One of the common investment methods in the world of cross border private equity (and by no means unique to Africa) but often misinterpreted by investors and the media is the use of Special Purpose Vehicles (SPVs). Too often the focus of SPVs centres on their ability to minimise withholding, income and other taxes – in effect neglecting their many other purposes. My own firm, pan-African private equity investor Emerging Capital Partners (ECP) has been investing across the continent for over 10 years and forms SPVs to hold fund investments for a variety of reasons including:
• To allow shareholder agreements and other documentation to be held under international law
• To combine with additional investors in a holding company to have more control and/or rights at the operating company level or to meet local shareholding requirements
• To simplify approvals, avoid having to transfer licenses and concessions and/or provide an exit mechanism through the sale of the SPV
• To enable the possibility of transactions to be leveraged through debt at the SPV level
• To facilitate the eventual repatriation of monies by, for instance, making loans rather than equity investments to operating companies.
In short, SPVs provide a means to simplify the process of investment. By combining co-investments at the level of an SPV in Mauritius, Luxembourg, France or Dubai at the time of initial investment, the general partner will simplify the collection of money from multiple investors before it reaches the end company.
By gathering money at an intermediary stage and moving the point of investment back to a common jurisdiction, having already worked out the contracts in the final investment destination, investors are working in a regulatory framework that they understand – as opposed to the potentially unknown rules and regulations of Africa which require an expert practising in those markets to navigate the constant changes in foreign regulation across more than 50 countries.
The formation of an SPV also helps to alleviate the route to sale when it comes to exit the investment. A potential international buyer of a portfolio company investment is also likely to want to operate under the regulatory framework of the country hosting the SPV, in addition to benefiting from the simplification of co-investment.
The long-term aim of using SPVs is to increase the returns from the investment; however they must be managed properly to ensure that they do not create additional costs for the fund which ultimately negate the overall benefits. ECP has a strict policy for the creation of SPVs, clearly delineating responsibility for deciding whether an SPV is required and in which jurisdiction it is to be located. Company policy relating to budgets, administration and reporting issues, legal documentation, timings, selection of administrators and auditors, structure of payments, local authority clearances, signature authority, funds flow, maintenance of accounting records, and ESG and compliance matters are just some of the issues which must be firmly adhered to in order to form a successful SPV. Fund managers and investors should keep in mind that by undertaking this process, a potential route to exit is significantly improved.