PRIVATE EQUITY FUND REGISTRATION

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

2. 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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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;

8. 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;

9. 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;

10. 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. • 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;

11. 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;

12. 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;

13. 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.

14. SEC requirement for registration & authorization of Private Equity Funds contd.. • Prototype agreement between the Fund Manager and investors; • Establishment of an anti-money laundering program and duty to report suspicious activities. • Copy of the certificate of incorporation of the manager of the Private Equity fund; • 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; • Two copies of form C07 of the manager to the Private Equity fund certified by the CAC; • Sworn undertaking to file quarterly returns with the Commission; • Any other material information

15. 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.

16. 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.

17. 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.

18. THANK YOU