In the last 15 years, private equity in Morocco has experienced significant change. In 2016, according to a survey of the Moroccan Association of Capital Investment, MAD305 million was raised and MAD786 million invested in Morocco by private equity. The 2018 annual AVCA (African Private Equity and Venture Capital Association) conference was held in Marrakech, with national and international players representing sectors including agribusiness, education, life sciences and healthcare, industry, energy and mining.
Inspired by the European market, the legislator has, for example, recently recognized regulated collective investment trusts and real estate investment trusts (REITs, or OPCI in French). Today, investment funds are a significant source of financing in Morocco for small and medium-sized companies (SMEs).
A key reason for this rapid growth of private equity is Morocco's standing as a financial hub and entry platform for doing business in Sub-Saharan Africa.
Private equity as an alternative to bank financing
The number of investment transactions has drastically increased. The establishment of Moroccan and foreign funds (including Chinese funds in anticipation of direct investments in Morocco as a part of China's One Belt One Road initiative) has multiplied, and the amounts invested in those funds have also increased.
This evolution is also the result of banks no longer granting easy financing, which encourages companies to use private equity as an alternative. The growth is also attributable to the creation of free-trade zones in Morocco (for example, in Tangiers and Kenitra) that attract increasing levels of specialized funds, and the implementation of Casablanca Finance City, a financial ecosystem offering a range of legal and tax incentives encouraging private equity funds to locate the headquarters of their pan-African investments in Morocco (such as Wendel Africa, Brookstone Partners and Africa50).
This coincides with a shift of mentality by entrepreneurs and Moroccan family businesses that are increasing attracted to training programs (particularly through the Elite program of the Casablanca Stock Exchange) that cover the benefits of private equity and prepare them for the opening-up of their capital to private equity funds.
Some obstacles to effective growth
This growth, however, can occasionally be hindered by cultural issues, and there is still a long way to go in terms of Moroccan SMEs and family businesses fully opening up to private equity funding. Fears of loss of independence, a heavy financial formalism and interference into family affairs remain prevalent.
In addition, the legal and tax arsenal is arguably not yet attractive enough for some private equity funds in the Moroccan market, and is not flexible enough to create incentive management packages. The tax framework must also be clarified, for example by increasing the number of state double tax treaties, or by adopting the parent-subsidiary tax consolidation arrangement to avoid negative tax impacts.
In order to incentivize a company's managers, private equity funds regularly offer management packages, which enable managers to make significant profits when the financial objectives set out by the fund are achieved.
Such packages can take several forms, including a free-share allotment for managers, or preferred shares through which managers receive substantial pay raises when the company has reported a strong performance. Indexing managers' remuneration to the company's performance helps create a motivating dynamic that aligns the investment fund and managers' interests.
Other mechanisms include the signing of "put and call options" (good and bad leaver) by which the funds undertake to acquire the managers' shares when they leave the company, indexing the redemption price with criteria such as the company's performance, or the departure of the manager (by resignation or dismissal).
A rigid legal arsenal
Morocco's legal arsenal is strict, imposing numerous conditions and restrictions on the creation of preferred shares (whether shares with double-voting rights or priority dividend shares). The implementation of these has two significant limits. The first is the legal requirement of fully paid-up shares, and the second is the requirement of share ownership for at least two years by the same shareholder. Further limitations, with regard to the creation of priority dividend shares, are that the company must have made distributable profits in the last two financial years, and that they may not exceed a quarter of the share capital.
Also, apart from a few limited cases, removal of shareholders voting rights is not allowed, nor the issuance of multiple voting rights – save for the exception noted above.
These restrictions make it difficult for investors to implement sufficiently flexible management packages. As such, lawyers must find creative contractual arrangements to fill the gap.
The new investment fund trend
Investment funds in Morocco increasingly behave more and more as corporate actors, becoming long-term investors by diversifying the type of business sectors they operate and invest in, and taking more and more space in the management of the businesses.
With a diversification of the product range, private equity actors are no longer confined to their investment policy of minority or majority shareholders, and we see more funds investing both as a minority and majority shareholders and on a long-term basis (for example, seven years, instead of three to five).
As the market grows increasingly competitive, with a shortage of potential targets, the difference between corporate and private equity funds is becoming less clear. In fact, the interests of both private equity funds and corporates are becoming more aligned with regard to a company's valuation and investment policies.