EGYPT Law and Practice Contributed by: Arig Ali and Lana Abd El-Rassoul, Zaki Hashem, Attorneys at Law
cumstances in which it is permissible to acquire majority stakes in one company, and the extent to which it is permissible to exceed the percent - age of investment in one company at the begin -
of assets), which can be an important tool in maximising exit flexibility and investor returns. As a result of these structural differences, GPs may be required to adopt contractual worka - rounds to deliver outcomes that align with the expectations of international LPs. While these arrangements can be effective in practice, they may create hesitation among some foreign investors who are more comfortable with famil - iar structures. 2.3 Fund Regulation See 2.1 Fund Structure . There are several options for carrying out VC activities, each with their own advantages and disadvantages, depending on manager and investor objectives and preferences. However, other than ordinary companies which, de facto, practice VC activi - ties as explained in 2.1 Fund Structure , all of these structures are regulated by the FRA. They must comply with regulations related to mini - mum capital requirements, governance, trans - parency and reporting, among others. Further - more, all of them involve investors, which must meet certain criteria to be considered as Quali - fied Investors, as defined by the FRA, and who are by law required to form part of the sharehold - ing structure of such companies. Fund managers, who are responsible for manag - ing the fund’s assets and operations, must also obtain a licence from the FRA and comply with its rules and regulations. 2.4 Particularities As is the case with investments in portfolio companies through offshore structures, most VC funds are established offshore in jurisdic - tions familiar to international investors, requir- ing parallel funds in Egypt for local LPs, notably state-owned banks and publicly owned insur -
ning of the investment. 2.2 Fund Economics
VC structures in Egypt benefit from tax treatment that avoids double taxation, meaning that invest - ment income is taxed only once, and not at the fund level and again at the level of the LPs. This approach is consistent with international best practices, and is considered a positive feature of the Egyptian regulatory framework. Fund-manager compensation also aligns with international market norms, where managers typically earn an annual management fee (com - monly 2% of committed capital) and carried interest (usually 20% of fund profits after capi - tal has been returned and a hurdle rate met). A deal-by-deal distribution model tends to be preferred, usually coupled with contractual claw - back arrangements. That said, certain elements of the existing framework diverge from global fund structuring standards, and could have an impact on fund economics: • capital contribution mechanics these do not currently mirror the international model of flexible capital calls, which may create practical challenges for fund managers who need to align capital inflows with the timing of investment opportunities; and • the profit distribution framework the current regulatory framework does not incorpo - rate the internationally recognised waterfall distribution model, nor does it provide for distribution in specie (ie, in-kind distribution
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