BY C.E. NWUDE BEING A PAPER PRESENTED AT THE PRIVATE EQUITY FUND REGISTRATION SEMINAR – NOVEMBER 14, 2013

PRIVATE EQUITY FUND REGISTRATION

Outline

Introduction

Global changes in Private Equity/ Hedge Fund regulatory

landscape

SEC requirement for registration & authorization of Private Equity

Fund Managers

SEC requirement for registration & authorization Private Equity

Funds

Reporting & other requirements for Private Equity Funds

Conclusion

2

Introduction

Private Equity seek to provide equity financing for companies not quoted

on an exchange, and covers a wide range of business, from small venture

capital firms to large portfolio companies.

Structurally, it operates as a wholesale market in many jurisdictions

comprising institutional investors and financially knowledgeable

individuals.

Prior to the financial crisis of 2007 and 2008 private equity like other

hedge funds were unregulated because it is assumed that practitioners

are knowledgeable enough to negotiate deals and conduct due diligence

before attempting to invest.

3

Global changes in regulatory landscape

Changes seen in global regulatory landscape in Private Equity/Hedge

Funds came about in response to the financial crisis. Though the crisis

was triggered by the serious deficiencies in underwriting and

disclosures of sub prime mortgages but its spiral effects on the other

segments of the financial market had far reaching effect. In the US, the

Dodd Frank wall Street Reform and Consumer Protection Act 2010

introduced new regulatory regime to Private Equity/Hedge Funds.

The Act requires advisers to private funds with more than $150million

in asset under management to register with the US SEC as an

investment adviser with an additional requirement to design and

implement a compliance program and designate a chief compliance

officer.

Global change in regulatory landscape contd.

The European Union directive on alternative investment fund managers

(AIFM) which became effective in July 2013 imposed a wide range of

requirements on private fund managers doing business across the EU in the

following areas:

Capital Requirements;

Reporting and disclose to regulators& investors;

Conduct of business (remuneration guidelines, conflict of interest);

Marketing, e.t.c.

The Nigerian Case

In Nigeria, the 2010 PENCOM reform guidelines for the regulation of

investment in pension fund assets i.e section 5: 2:11 provides a window

for pension fund assets to be invested in Private Equity Fund.

This gave impetus for the creation of the new rules on private equity

funds by SEC. However, for registration and authorization of of Private

Equity Fund Manager provision of Rule 91 (1) of the SEC consolidated

Rules 2013 still applies.

SEC requirement for Registration/ Authorization of Private Equity Fund Managers(Rule 91 SEC consolidated Rules 2013)

An application for registration and authorization as a Private Equity Fund

Manager shall be filed along with the following:

Evidence of payment of ₦5,000 being application fee;

Evidence of payment of ₦100,000 being registration fee for the company

and ₦1,000 each for sponsored individuals;

Duly completed SEC form 3 to be accompanied by the following:

Completed SEC form 2 for atleast three sponsored individuals, one of

which should be a compliance officer responsible for monitoring

compliance with Investment & Securities Act (ISA) 2007, SEC Rules &

Regulations, notifications, guidelines, e.t.c;

SEC requirement for Private Equity Fund Managers contd.

• Copy of certificate of incorporation certified by the Corporate Affairs

Commission (CAC).Original is to be sighted by the authorized staff of the

Commission;

• A copy of Memorandum and Article of Association also certified by CAC

which should include power to act as fund/portfolio manager, in this

case a Private Equity Fund Manager;

• Name(s) and address (es) of the company’s subsidiaries, associated

companies, type of business and percentage holding;

SEC requirement for Private Equity Fund Managers contd..

• Latest/current audited accounts or statement of affairs of the company;

• Latest professional indemnity insurance policy for the company

covering atleast 20% of the minimum paid up capital of ₦20million;

• Profile of the company/firm which should include among others, brief

history of the company, organizational and shareholding structure,

principal officers as well as details of past & present activities of the

company;

• Sworn undertaking to keep proper records and render returns;

SEC requirement for registration & authorization of Private Equity Funds(Rule 561 SEC Consolidated Rules 2013)

In line with the above provision, an application for registration & authorization

of a private equity fund shall be filed along with the Information Memorandum

to be issued to the target investors.

1.The Information Memorandum shall contain the following:

The investment policy and objective of the fund;

The industry or geographical focus of the fund;

The fund managers experience in private equity;

The investment criteria for target portfolio companies;

SEC requirement for registration & authorization of Private Equity Funds contd..

The names and profile of the fund manager’s principal officers and

management team;

Tax issues;

Material risks associated with investing in the fund;

A statement of any minimum investment commitment required of an

investor;

Total capital commitment;

Net target investment returns;

SEC requirement for registration & authorization of Private Equity Funds contd..

Distribution of proceeds and sharing ratio;

Relevant fees and charges connected with investment in the fund;

Provision for admission of new investors and withdrawal of existing

investors;

Valuation methodology and frequency of valuation;

Exit routes from investments;

Management participation in the fund;

Repayment of capital;

SEC requirement for registration & authorization of Private Equity Funds contd..

Duration of the fund and any possible extension thereof;

The establishment of an anti-money laundering program and duty to

report suspicious activity;

The duties, responsibilities and liabilities of the fund manager;

Provision for meetings and voting quorum.

Economic development impact.

Provision for termination or winding up.

SEC requirement for registration & authorization of Private Equity Funds contd..

2. Prototype agreement between the Fund Manager and investors;

3. Establishment of an anti-money laundering program and duty to report

suspicious activities.

4. Copy of the certificate of incorporation of the manager of the Private Equity

fund;

5. Two copies of the memorandum & article of association of the manager of

the private equity fund certified by the CAC, with a provision authorizing the

company to manage Private Equity fund;

6. Two copies of form C07 of the manager to the Private Equity fund certified by

the CAC;

7. Sworn undertaking to file quarterly returns with the Commission;

8. Any other material information

Reporting /Other requirements for Private Equity Funds

In addition to the Provisions of SEC Consolidated Rule 561, SEC Rule 562 (1) &

(2) stipulates reporting requirements for Private Equity funds i.e:

Submission of Quarterly returns detailing: Total number of investors in the

Fund, total commitment received from investors, total commitment already

drawn-down, current of investments of the fund and current value of assets of

the fund;

Submission of Annual account/report of the Fund and a semi-annual report to

the investors.

Reporting /Other requirements for Private Equity Funds

SEC Rule 563 requires a private equity fund investment to be priced at fair

value, where fair value means the amount for which an asset could be

exchanged between knowledgeable willing parties.

However, these rules are only applicable to private equity funds with a

minimum commitment of ₦1billion investors’ fund.

Conclusion

Current global wave of regulatory reforms in the private equity/ Hedge

funds space is premised on the believe that the alternative investment

industry contributed in no small measure to the global financial crisis

hence across jurisdictions, the regulators are imposing significant

transparency and disclosure obligations on the Private Equity Fund

industry to guard against Systematic failure as the collapse of a major

Hedge fund could significantly impact the financial market

Though investors in Private Equity Funds are usually sophisticated and

have the capacity to demand information themselves there is the

additional comfort of regulatory oversight.

17

THANK YOU