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Private Equity/Venture Capital (PEVC)

October 28, 2020
IFC/ WB/ EAVCA Webinar

Shanthi Divakaran, Senior Financial Specialist, World Bank Finance, Competitiveness & Innovation

Presenting on behalf of WB FCI Ethiopia PEVC assessment team including Patrick McGinnis (Senior
Consultant), Mesfin Tafesse & Associates (Ethiopian Law Firm), and Austin Hulbert (Consultant)

**This Report is the 4th in the series of regulatory assessments initiated by the IFC SME
Ventures program** 1

1. Context

2. Ethiopia PEVC Market

3. Ethiopia PEVC Regulatory Environment

4. Annex

• Asset class in which investors purchase the illiquid equity (or equity-like) securities of operating companies

• Privately held. These securities are not publicly traded, but instead held privately

• Ownership stake. In exchange for capital, PE firms take minority or majority ownership stakes in the

• Illiquidity. PE investors typically hold these securities for 3 – 7 years with expectation of generating attractive
risk-adjusted financial returns upon exiting the investment.

• Investment strategies. Private equity encompasses a range of investment strategies, including venture
capital, growth equity, buyout

• Venture capital (VC) is financing provided to early-stage, high-potential companies in exchange for owning
equity in the companies. These companies usually have a scaleable technology in high technology industries.

• For companies/ economic development

• Financing + Mentoring.
• Innovation/ technology transfer/access to markets. Brings innovative products to markets
• ESG principles. Raises environmental, social and governance standards
• Nursery for capital markets. Can act as a nursery for the public markets, because they have an
incentive to bring investee companies to the market to facilitate their own exit from their
• Jobs. Private equity investments help create jobs, which in turn reduce poverty

• For investors
• Diversification & professional management. Offer investors, such as pension and insurance funds,
a more liquid, professional managed and diversified investment approach
• Prospect of attractive returns.

Growth in Private Equity Venture Capital (PEVC) investment domestically is broadly favourable
for the country’s economic and social development, particularly with respect to access to
capital, strategic sector development, SME growth, and in turn, job growth.

1. Understand the market structure and the players

2. Understand market drivers and impediments

3. Understand legal/regulatory/taxation drivers & impediments

4. Identify areas of reform

1. Pandemic has shifted the course of economic development and priorities

2. World Bank predicts Sub Saharan Africa growth at -3.3 percent in 2020; region will enter first recession in 25 years

3. Ethiopia is among few countries on continent where economic growth expected to slow but remain positive

4. PEVC can represent an important economic solution in the COVID environment

1. As businesses face equity shortages with prolonged periods of negative cash flow, PEVC funds present a
compelling lifeline for companies under tremendous upheaval and stress during this crisis.

2. Economic agents which, through their funding and strategic decisions, can efficiently allocate and re-allocate
economic resources based on need and changing behavior patterns during the crisis.

3. Private equity ownership allows for considerable influence in navigating the strategic direction of a portfolio
company. They can read market signals and help companies transition through the crisis, adopt new
technologies, reconfigure products/services to address changing patterns

1. Context

2. Ethiopia PEVC Market

3. Ethiopia PEVC Regulatory Environment

4. Annex
1. PEVC industry in Ethiopia is over a decade old, consisting of offshore funds.

2. World Bank estimates that >$650 million has been deployed in Ethiopia through approximately 30 PEVC

3. Combined AUM of Ethiopia-centric funds and regional firms investing in Ethiopia is estimated at >$400

4. PEVC investments in Ethiopia have typically provided capital to SMEs at growth or VC stages, with average
investment size of ~$6.5 million (excluding a few large buyout deals).

5. PEVE interest has primarily been focused on two sectors: food & agriculture and manufacturing which
are also among strategic sectors promoted by the EIC through tax incentives etc.

