Many of the private equity funds set-up by Nigerian sponsors are domiciled offshore.1 However, the SEC in Nigeria has published rules relating to the formation of private equity funds in Nigeria. As of December 2021, only 10 private equity funds have been authorised in Nigeria. Whilst 8 out of the currently authorised private equity funds are structured as partnerships, only 2 are structured as trusts. Here are a few considerations for private equity funds managers looking to set-up private equity funds in Nigeria.
- Scope of Authorisation
The SEC private equity rules regulate private equity fund managers at the fund level and at the manager level. This means that managers of private equity funds and each of the private equity funds formed are subject to authorisation requirements in Nigeria.
- Safe Harbours/Exemptions
The SEC private equity rules provide a safe harbour for private equity funds that are less than N1,000,000,000 (One Billion Naira) in investor commitments, meaning that, private equity fund managers do not have to register private equity funds with a target investment size less than this threshold, with the SEC.
- Marketing Regulations
The SEC private equity rules authorise the SEC to review marketing documentation. Fund managers are therefore required to submit key marketing documents for review and approval by the SEC before marketing commences. However, the activity or term "marketing" is not defined in the context of the SEC private equity rules and the term does not have a specific meaning different from the ordinary meaning of the term. There are no provisions regulating the pre-marketing activities of fund managers. There are also no provisions limiting the number of investors that can participate in a private equity fund. However, there are regulatory mandates on a private equity fund manager to market only to qualified investors2.
- General/Public Solicitation
The SEC private equity rules are clear on the prohibition on private equity fund managers to only market their securities by way of private placement.
- Authorisation Fee
On the fund level, the SEC private equity rules do not require fund managers to pay an authorization fee as part of the authorisation process.
- Minimum Share Capital
Fund manager entities are required to have a minimum paid up share capital of N150,000,000 to qualify for authorisation under the SEC private equity rules. Promoters are also required to obtain a Fidelity Bond Insurance covering at least 20% of the minimum paid up capital.
- Promoter Regulation
The promoters/founders of a private equity fund are also subject to credential and character evaluation as part of the authorisation process. Promoters are required to have a minimum of 4 years post graduation experience to perform their functions and are required to write exams to test their knowledge of securities laws and the Nigerian capital market. Amongst other requirements, Promoters would have to undergo police clearance and obtain a clearance report certifying that the promoters of good conduct and have no criminal history. Promoters who decide to register with the SEC are referred to as "Sponsored Individuals" and there are to be a minimum of 3 Sponsored Individuals, one of which must be the Managing Director and another, the compliance officer, responsible for ensuring compliance with securities laws.
- Investment Restrictions
The SEC private equity rules prohibit private equity fund managers from investing more than 30% of the assets of a private equity Fund in a single investment.
- Reporting Obligations
The SEC private equity rules mandates authorised private equity fund managers to submit quarterly reports to the SEC. Such reports must contain information on (a) the total number of investors in a private equity fund; (b) the total commitment received from investors (c) the total commitment already drawn-down (d) the current investments of the private equity fund (e) the current value of the assets of the private equity fund and (f) the annual account/report of the private equity fund.
Additionally, the SEC private equity rules, mandate authorised private equity fund managers to submit quarterly reports to all limited partners. Such reports must contain information on (a) details of total commitments (b) draw-down and distributions (c) changes to investment strategy (d) current and new investments;(e) detailed realization summary by investments; (f) valuation of each investments and a (g) statement of benefits, fees and net management fee.
Footnotes
1. In addition to understanding the rules around the formation of private equity funds, it would be prudent for first-time fund managers to have a thorough understanding of how private equity funds are structured, the motivations all of the key stakeholders in a private equity fund, industry best practices and also the business and revenue models of private equity funds. To speak to our investment funds team regarding forming a private equity fund in an offshore jurisdiction or regarding a training session, please reach out via support@balogunharold.com
2. Qualified Investors is defined to include institutional investors and high net worth individuals
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
