Legal and regulatory framework for private equity in Nigeria

September 2021 | SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

September 2021 Issue

Nigeria is a popular investment destination in Africa due to its large economy and population size, which has led to a vast number of businesses operating in the country.

In recent years, Nigeria has witnessed a boom in private equity (PE) investments. In the African Private Equity and Venture Capital Association’s (AVCA’s) ‘2020 Annual African Private Equity Data Tracker’, Nigeria is reported to have struck 50 percent of PE deals in West Africa between 2015 and 2020.

Several players have taken advantage of Nigeria’s potential to invest across different sectors. The market is largely dominated by investments from high-net-worth individuals (HNWIs) and institutional investors that possess large stakes in businesses across the economy, typically through PE funds.

In Nigeria, PE funds serve as: (i) an alternative source of investment for sophisticated investors; and (ii) an alternative source of funds for companies seeking to raise capital through the non-public market. The nature of PE funds offers unique advantages to businesses in Nigeria, as it creates an avenue to access capital investment other than through traditional bank loans and publicly listed shares.

In Nigeria, players looking to establish PE funds need to consider the available corporate structures for such investments, the means of making investments, the management of funds and how to import capital (where required) for investment purposes.

In terms of corporate structure, under the laws in Nigeria, investors can adopt different investment vehicles, including: (i) a limited partnership registered under the Companies and Allied Matters Act (CAMA) or under the partnership laws of the various states; or (ii) a private limited liability company under CAMA. A review of market practices reveals that the vehicle most commonly utilised by investors is the limited partnership, due to the perception that it is tax-efficient and allows investors to participate in the funds as limited partners (LPs) or limited liability partners.

Where the limited partnership vehicle is utilised, LPs – often institutions or HNWIs – invest or commit to invest in the PE fund on the understanding that their total liability is limited to the extent of the capital invested. LPs are not involved in the management of the fund. Decision making for the PE fund and management of the fund’s portfolio is often done by the general partner (GP). Upon registration with the Corporate Affairs Commission (CAC), the vehicle is vested with the rights of a body corporate under the law.

The Securities & Exchange Commission (SEC), however, has published rules regulating PE funds, which only apply to PE funds with a minimum commitment of NGN1bn. The fund manager of registrable PE funds is expected to have a minimum paid up capital of NGN150m. Furthermore, PE funds are precluded from raising funds from the public, investing more than 30 percent of the funds in a single investment, and are expected to submit quarterly, semi-annual and annual returns to the SEC.

Pension funds are a major investor in PE funds. Nigerian pension fund administrators are prohibited from investing pension fund assets in PE funds that are not SEC-registered or managed by SEC-licensed fund managers.

From a tax perspective, PE fund vehicles registered in Nigeria will be subject to payment of statutory taxes. Under the present tax regime, where the PE fund vehicle is a company with an annual turnover of more than NGN100m, it is liable to pay corporate income tax at 30 percent of taxable profits, a police fund levy of 0.005 percent of the net profit of the company’s operating business in Nigeria, and tertiary education tax at 2 percent of assessable profit.

Where a limited partnership vehicle is utilised, the income of individual partners is taxed under the Personal Income Tax Act 2004 (as amended) at a progressive rate of up to 24 percent. It is often the case that PE funds are non-operational entities deriving income mainly from dividends from their portfolio companies. Where the PE fund investment vehicle is a Nigerian company with turnover below NGN100m, no corporate income tax is payable. However, the investment vehicle will be liable to pay withholding taxes at 10 percent on dividends paid on shares held in portfolio companies. This withholding tax payment represents the final tax payable in respect of the investment.

Where PE funds invest in various sectors of the Nigerian economy, a number of legal considerations come into play. First is the requirement to obtain sector regulatory approval (where applicable) for the investment. Qualifying investments in the banking, insurance, telecoms, oil and gas and pension sectors require the approval of regulators, such as the Central Bank of Nigeria, the National Insurance Commission, the Nigerian Communications Commission, the Department of Petroleum Resources and the National Pension Commission.

Secondly, managers of PE funds need to determine whether any antitrust or competition clearance will be required for the transaction. The approval of Nigeria’s antitrust regulator, the Federal Competition and Consumer Protection Commission (FCCPC), will be required if: (i) the PE fund acquires control of the investee company; and (ii) in the preceding financial year before the acquisition, either the combined annual turnover of the target and acquiring undertaking from, into and in Nigeria equals or exceeds NGN1bn or the annual turnover of the target undertaking from, into and in Nigeria equals or exceeds NGN500m.

It is not uncommon for PE fund managers to enter into agreements with portfolio companies for the provision of certain technical know-how and management services to these companies. Care must be taken to ascertain whether the agreements governing these services are registrable with the National Office for Technology Acquisition and Promotion (NOTAP). Failure to register a qualifying agreement will preclude the investee company from making any payments to the fund manager under such agreements through authorised channels. If an agreement is not registered within 30 days of the date of execution, a monetary fine of NGN100,000 may be imposed.

PE funds that import foreign capital into Nigeria for investment purposes (equity or loan) are guaranteed unconditional repatriation of dividends, profits and return on investment, where: (i) such funds are imported through licensed banks and converted into naira; and (ii) the PE fund obtains a certificate of capital importation (CCI) (usually issued by a Nigerian bank) within 24 hours of the inflow. The CCI is a valuable tool which provides investors with access to the official foreign exchange market at the point of repatriation.

The legal and regulatory framework in Nigeria provides a receptive and enabling environment for a PE fund to set up and make PE investments. Though fundraising, investments and exits may be challenging at the moment due to the impact of the COVID-19 pandemic, as well as the economic downturn and security and liquidity issues, the Nigerian economy has proven resilient over the years and it is envisaged that the country will continue to attract PE investment.

Anu Balogun is a partner and Damilola Obafemi is an associate at Olaniwun Ajayi LP. Ms Balogun can be contacted on +234 1 270 2551 ext. 2609 or by email: abalogun@olaniwunajayi.net. Ms Obafemi can be contacted on +234 1 270 2551 or by email: dobafemi@olaniwunajayi.net.

Anu Balogun and Damilola Obafemi

Olaniwun Ajayi LP