Funds and gains: Private equity investments have a role to play in deepening and diversifying the economy, but some obstacles remain

Investment funds are smart financing tools that encourage private investment by providing shortand medium-term capital resources to companies. Private equity financing supports companies looking to finance their foundation, growth and in some cases recovery and maintenance. Furthermore, in an economic context in which financing needs are steadily increasing, they represent a real operational solution to enhancing the national economy, which is still largely dependent on hydrocarbons.

Strategic Support

This type of investment constitutes a majority or minority stake in the capital of a small or medium-sized enterprise (SME), not usually listed on the stock exchange, for a limited period. The duration of financing may vary. When the investment is made by a fund, only the quantity is defined beforehand, while the return and exit are decided on later, in line with the evolution of the funds placed. At the end of the financing period the target company has the option of choosing which exit method to adopt. The invested capital could be redeemed by the original shareholder (that is, the company itself) or by another investment fund, with a view to continuing the development phase. In this context, the investment fund can carry out its exit through the stock exchange.

Private equity represents an innovative financing instrument in Algeria that aims to offer complete support to SMEs with high growth potential, in the development of both the financial and the strategic aspects of their projects. It offers secured equity financing accompanied by contracts that provide operational support in the management of these companies, enabling them to achieve their growth objectives and create value.

Barriers to Growth

Nevertheless, given the absence of a structured stock market in Algeria, private equity financing is struggling to grow, with demand tending to exceed financial organisations’ capacity to meet the market’s needs. Moreover, priority is often given to larger projects, leaving small businesses to face recurring difficulties, in addition to a very low level of capitalisation.

The broader Algerian public remains largely uninformed about the private equity sector, due to lack of promotion and communication on the part of the funds themselves, as well as the fact that local entrepreneurial culture tends to be orientated towards self-financing, or simply indebtedness. Besides this, various economic factors directly impact the growth of the private equity business, such as foreign exchange losses and administrative delays.

Expanding Market

The authorities have made considerable efforts to ameliorate this situation, notably through the creation of 48 regional public investment funds. In addition, Articles 27, 28 and 29 of the Private Equity Law of 26 June 2006 established an attractive tax regime for investment funds, which includes total exemption from corporate income tax on dividends, investment income, proceeds and capital gains from the sale of shares and corporate shares by investment funds.

These efforts notwithstanding, the barriers to market entry for private equity activity in Algeria remain relatively stringent. Entry is subject to prior authorization from the Ministry of Finance, following an opinion issued by the Commission for Organisation and Supervision of Stock Exchange Operations, and the Bank of Algeria. In addition, local regulations set a maximum participation rate of 49% in the capital of the funded company and a participation period of between five and seven years. If these barriers were to be removed or alleviated, private equity investment could work to encourage local investment in the country, enhancing export activities as well as strengthening the country’s foreign exchange earnings. This would contribute substantially to the development of a sustainable industrial economy. (ultram)