The Private Equity (PE) and Venture Capital (VC) space has seen significant strides in Nigeria in recent years. The past decade has seen a surge in these investments, resulting in over 450 reported deals in 2023 and a total deal value surpassing $5.9 billion, as highlighted in the AVCA 2023 Private Capital Activity in Africa Report.
While the prospect of launching profitable PE funds in Africa’s fourth largest economy remains enticing, the process of establishing and managing a successful PE fund is challenging due to the numerous regulatory hurdles and sectoral restrictions encountered when establishing PE funds in the country.
The establishment of PE funds in Nigeria is not regulated by a single comprehensive law. Instead, it is guided by various pieces of legislation all of which aim to protect investors, promote transparency and accountability, while supporting the growth of the financial sector.
As indicated, the establishment of PE funds in Nigeria is governed by a panoply of legislations including the Investments and Securities Act of 2007 (the ISA); the Rules & Regulations of the Securities and Exchange Commission 2013 (as amended) made pursuant to the ISA (the SEC Rules); and the Companies and Allied Matters Act 2020 (the CAMA).
The SEC Rules regards a PE fund as a type of a collective investment scheme (CIS) . In this regard, the ISA defines a CIS as “a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio...”
Additionally, before any PE fund can be established in Nigeria as a CIS, the ISA stipulates that such fund must be authorised by and registered with the Securities and Exchange Commission (the SEC). Furthermore, the ISA also makes it unlawful for any person, directly or indirectly to deal in units or securities of a scheme (described whether as units, securities or otherwise) unless such units or securities have been duly registered with the SEC. Finally, the ISA prescribes that a PE fund, established as a CIS must be administered by a manager who must be incorporated under the CAMA and registered as a fund manager by the SEC and is expected to have a minimum paid up capital of NGN150,000,000 (One hundred and fifty million naira).
Additionally, under the SEC Rules PE funds are required to maintain a minimum commitment of NGN1,000,000,000 (One billion naira) (circa US$599,980) to be registered with the SEC. Furthermore, expectedly, PE funds are prohibited from soliciting for funds from the general public and must exclusively source capital from qualified investors, such as high net-worth individuals, private institutions etc. They are also restricted from investing more than thirty percent (30%) of the funds’ assets in a single investment.
Beyond the regulatory frameworks indicated above, CAMA and the Corporate Affairs Commission (CAC or the Commission), also play a significant and important role in the process of fund establishment in Nigeria. CAMA defines and details the various corporate structures through which a fund can be established in Nigeria. It specifies the appropriate structures and investment vehicles, outlines the applicable corporate responsibilities associated with the selected investment vehicles and sets forth all necessary filings to be provided and filed with the CAC. In Nigeria, a PE fund may be structured as either a limited liability company incorporated under CAMA, a limited liability partnership or a limited partnership incorporated under CAMA or under the partnership laws of various states.
Also, depending on the investors the prospective PE fund wishes to attract, adherence to sector-specific regulatory guidelines may also be required. For instance, where the prospective PE fund seeks investments from Pension Fund Administrators (PFAs), strict adherence must be paid to the provisions of the sector-governing law, the Pension Reform Act and the provisions of the Regulations on the Investment of Pension Fund Assets 2019 (the Investment Regulations). Essentially, this requirement adds another layer of complexity, as fund managers and sponsors must ensure that their PE funds are structured in a manner that complies with the relevant guidelines so the fund can attract the right calibre of investors.
a. Lack of cohesive and unified regulatory approval structure
The regulatory environment for establishing PE funds in Nigeria is fragmented and lacks a cohesive framework. This absence of a unified regulatory structure results in a complex and disjointed establishment process, requiring multiple registrations and authorisations from various regulators. Each regulator demands different information, which may lead to duplicative requirements and an inefficient registration process. Consequently, the establishment of PE funds is often cumbersome and unnecessarily burdensome due to these overlapping regulatory frameworks . Typically, authorisations and approvals are required from foremost regulators including the SEC, CAC, and any sector specific regulator. The net effect of this is that timelines cannot be sufficiently estimated, leading to constant revisions of transaction timelines and often delays in the establishment of the proposed fund.
A vivid example of the increasing multiplicity of legislations is the circular which was published by the CAC on 5 December 2023, which sought to increase the minimum paid-up capital requirement for companies with foreign participation from NGN10,000,000 (Ten Million Naira) to NGN100,000,000 (One hundred Million Naira) (the Amendment). This was issued in paragraph 3, page 5 of the Revised Handbook on Expatriate Quota Administration 2022 (the Revised Expatriate Quota Handbook) and created a daunting problem for multiple foreign promoters and fund sponsors who had sought to establish the PE Funds and even General Partners (GPs) – where the funds were structured as limited partnerships – and increase the regulatory expenses to be incurred and further straining the efforts of promoters and prospective funds with established structures. Our firm, in the process of providing legal advisory on the establishment of a fund in Nigeria, sought to rectify this amendment by writing to the CAC describing that the GP sought to be incorporated, (its incorporation had been stalled and flagged by the CAC for failure to comply with the amended share requirement), was exempt from this requirement as it had no element of foreign participation given its sponsor was a Nigerian entity. The Amendment was retracted by the Commission via communication on its official X account on 8 December 2023, our application was successful, and the GP incorporated, albeit beyond the timeline envisaged.
As such, in order to avoid continuous legal and regulatory hurdles and hopefully increase the ease of establishment of funds within the country, and increasing its financial profile, we recommend that the regulatory frameworks for PE and VC funds, applicable across relevant regulators, be unified to ease the registration process and boost investor confidence.
b. Regulatory compliance uncertainty and cost of compliance
Another challenge often faced in the establishment of PE funds in Nigeria is the regulatory uncertainty and costs of compliance. The frequent and constant changes in regulatory frameworks, guidelines and regulations in Nigeria often create uncertainty for prospective PE funds, investors and fund managers.
Additionally, the cost of compliance and registration with multiple regulators remains a daunting challenge for smaller prospective PE funds and the continuous changes to regulatory frameworks make compliance more difficult and expensive. As an example, the minimum cost of registration of a PE fund with the SEC in Nigeria can amount to over NGN250,000,000 (Two hundred and fifty million naira), compared to a minimum amount of USD25,000 (Twenty five thousand US Dollars) which is usually chargeable for the establishment and registration of PE funds in Mauritius, and this cost usually remains completely dependent on the structure of the PE fund adopted by its promoters. Comparatively, the costs related and incurred by prospective promoters in establishing PE Funds in Nigeria continue to be dauntingly expensive and often poses a significant problem when compared to the value of the prospective fund to be established, especially where the parties wish to establish a small fund.
It is recommended that the Nigerian regulators collaborate with each other to effectively unify the costs of registration such that double costs paid to different regulators are extinguished. This will in turn improve Nigeria’s profile as a favourable destination for the establishment of PE and VC funds.