6. PEVC Penetration (Investment/GDP) remains low at 0.02-0.03% (vs. UK / US > 1%).

7. Since 2015, the PEVC industry in Ethiopia has developed a much deeper local presence.
PEVC Funds
Buyout/Infrastructure Growth SME/Venture Capital

Abraaj (Inactive) 8Miles Acumen

Berkeley Energy Ascent Exeo Capital
Duet Group Catalyst Principal NovaStar Ventures
KKR Cepheus Growth Capital Partners Pearl Capital Partners
Sun Capital Partners Ethiopia Investment Partners
Kibo Capital Partners
SGI Frontier Capital
Silk Invest
Zebu Investment Partners
Zoscales Partners

Fundless Sponsors*
54Capital Renew LLC
PEVC Funds

Exclusive/Primary Focus on Ethiopia Regional Funds that Have Invested in Global Funds that Have Invested in
Ethiopia Ethiopia
Cepheus Growth Capital Partners NovaStar Ventures Abraaj (Inactive)
Ethiopia Investment Partners Ascent Berkeley Energy
SGI frontier Capital Exeo Capital Duet Group
Zoscales Partners 8Miles KKR
Acumen Sun Capital Partners
Catalyst Principal Partners
Kibo Capital Partners
Pearl Capital Partners
Silk Invest
Zebu Investment Partners

Fundless Sponsors*
54Capital Renew LLC

1. PEVC investors in Ethiopia are predominantly development finance institutions (DFIs) and
foreign family offices or high net worth individuals (HNWIs).

a) DFIs active in Ethiopia include the EIB, Norfund, CDC, DEG, ADB and the IFC, who are also
active in other parts of E. Africa

b) High Net Worth Individuals and Family Offices from Sweden, Denmark, the United
States, E. Africa, HNWI from Ethiopian diaspora

c) Some regional focused funds have diversified their investor base with pension funds, and
private sector investors like JPMorgan Chase and AXA Investment Managers

d) Local capital is absent from the asset class

1. Persistent shortage of foreign currency affects PEVC
1. Large population of >110 million people
investment process. E.g.:
2. Strategic geographic position in the Horn of
a) Determines which sectors PEVC firms consider to
invest in – favor sectors that are resilient to FX
3. Rapid economic expansion (avg 9.8% between
b) Dictates timing of repatriation following sale
2. Underdeveloped entrepreneurial culture
4. Change in political climate/ economic reform –
e.g. plans to liberalize sectors dominated by
3. Ranks poorly on ease of doing business : 159/190
SOEs such as Ethiopian airlines, telecoms;
creation of a stock exchange
4. Slow internet connectivity; English is not widely used

5. Talent recruitment is difficult, labor laws challenging

6. Exits can be challenging, no stock exchange


1. Context

2. Ethiopia PEVC Market

3. Ethiopia PEVC Regulatory Environment

4. Annex
1. Ethiopia currently has no overarching regulatory framework for PEVC funds

2. All PEVC funds are domiciled offshore and operate under Ethiopia’s FDI regime

3. Regulatory influence over offshore VCPE funds is fragmented and dispersed across several
1. Ministry of Trade and Industry (MoTI): Registers businesses/issues business licenses
2. Ministry of Revenues (MoR): Determines and collects taxes
3. National Bank of Ethiopia (NBE): Licenses banks/FIs; Determines terms of foreign exchange transfer
4. Ethiopia Investment Commission (EIC): Investment permits; registers foreign investment
5. Trade Competition and Consumers’ Protection Authority (TCCPA): Controls anti-competitive practices
6. Document Authentication and Registration Agency (DARA): Notarizes company bylaws/key docs

4. Recent regulatory changes include a new investment proclamation; ratified New York Convention
to recognize and enforce foreign arbitral awards made in other contracting states
1. Mobilizing Capital/ Domestic Institutional Investors
1. Given scarcity of forex, impractical for institutional investors to be permitted to invest in offshore PEVC funds
2. Unclear if pension funds can invest in PEVC: MoF not specified permissible investments beyond treasury bonds
3. Insurance companies can potentially invest in PEVC, but generally invest in bank deposits & T-bonds
4. NBE Banks Directive SBB/65/2017 investment guidelines do not specifically refer to PEVC investments

2. Investment Entry/ new Investment Proclamation No. 1180/2020

1. EIC regulates greenfield and brownfield investments
2. More open approach to foreign investment – restricted sectors have to be specified
3. Offshore VCPE funds must invest a min. capital (up to $200K), hindering investment in SMEs

3. Intellectual Property Regime

1. Ethiopia’s domestic intellectual property regime is robust, but not party to international treaties on IP, which
can concern offshore VCPE funds w.r.t technology/trademark transfer across borders.

