Private Equity Fund Raising in Nigeria; The legal requirements for Pension Funds.

Fund raising sits at the very pivot of the private equity chain. Without funds or the promise of funds, investment activity is practically impossible anywhere. Beside the primary significance of fund raising to a firm, the availability of opportunities for fund raising in a financial system is directly related to and has considerable impact on the growth of the local PE industry as this should typically stimulate both global and local interest in the local PE industry. The primary goal of a GP at the fund raising stage of the private equity chain should be to obtain competent local advice on the legal and regulatory aspects of creating, structuring, marketing, operating and closing of a fund. This is particularly important in a jurisdiction like Nigeria where the legal framework for private equity is still largely evolving. Given that one of the key goals of fund structuring is the effective management of regulatory cost/burden and benefit, the aim of this article is to give the GP interested in raising private equity funding in Nigeria, an overview of the legal requirements of fund raising as it relates particularly to pension funds. Although existing pension regulations only have direct implications for PFAs in Nigeria, there are also salient implications for a GP or a Placement Agent who seeks to raise pension funds in Nigeria. Policy and Regulatory Framework The Regulations on Investment of Pension Fund Assets in Nigeria, 2010 (the Regulation) prescribes the regulatory framework for the investment of pension funds in Nigeria. The Regulation is the first to expressly allow the investment of pension fund assets in PE. Before then, the major sources of funds in Nigeria were local banks, private equity investment portfolios of government/aid agencies and international private equity funds. In the absence of PE specific regulation, the National Pension Commission evolved specific regulations regarding the investment of pension fund assets in private equity funds. A new "Regulations on Investment of Pension Fund Assets in Nigeria, 2012" (the Draft Regulations) is expected to be effective before the end of the year. Nigeria currently operates a Defined Contribution pension policy. The policy is mandatory for all employers in Public and Private Sector organizations with 5 or more employees. The employee and the employer are required to each pay a minimum of 7.5% of the employees total emolument every month into a Retirement Savings Account operated by Pension Fund Custodian on behalf of a Pension Funds Administrator. Nigerias pension assets hit N2.25 trillion in the first quarter of 2012. With renewed efforts by the National Pension Commission (Pencom) to enforce compliance with the provisions of the Pension Reform Act, 2004, pension assets in Nigeria are clearly hitting N3 trillion in the 2012/13 corridor. Registration with Sec Under the Regulation, a PFA, typically, an LP is not allowed to invest pension assets in a PE fund that is not registered with the Securities and Exchange Commission (Sec). Similarly, the Regulations provide that the private placement arrangement or public offering of participation units of a private equity fund must be approved by Sec. In other words, evidence of the Secs approval of a private placement arrangement or a public offering is a precondition for investing pension funds in a private equity fund. The requirement of registration of private equity funds with Sec and that of Secs approval of a funds offerings effectively gives Pencom the assurance that the private equity funds so registered are under some form of regulatory surveillance. This is very significant, given that pension funds are essentially retirement savings. The registration of a private equity fund by a GP with the Sec and the approval of the fund's offerings are mandatory requirements for which penalties may ensue against a defaulting LP under substantive pension laws. A GP therefore has not only a regulatory obligation but also, a commercial

obligation in ensuring that its funds and offerings are duly registered with and approved by the Sec. Whilst there is currently no PE- specific legislation by the Sec which lays down the procedure and legal basis for registration of private equity funds in Nigeria; it is believed that the new PE regulations to be issued by Sec will address this gap. Funds Management Another key requirement that a GP should consider in raising pension funds for PE investments in Nigeria is the requirement that the PE fund must have reputable development finance institutions or multilateral development finance organizations as LPs. Where the requirement of having a reputable finance institution is not attainable or unnecessary as it may indeed be in many cases, a GP is required to have a minimum Investment Manager rating of BBB issued by a rating company registered or recognized by Sec. The PE fund must also have an advisory board with representatives of institutional investors in the majority. The Draft Regulations make significant amendments to the powers of the advisory board of a private equity fund. For instance, the Draft Regulations imposes an obligation on the LP to ensure that at all times, the advisory board has responsibility over audit functions at least regarding (a) the evaluation of projects prior to investment b) transactions with parties related to the PE Fund Manager and (c) strategies concerning divestiture of investments in which the PE Fund has interests. The Regulations also provide that the PE fund to be registered with the Sec is managed by individuals versed in PE investment and experienced in funds management. Additionally, the CEO and CIO of the Fund Manager are required to have a minimum of ten (10) years experience in PE investment and management of third party assets. The specific aim of these provisions is to ensure that some form of international best practice, experience and competence is brought to bear in the management of the private equity funds. Investment focus To be eligible for pension to private equity funds, a GP must demonstrate that a minimum of 75% of the PE fund will be invested in companies or projects within Nigeria. Whilst the importance of this requirement is appreciated, the extent to which economic/developmental objectives can or should be allowed to override private investment goals should be controlled. The Author holds the view that it is far more important to focus on creating a tight framework that is also flexible enough to allow maximum returns on investment for a fund manager. Given that pension funds are retirement savings, the author believes that this position is essentially in the public interest. It may therefore not be out of place to review the current threshold and to opt for a system that would periodically mark the threshold to the market. Investment Limits. The Regulations only allows for the investment of pension funds assets in private equity funds up to a Global Portfolio Limit of 5% and a Per Issuer Limit of 5%. The Regulation also prevents pension funds from purchasing more than 20% of any private equity fund. Under the proposed Draft, which envisages a multi fund investment structure that is sensitive to the risk appetite of the account holder, the Global Portfolio Limit is to be increased to 10% whilst the Per Issuer and Per Issue limit remains at 5% and 20% respectively.

Marketing The Regulation also makes other prescriptions that touch on marketing, reporting and financial promotions. For instance, the Regulations provide that the private equity fund into which pension funds are to be invested must have well defined and publicized investment objectives and strategy as well as disclosures of pricing of underlying assets; annual financial statements audited by reputable firms of chartered accountants; and any other necessary information. The fund is expected to clarify satisfactory pre-defined liquidity/exit routes such as Initial Public Offers; Dividends; Sale to industry buyers; and use of buy-out instruments in investing in the underlying companies or projects.

Another important consideration is the requirement that GPs are to retain a minimum of 5% of the Fund. The word retain in this context requires that a minimum of 5% must be maintained throughout the tenor of the fund. The Chief Financial Officer and the Chief Executive Officer are not allowed exit the Fund without prior notice to the Commission through a Limited Partner. The Regulations also require that the exit clause shall be expressly stated as a condition in the investment agreement/ covenant between LP and a GP. While it is important to align the interests of the GP with that of a LP, we believe that the requirement of 5% is a rather high requirement particularly for local players giving the evolving nature of the Nigerian private equity industry. It is believed that the Draft Regulations would consider a more realistic review of this provision. Conclusion As Nigeria continues to move away from a generic investment framework to a more defined and specific legal framework for its evolving private equity industry, it is very clear that the pedigree, overall track record, investment profile of GPs would be a very significant consideration for LPs given the obligations placed on them by the Regulations. Global private equity firms interested in the Nigerian private equity industry and local GP with very strong credentials will certainly be treated more seriously and would stand a better chance at obtaining commitment capital. Pencom's bold reaction to the investment of pensions in private equity would also significantly affect the regulatory approach to be adopted by other relevant agencies and indeed the Sec.

Olubunmi Ogunkunle is a Partner in the law firm of Samuel Stampley & Strauss LP based in Lagos, Nigeria. He is a specialist in both local and Africa - focused international private equity investment advisory, including fund formations, mergers and acquisitions, management arrangements and joint ventures.