Corporate Governance, Insights

Legal Mechanism for Investor Protection in Private Equity Transactions in Nigeria

According to the African Private Equity and Venture Capital Association, 73 percent of the total value of private equity deals in West Africa between the years 2013 to 2018 were recorded in Nigeria. This trend continued into 2019 and 2020 with a high volume of deals recorded in the financial services, information technology and real estate sectors. In recent years, the Nigerian private equity industry has grown exponentially with the establishment of a number of indigenous private equity funds, however deal activity continues to be dominated by international funds. Established indigenous fund managers include African Capital Alliance which was established in 1997, Sahel Capital Agribusiness Limited, Synergy and Verod. The Nigerian government has recognized private equity as a catalyst for growth, accordingly it has passed laws and made regulations to encourage investor confidence in the Nigerian private equity market despite obvious limitations and risks. This article examines available legal mechanisms to guarantee investor protection.

In 2013 the Securities and Exchange Commission (SEC) introduced rules for the registration and regulation of private equity funds. The Sec Rules 2013 define Private Equity Funds (PEF) as a type of collective investment scheme that invests primarily in private companies and unlisted companies, whether or not in an attempt to take control of the business.  The rules apply to PEF’s with a minimum commitment of N1 billion investor funds.  The implication is that PEF’s with less than N1 billion in investor funds are not subject to the rules. The rules mandate the fund manager of a PEF to have a minimum paid up capital of N150million to qualify for registration. PEF’s may only privately source for funds from Qualified Investors alone, they are not permitted to source funds from the public. Qualified investors include institutional investors and high net worth individuals. The rules prohibit fund managers from putting all their eggs in one basket, accordingly, a PEF shall not commit more than 30% of the funds in a single investment.  This is a common sense provision aimed at minimizing risk exposure and diversifying investment. The rules establish and promote a regime of transparency on the part of fund managers. Fund managers must disclose detailed information on the risks and potentials of the fund to investors by way of an information memorandum. The information memorandum must contain specific particulars and must be filed with the Commission.

The SEC rules on PEF’s are skeletal and lacking in essential detail. This is very evident when the SEC rules are compared with the provisions of the PENCOM Regulation on Investment of Pension Fund Assets (Pencom regulations) which are more detailed. The Pencom regulations allow Pension Fund Assets to be invested in PEFs. Amongst other requirements, the regulations mandate the PEF to publish and publicize annual financial statements audited by two independent firm(s) of chartered accountants registered by the Financial Reporting Council. The regulations also prescribe that the PEF Vehicle shall have satisfactory pre-defined liquidity and exit routes such as IPO’s, Dividends, sale to industry buyers etc. This implies that at the commencement of the investment, the PEF must have a well-defined and detailed exit strategy, after all, the ultimate aim of the fund is to make substantial gain upon the liquidity event. The regulations stipulate that key principals of the fund manager should have at least ten (10) years’ experience in investments and management of third-party funds. The regulations also incorporate an important local content provision which provides that 60% of the fund shall be invested in companies or projects within Nigeria.

In 2015, the SEC established the National Investment Protection Fund which is incorporated as a legal entity. The fund is set up as a type of insurance scheme for investors in the event of losses suffered as a result of insolvency, bankruptcy, negligence or misappropriation of the funds by fund managers. However, subject to certain eligibility criteria, payment is made by the board to satisfy claims subject to the rules and provisions of ISA. However, the maximum amount paid out by the board to a single investor in the event of a claim is determined by the Board from a written policy from time to time. By the National Investment Protection Fund Rules 2017, the maximum amount payable to an investor who has suffered loss is Two Hundred Thousand Naira (N200, 000.00) or its equivalent in form of shares/units. It must be said that the N200, 000 Cap hardly scratches the surface. Unsuccessful investments usually lead to losses in millions, if not billions of Naira by individual investors. If the SEC is serious about insuring investor funds, then the cap must be increased substantially…



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