4. Approval from Competition Authority/ Trade Competition and Consumer Protection Proclamation No. 813/2013
1. If the target company’s registered capital is over 30 million ETB (~USD800K), even minority investment from
PEVC fund must receive TCCPA approval
Ethiopia PEVC Legal/Regulatory: Key Issues
1. Lack of institutional capacity/ Mandatory Notarization by Public Notary
1. PEVC investment triggers amendments to investee constitutional documents; requiring mandatory notarization
by public notary, DARA. Public notary’s lack of capacity on PEVC results in delays

2. Investor Protection & Rights/ ECC (enacted 1960)

1. ECC offers minority protections, but no tag-along rights/ drag along rights
2. ECC does not require board of directors for PLCs or other partnerships, only for share companies
3. Quorum and majority rules in the ECC are written in language that leaves shareholders/members little
flexibility, no rules in the ECC to resolve deadlock situations.

3. Forex rules/ NBE

1. Sets forex allocation priority, indirectly determining sectors attractive for investment and ease of repatriation.
2. If offshore VCPE funds intend to provide debt financing to investees, must obtain NBE approval. Approval is
more likely when the borrower generates foreign exchange itself.
3. NBE approval is also needed to repatriate repayment of foreign currency denominated loans

4. Taxes
1. High CGT of 30% compared to 5% in Kenya, Nigeria 10%
2. Only 12 Double Taxation Avoidance Agreements have been ratified and currently active.

1. Context

2. Ethiopia PEVC Market

3. Ethiopia PEVC Regulatory Environment

4. Annex
EU: Alternative Investment Fund Management (AIFM) Directive post GFC

• Post GFC, EU legislative framework for regulating

PEVC, hedge funds etc.
• Managers subject to AIFMD as transposed in
Member State
EU AIFM Directive
• Approved by home member state regulator, but
marketing passport in other EU member states

General Framework EuVECA Regulations 2013

Sub Threshold Regime EuSEF Regulations 2013
AIFM managing AIFMs managing
AIFM managing Social Entrepreneurship
>€ 500mn (unleveraged) or < €500mn (unleveraged);
< € 500mn (unleveraged) or Funds
>€ 100mn (leveraged) closed-end AIFs;
< € 100mn (leveraged)
>=70% committed to young and
Less stringent requirements
EU wide passport innovative companies
Less stringent requirements EU wide passport
No EU-wide passport
Less stringent requirements
EU wide passport
US: Dodd Frank Act led to significant change

• Prior to GFC, PEVC fund managers generally exempt from Investment Advisers Act, 1940 through restrictions on #investors etc.

• Post GFC/ Dodd Frank Act Wall Street Reform and Consumer Protection Act, 2010, which included the Private Fund Investment
Advisers Registration Act of 2010:

• Changed the regulatory framework for investment advisers managing private capital funds: All private equity firms with >$150
million in assets must register with the Securities and Exchange Commission (SEC) in the category of “Investment
comply with Investment Advisers Act of 1940, including disclosure requirements, compliance procedures, and inspections by

• Accredited Investors only: Retail investors prohibited from investing in PE. Currently open only to “accredited investors” –income
>$200,000, net worth >$1 million

• Volcker Rule: To limit bank risk-taking, generally prohibit investment banks from investing in PEVC / hedge funds
Considering Legal/Regulatory Factors Across the Life Cycle of a PEVC fund
Key Factors in Designing a Govt Anchored Fund

Investment Exit
Example: Kenya
Reintroduction of Capital Gains Tax in 2015
Investment Structuring caused potential adverse impact to PEVC funds
that made investments when CGT was suspended

Investment Entry
Example: Nepal
Domestic PEVC funds need to be licensed as a
Domestic Legal bank in order to use debt instruments
Example: Ethiopia
FDI regime prohibits offshore funds from
Mobilization of Domestic investing in certain attractive sectors
Example: N. Macedonia
Lack of legal clarity on regime for PEVC funds
(provisions from other laws could apply by
Example: Nepal
Pool of domestic institutional capital limited
because of investment restrictions for pension
funds, insurance companies .
Global PE & VC Fund Performance

Source EMPEA 2019
What constitutes
What constitutes
a conducive
a conducive
for PE? for PE?

