exceptional cases, to apply for a temporary suspension of redemption requests, subject to the approval of the FRA.
Are there any restrictions on transfers of investors’ interests?
No. It only depends on the type of the AIF (i.e., whether closed-end or open-end AIF). In case of closed-end, the transfer is restricted until the liquidation of the AIF or listing in the stock exchange. As or open-end AIF, the transfer can take place on the same day, as usually highlighted in the AIF prospectus.
Are there any other limitations on a manager’s ability to manage its funds (e.g., diversification requirements)?
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.
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:
the specialised target sectors and the relevant type of investment; and
the ratio and level of diversification of such target sectors and investments pro rata the total assets of the alternative investment fund; and
disclosure of such specialised sectors as targeted for investment, and its geographical distribution.
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 the real estate alternative investment funds (REIF), the investment in the earning assets –whether real estate assets or financial assets related to the real estate activity– 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:
Real Estate: earning assets can be the real estate assets that are owned, built, or developed (whether directly or indirectly), which generate or are expected to generate returns (whether by lease, management or Exploitation, and whether such real estate assets are, for example, for housing, touristic, commercial, retail, or industrial purposes; and
Financial Assets: the financial assets related to the real estate activity, which generate recurrent revenue, include (a) securitisation bonds that are issued in lieu of the financial rights portfolio of the real estate loans, (b) bonds issued by the real estate financing companies secured by the real estate financing loans portfolio, (c), securities listed on the EGX, provided that such securities must be issued by a company of which the majority of assets are real estate assets, or issued by a company operating in a field pertaining to the real estate development, (d) shares the Egyptian non-listed companies, whose 80% of assets are real estate assets, in which case the REIF’s ownership ratio in such company’s capital shall not fall below two-thirds at any time, and (e) securities issued by the other REIFs.
What is the local tax treatment of (a) resident, (b) non-resident, and (c) pension fund investors (or any other common investor type) in Alternative Investment Funds? Does the tax treatment of the target investment dictate the structure of the Alternative Investment Fund?
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:
dividends of investment funds whose investments in securities and other debt instruments are not less than 80%;
profits distribution of holding funds whose investment is limited to aforesaid funds;
profits distribution received by such funds after adding 10% of the value of the said distributed profits to tax deductibility in lieu of the non-deductible costs;
return on investment in the money market funds;
return on the bonds listed in the stock exchange (without the treasury bonds); and
profits of the investment funds whose activity is limited to monetary investment only.
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.
Further, both corporate and individual investors are subject to the EITL. 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.
What rights do investors typically have with respect to the management or operations of the Alternative Investment Fund?
In general, the investors are not allowed to manage the AIF. However, they are entitled to monitor the actions of the managers in relation to the management of the AIF. For example, the investors have the right to approve any amendments to the constitution of the AIF.
Where customization of Alternative Investment Funds is required by investors, what types of legal structures are most commonly used?
This is not common in Egypt.
Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?
Yes. 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 as an investment manager. Most investment managers in Egypt adopts the JSC structure.
Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?
Yes. The regulatory regime of alternative investment funds does not vary from the legal regime governing investment managers, as all are governed by the ECML, its Executive Regulations, as well as the FRA decrees/circulars issued in this regard.
Does the Alternative Investment Fund require a manager or advisor to be domiciled in the same jurisdiction as the Alternative Investment Fund itself?
Yes. The investment manager shall be an Egyptian juristic person licensed by the FRA. Non-local manager(s) cannot operate in Egypt. Hence, in the event that a non-local manager opts to operate in Egypt, such manager will have to secure a legal presence.
Are there local residence or other local qualification or substance requirements?
What service providers are required?
According to the ECML and its Executive Regulations provides for certain service provider (e.g. custodian and management service company). The service provider (eg, custodian) are required to be Egyptian and licensed by the FRA.
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.
Are local resident directors / trustees required?
As a general rule, local resident directors are not required.
What rules apply to foreign managers or advisers wishing to manage, advise, or otherwise operate funds domiciled in your jurisdiction?
