Nigeria continues to generate a fair share of private equity transactions in Africa, especially in telecommunications, health, insurance, agriculture, financial, manufacturing, retail and real estate.
The country’s evolution as a preferred destination for private equity investment in sub-Sahara Africa is largely due to its growing population and rising middle class, as well as the ongoing privatisation, deregulation and restructuring of strategic sectors.
Major reforms helped reduce the risk of such investments by improving the code of corporate governance; by creating a legal structure and establishing investment governing entities, such as the Investment and Securities Tribunal; and by migrating to international financial reporting standards and risk-based supervision, among others. By amending the Securities and Exchange Commission (SEC) rules in 2013, specific provisions were introduced for private equity funds (PEFs). By the amendments, the registration of PEFs with minimum commitments of N1bn ($3.5m) investors’ fund wishing to raise funds from the Nigerian market is required. PEFs are generally prohibited from soliciting funds from the general public. Funds may, however, be sourced from qualified investors – either institutions or high-net worth individuals.
To protect investors, registered PEFs are not allowed to invest more than 30% of the fund’s assets in any one single opportunity, and the fund manager of a PEF must have a minimum paid-up capital of N150m ($530,100). Amendments to the Regulations on Investment of Pension Funds Assets permit investment of pension funds in private equity and infrastructure funds registered with SEC on the condition that at least 60% of the PEF is invested in Nigeria.
Available private equity vehicles include the limited liability companies registrable under the Companies and Allied Matters Act (CAMA), general or limited partnerships, and limited liability partnerships introduced by the Partnership Law of Lagos State 2009. The majority of PEFs in Nigeria have been structured as limited partnerships, in which the general partner is liable for all debts and obligations, while the liability of the limited partners is restricted to the extent of their respective contributions. Where the PEF is structured as a limited partnership, individual partners are taxed under the Personal Income Tax Act. Capital gains made by the business are taxed at 10% under the Capital Gains Tax Act. Gains made on the sale of shares in target companies are exempted. For limited liability companies tax is payable under the Companies Income Tax Act at 30% on profits made. The profits are further subjected to 2% tax under the Tertiary Education Trust Fund Act.
To protect investments and ensure maximum return on investment, PEFs take pragmatic steps to assert some level of control in the target/investee company. This interest is protected in investment agreements, which include terms and conditions relating to powers to appoint directors and other management officers, voting rights, financial and other controls, and an enforcement mechanism. The provisions of the equity purchase agreement must not contravene CAMA, an investee company’s articles of association or any other applicable legislation in Nigeria.
Foreign PEFs are allowed to invest in Nigerian securities, and such investments are regulated by the Nigerian Investment Promotion Commission Act and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act. These Acts permit foreign investors to invest in Nigeria without obtaining approvals from different regulators. When funds for investment are imported into Nigeria through an authorised dealer, a foreign investor is entitled to receive a Certificate of Capital Importation. This enables the investor to repatriate the proceeds of its investment without any governmental restrictions, net of payment of taxes.