Is french-speaking Africa the land of investment funds?
Knowing that funds sent by the Diaspora represent the largest source of external financial flows of low and middle income countries and three times the volume of official development assistance, and that, in the case of Africa, these flows represented 45 billion dollars in 2021, we can only conclude that this is potentially a considerable source of funding for new African companies. However, in so-called French-speaking Africa, these funds do not find the opportunity to be in the “formal” sector, and most of them prefer to incorporate in Mauritius, South Africa, or in Western countries; but in Central and Western Africa, there is a certain reluctance to set up investment funds and even more to make financial investments in those funds. But this opportunity could arise from the recent adoption of a solid legal framework.
Investment funds are drivers of a booming economy
An investment fund is a company whose purpose is to raise capital from investors to make collective investments in financial securities of promising projects. Most of the time, investment funds are specialized in certain fields of activity, and their objective is to make profits in the short, medium or long term, which of course does not exclude all risk for investors.
For business projects or start-ups, investment funds are an alternative to grants, personal sources or loans. The entrepreneur will therefore have to convince the fund of the potential of his project. Investment funds also give investors, who may be professionals but also inexperienced individuals, the opportunity to benefit from the intermediary of professionals specialized in investment advice and guidance. Investment funds therefore offer many advantages, as they enable:
· to take advantage of the leverage effect by pooling capital: this gives to an investor the opportunity to invest in projects of a certain size to which s/he would not have had access alone;
· to diversify one’s investment portfolio;
· to support companies with high potential;
· in certain regulations, to exempt one’s capital from tax;
· and finally, to benefit from the expertise of portfolio managers.
Why is it crucial to regulate investment funds?
Generally, investment funds can be created by finance organizations, banking institutions or individuals, subject to obtaining approval from the national or regional regulatory authority. When they exist, regulations are generally extensive in order to protect investors and limit the risks incurred by them. Thus, fund managers must be subject to a rigorous approval procedure to ensure their ability to manage funds in a given context. During their existence, they are subject to obligations and controls ensuring the protection of investors.
New regulations in Western and Central Africa
In West Africa, in 2006, WAEMU adopted a uniform law on investment companies with fixed capital and in 2011 issued a directive for a preferential tax treatment. However, this law had only been transposed in four countries, and in the others, general company law applied. This regulation was incomplete, and had conducted to the creation of only a few funds. Things should change, because the WAEMU Regional Council for Public Savings and Financial Markets (CREPMF) issued on December 16, 2021 Instruction No. 66/CREPMF/2021 relating to undertakings for collective investment and their management companies in the WAMU regional market.
This instruction includes a typology of investment funds, and introduces, among other things, alternative investment funds or undertakings for collective investment. It imposes on these funds and their managers an approval procedure before operating on the market, but also a certain organization after their creation. As such, it specifies the financial instruments that can be issued by these funds. It protects investors by ensuring their enlightened information, with mandatory documents such as key investor information documents and prospectuses.
The same legislative evolution has been observed in the CEMAC zone: the regulation on the organization and functioning of the Central African financial market promulgated on July 22, 2022 includes a Title VI on undertakings for collective investment, with substantially the same requirements in terms of approval, operations and investors’ information.
These regulations are very recent, having entered into force only last year. The existence of a regulatory framework is a good start for attracting investment funds and investors, but it is maybe not totally sufficient: the tax regime should be harmonized and favorable, and local expertise is needed, both on the side of private professionals and public authorities; only practice and experience will enable to refine this expertise. Who wants to get started?