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 (i.e., Egyptian company), and satisfying the licensing requirements imposed by the ECML and FRA.
What are common enforcement risks that managers face with respect to the management of their Alternative Investment Funds?
The manager is required to provide the FRA with a periodic report highlighting the results of the management of an AIF. Further, there are certain internal committees must be maintained by the manager such as compliance & governance committee, audit committee and risk committee. Moreover, the FRA has a supervisory role, whereby the FRA parodically inspect the activities of the manager and extend warning to clear any discovered violation(s).
What is the typical level of management fee paid? Does it vary by asset type?
The management fee rates can vary depending on an alternative investment fund’s size and investment strategy. In our experience, the typical management fee rate is an agreeable percentage calculated based on the net value of the AIF’s assets.
Is a performance fee typical? If so, does it commonly include a “high water mark”, “hurdle”, “water-fall” or other condition? If so, please explain.
Yes. Generally, the CML allows incentives and other performance fee/commission, provided that such incentive provisions shall be included in the management agreement to be approved by the FRA. Moreover, in the event of any adjustments to such incentive scheme, the instrument holder shall approve the same.
Are fee discounts / fee rebates or other economic benefits for initial investors typical in raising assets for new fund launches?
This is not common in Egypt.
Are management fee “break-points” offered based on investment size?
This is not common in Egypt.
Are first loss programs used as a source of capital (i.e., a managed account into which the manager contributes approximately 10-20% of the account balance and the remainder is furnished by the investor)?
No. This is not common in Egypt.
What is the typical terms of a seeding / acceleration program?
This is not common in Egypt.
What industry trends have recently developed regarding management fees and incentive fees?
We witness a state of stability with respect to the management fee. As the market practice remains same.
What restrictions are there on marketing Alternative Investment Funds?
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.
Is the concept of “pre-marketing” (or equivalent) recognised in your jurisdiction? If so, how has it been defined (by law and/or practice)?
In principle, no promoting information of data is allowed to be published unless the prospectus memorandum is approved by the FRA. However, following submission of the prospectus memorandum to the FRA, advertisements and distribution of marketing brochures and letters or any other essential data are allowed, provided that it should be clearly stated that the prospectus memorandum is not yet approved by the FRA.
Can Alternative Investment Funds be marketed to retail investors?
Yes. However, the classification of the retail investors of the funds depends on whether the fund is closed-end or open-end. For example, 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.
Does your jurisdiction have a particular form of Alternative Investment Fund be that can be marketed to retail investors (e.g. a Long-Term Investment Fund or Non-UCITS Retail Scheme)?
In principle, no particular forms of an alternative investment fund to marketed to retail investor. 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.
What are the minimum investor qualification requirements?
While the ECML provides for generic concept of the “qualified investor”, the FRA further details the qualifications that must be vested in a qualified investor to participate in alternative investment funds. Such qualifications can be summarized, as follows:
financial institutions (e.g. Egyptian banks, insurance and reinsurance companies, VC companies); and
qualified investors can also be pension funds, retail investors who have experience of not less than three years in managing banks and financial institutions, and any other natural person owning securities or financial instruments of a value exceeding EGP 500,000.
Are there additional restrictions on marketing to government entities or pensions?
No further restrictions are imposed.
Are there any restrictions on the use of intermediaries to assist in the fundraising process?
The use of intermediaries is subject to general licensing requirements for an intermediary (e.g. broker and management service company); as both must be licensed by the FRA.
Is the use of “side letters” restricted?
The CML does not specifically address the use of side letters with explicit provisions. However, the alternative fund manager is under obligation to act in a transparent and fair manner with all investors. Hence, the side letter concept might be deemed a violation of the fund manager’s obligation.
Are there any disclosure requirements with respect to side letters?
As a general rule, the material information, data, or event must be disclosed to the investor and the FRA. Accordingly, within the context of supervisory role of the FRA, the side letter the disclosure will be obligatory.
What are the most common side letter terms? What industry trends have recently developed regarding side letter terms?
In our experience, side letters are not common in Egypt.
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