IN this second part of our ten-part article series on the market, legal and regulatory perspectives of Tanzania’s private equity industry, we focus on the formation of private equity funds and some key regulatory issues in the industry.
In many countries, private equity (PE) funds are typically formed as limited liability partnerships (LLPs), a structure that’s not available in Tanzania. The Business Laws (Miscellaneous Amendments) Act 2012 amended certain laws which regulate the conduct of business to improve the country’s business climate and it was a positive step in that direction. But the Act was a missed opportunity for private equity regulation as it did not introduce the LLP structure to enhance the local private equity industry.
Despite that, collective investment schemes (CIS) can be used for PE funds in Tanzania. A CIS is managed by a fund manager without a legal vehicle structure. A CIS does not have a separate legal personality nor does it need to be registered at BRELA. It’s a contractual arrangement between the investors and the fund manager deemed complete once the constituent contract is executed by all initial investors.
The Capital Markets and Securities Act 1994 regulates the securities business and the provision of fund management and investment advisory services in Tanzania. Unless exempted from the application of the Capital Markets and Securities (Collective Investment Schemes) Regulations 1997, registered venture capital companies and CIS, including Tanzanian PE funds, must receive approval from the Capital Markets and Securities Authority (CMSA), and should be managed by a fund manager (a legal entity) duly licensed and approved by the CMSA.
Specifically, the fund manager must hold the Investment Adviser’s License and the Fund Manager’s License. A minimum of two individuals with relevant experience representing the fund manager must hold Representative Licenses. Unlike in South Africa, in Tanzania there’s no requirement for fund managers managing/advising PE funds with Tanzanian pension fund investors to hold any extra, special license.
From an exchange control perspective, Tanzanian PE funds may deal in any securities freely within the East African region and engage in FDIs and acquisition of real assets beyond the region. This is in terms of the Foreign Exchange (Listed Securities) (Amendment) Regulations 2014 and the Foreign Exchange (Amendment) Regulations 2014. However, these regulations have not entirely lifted foreign investment restrictions.
Tanzanian PE funds must use externally generated funds if they choose to participate in foreign securities markets. As well, investments in PE funds and CIS in general require CMSA approval. Even so, the regulations are an essential step to achieving the EAC’s Common Market goals.
The Dar es Salaam Stock Exchange (DSE) Plc Rules 2016 permit the listing of a fund. Under rule 2 of these Rules, a “fund” is defined as a REIT (Real Estate Investment Trust) or other CIS traded on the DSE. So, it’s possible to structure a listed private equity vehicle in Tanzania that’s traded on the DSE.
In terms of the CMSA (Foreign Investors) Regulations 2014 and the Foreign Exchange (Listed Securities) (Amendment) Regulations 2014, foreign PE funds may consider acquiring stakes in listed companies with the intention of de-listing them from the DSE and taking them private. After a finite period, the foreign PE fund would divest its holding. However, acquisitions by foreign PE funds of 5 percent or more are subject to continuous disclosure requirements.
Exposure limits for investment by Tanzanian pension funds were introduced by the Bank of Tanzania (BoT) through the Social Security Schemes Guidelines 2015 to limit investments by pension funds in PE funds to a maximum of 10 percent of the PE fund’s total assets. Specific requirements for a PE fund to qualify for investment by a pension fund are yet to be published.
Also, any investment by pension funds in unquoted equity must receive prior approval of the BoT. This means pension funds may acquire equity stakes of PE funds in unlisted companies if the BoT approves the transaction. Investment by pension funds in venture capital is not permitted.
As Tanzanian pension funds embrace private equity; this will increase the capital available to the private sector and build the confidence of foreign investors to invest further in Tanzanian private equity.