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EMPEA guidelines: Special significance for the MENA region

By Simon Witney and Benjamin Aller of SJ Berwin

It is no surprise that the Emerging Markets Private Equity Association (EMPEA) strongly believes that private equity is a global force for good, and an important source of long-term financing for growth businesses. It has argued consistently for legal and regulatory environments which support investment and cross-border capital flows, and much of its work around the world has been in support of that goal.
Taking these efforts a step further, the EMPEA Guidelines published earlier this month offer lawmakers new tools to evaluate their own legal environments, and give concrete advice - driven by experience around the world - on the guiding principles for any government that wants to encourage private equity (and not just governments in emerging markets).
The guidelines have special meaning in the Middle East and North Africa (MENA) where private equity faces daunting legal, regulatory and political challenges despite its promise to transform regional economies, build up strong private companies and create jobs.
As EMPEA says in its introduction to the guidelines, private equity investors are able to offer more than just capital to the businesses which they back: their input into strategy, their expanded networks, their operational expertise and governance enhancements can help to transform both nascent and established businesses, contributing to economic growth and prosperity. In a region that is reeling from political upheaval and desperate to create jobs for its restless youth, these messages should resonate at least as much in the MENA region as they do in other emerging markets.
The question for regulators and political leaders is how to create an environment that is attractive to such investors, so that investment opportunities are evaluated on their own merits and not hampered by political considerations or regulatory inefficiencies. Of course, as EMPEA clearly argues, regulation is essential - indeed, it is as valuable to investors as it is to other stakeholders - but the key is to find the right balance between effective regulation on the one hand, and overly restrictive rules which do not pass a cost/benefit test on the other.
EMPEA's guidelines cover 10 broad areas, each stated as a general principle but with detailed supporting material. The 10 principles cover a wide range of areas, including corporate law, anti-corruption, financial services regulation, enforcement mechanisms, property rights and tax. Although all of the areas covered by the 10 principles are of concern to a much wider range of domestic and international investors, in each case they are examined from the perspective of a private equity investor.
So, for example, the recommendations that relate to corporate law are focused on those aspects of corporate law that an active investor will be concerned about - including clear rules for company directors, the ability to create different classes of shares and debt interests, and effective minority protections. And while some of the exhortations are obvious, even to those with limited knowledge of the private equity model - such as the need to permit enforcement of arbitration awards, and to apply international standards of anti-corruption regulation - others are much less so. For instance, some of the specific rules on the ability of domestic investors to invest freely in the asset class, and the rules on taxation of capital gains, are quite specific to private equity.
EMPEA says it wants to stimulate and facilitate a dialog with governments and regulators. Every single MENA country stands to gain from evaluating their rulebooks and enforcement practices through the eyes of an investor, and it is to be hoped that these guidelines, and EMPEA's promotion of them, will provide a catalyst for that.
Benjamin Aller is managing partner at law firm SJ Berwin (MENA), where Simon Witney is a partner. Witney also serves on EMPEA's Legal and Regulatory Council.
© Zawya 2012

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