EMPEA guidelines developed in 2012

Clear and flexible laws
No double taxation
Efficient, Fair regulatory regime
Domestic investors can allocate to PE funds
Freedom of investment strategy
Free access to domestic credit markets
Fair licensing regimes
Conformity with international accounting standards (Adopt GAAP)
Property rights, access to credit, licensing regimes (sound business climate)
Consistent approach to dispute resolution and enforcement
Treatment of cross border investment
Private Equity
Related Definitions

Incubators/ accelerators. Intermediaries that help companies to grow by providing a combination of capital, mentorship, technical
support, infrastructure, and other critical resources. Their ultimate goal is to prepare companies for growth and eventual investment
from VC firms. Unlike VC firms, however, incubators and accelerators are not funds per se and generally provide only small amounts of
financing. Often the capital invested by such intermediaries is start-up capital and is less than $25,000–50,000.
Rather than providing significant cash, these intermediaries “invest” largely through in-kind contributions such as workspace, basic
infrastructure, advice, technical resources, mentorship, sector expertise, and other types of capacity building.

Private placement (or non-public offering) is a mode of financing through which securities are sold not through a public offering, but
rather through a private offering, typically to a small number of chosen investors. PIPE (private investment in public equity) deals are
one type of private placement, where publicly traded common shares or preferred stock or convertible security are sold to private

Impact investment. Investments that offer social and environmental returns, in addition to financial returns. JPM 2010 report
estimated that over the next 10 years market offers potential for invested capital of $400bn–$1 trillion and profit of $183– $667bn.
Private Equity
Related Definitions

Committed capital. Money committed by LPs to a PE fund.

Drawdowns. When GP identifies an investment and committed capital is required, the GP issues a capital call to drawdown on the
Paid in capital. Total amount of capital that has been drawn down.
Vintage year. The first year that the PE fund draws down on its committed capital.
Carried interest. GP share in profits.
Hurdle rate. Minimum annual return that LPs must receive before GPs can receive carried interest. Usually around 8%.
Clawback provision. LPs right to reclaim carry in the event of later losses on investments.
Cumulative distributions. Total amount of cash and stock paid out to limited partners
Residual value. Market value of remaining equity that LPs have in the fund.
Investment multiple. Indicators of total value of fund as a multiple of original investment (cumulative distribution + residual value)/
paid-in capital
Private Equity
Related Definitions

Dry powder. Committed but uninvested capital.

Double taxation: When the same income/ asset/ transaction is taxed twice in two jurisdictions (if investors is not from the country
where the investment is taking place); OR when corporations pay taxes on earnings, and shareholders pay taxes again on the

Double taxation treaties: Since double taxation is generally agreed to be inequitable, many countries make bilateral double taxation
agreements with each other, which also allows them to exchange information about tax declarations. By these agreements, either
Tax is paid in the country of residence and is exempt in the country in which the investment is made; OR
Tax is deducted (withholding tax) from the source country, and the taxpayer is compensated in their home country by a foreign tax

Repatriation. When an investor wishes to recoup profits from their investments in foreign currency as salaries, profits, dividends, etc.
Certain countries (with non convertible currency, which are not freely traded on foreign exchange market because of government
restrictions) have limitations on such capital repatriation. Typically central banks must give permission to repatriate. However, there can
be bureaucratic delays in converting currency.
Recommendations - Examples

1. Policy Level.

1. E.g. Ensure coordination between multiple regulators in this space

2. E.g. Ensure govt initiatives do not crowd out private capital

2. Legal/Regulatory

1. Domestic Investment. E.g. Specify if pension funds are permitted to invest in PEVC asset class

2. FDI Regime. E.g. Lower the minimum capital requirement for foreign investors

3. Taxation. E.g. Ratify double taxation treaties

4. Institutional Capacity. E.g. Provide capacity building to key regulators on PEVC industry