Brexit: What does it mean for African private equity?

24 Oct 2016

By John Rife, Associate at Debevoise & Plimpton LLP

Markets were thrown into a state of turmoil on Friday, 24th June, 2016, following the surprise outcome of the referendum that saw the UK voted to leave the European Union (EU). Notwithstanding the outcome of the referendum, the UK has yet to commence the formal process of withdrawing from the EU, and markets have since, at least temporarily, returned to a state of relative stability.

There remains great uncertainty as to when, and if, the UK will begin the process of withdrawal and the nature of the UK’s relationship with the EU following a withdrawal. This includes the possibility that Scotland’s relationship with the EU will be different to that of the rest of the UK.

There are a number of potential implications for African private equity sponsors and investors to consider:

  • AIFM Jurisdiction: Despite the historical prevalence of non-European fund structures for inbound African private equity investment, one issue frequently considered by African and other non-European fund sponsors is whether establishing a European “alternative investment fund manager” (AIFM) would be worthwhile to enable that sponsor to obtain a marketing passport under the Alternative Investment Fund Managers Directive (AIFMD). The marketing passport avoids difficulties associated with utilizing the private placement regimes in particular European jurisdictions, and the fact that in some European jurisdictions there is no viable route to marketing by a non-EU AIFM. A sponsor currently contemplating a European AIFM may well be best served exploring European jurisdictions other than the UK.
  • Bifurcated Status of UK Institutional Investors: In the event that Scotland is able to maintain its position within the EU notwithstanding a withdrawal by the rest of the UK, African fund sponsors may find that the process of marketing to UK investors will split depending on whether those investors are Scottish or based in any other part of the UK, with the result that sponsors may need to familiarize themselves with a new marketing regime relating to Scottish investors.
  • Allocation Adjustments: Economic uncertainty and instability in the UK, Europe and possibly further afield may well lead institutional investors to adjust private equity allocations. In the aftermath of the global financial crisis, a number of investors sought to increase their allocations to emerging markets as the financial outlook for more developed markets deteriorated. In recent years, African private equity has taken center stage and any such shift in allocations could well see an increase in commitments to African private equity.

At this stage, the only thing that is certain about the Brexit referendum is that it has created a great deal of uncertainty. If the UK does ultimately withdraw from the EU, African fund sponsors and investors in African private equity may need to adjust to regulatory evolution. With that said, African private equity as a whole may ultimately benefit from the resulting instability.

About the author

John Rife is an associate in the London office of Debevoise & Plimpton LLP. He advises institutional and independent sponsors of buyout, debt, secondaries, infrastructure and energy funds, as well as funds of funds, in connection with a broad range of matters, including fund formation and on-going operational matters, co-investments and internal reorganizations.

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