The Evolving Nigerian Private Equity Landscape: Finally Coming of Age?

redundant or already available to companies generally, under the provisions of the Industrial Development (Income Tax Relief) Act. For instance, one of the main incentives in the VCA, the relief from tax on the disposal of equity in a venture capital company is currently redundant due to a general exemption from capital gains tax in respect of any gains from the sale of shares.

STRUCTURES

The result of the foregoing, challenging regulatory framework, is that virtually all of the fund managers (including the wholly indigenous ones) typically establish their funds outside Nigeria. Mauritius tends to be the base of choice due to its collection low tax rate, network of tax treaties and private equity specific legislation, which allows for significant flexibility and certainty.

Typically the funds will be registered as a limited partnership with the Partnership Registry in Mauritius and will be licensed by the Financial Services Commission as a Closed-end Fund.

In practice, Nigerian private equity funds will only look to register with the SEC where there is an intention to source investment funds from Nigerian pension funds. In such instances, the fund manager will normally seek to register a parallel fund with the SEC, in addition to the fund registered in Mauritius.

DEALS

While jurisdictions like Mauritius help to bridge gaps that might otherwise have existed in approaches to fundraising, as regards deal structuring and execution, African private equity is not without its peculiarities.

Private equity deals on the continent tend to be much smaller (typically below US$10 million) and with family owned businesses, which are reluctant to relinquish control. Furthermore, given the particularly high domestic borrowing costs and relatively limited exit options (few, if any, regional stock exchanges), investments tend to be held for longer periods⁷.

The impact of the foregoing is that sometimes deals need to be pieced together to achieve scales sufficiently attractive for private equity investors. Also, minority protection issues tend to be a greater concern and, increasingly, fund managers are considering less common (but more easy to exit) structures like equity-linked notes.

Likewise in relation to exits, because most private equity investments are relatively small and, unlike their western counterparts, African private equity is generally not in the habit of loading acquired investments with debt as a means of boosting returns, exits generally tend to be at the stage where businesses are ripe for standard private equity investment. The result of this is that exits tend to be by way of secondary sales to either financial investors like larger private equity firms (e.g. Verod’s partial exit from GZ Industries Limited, Actis’ full exit from Mouka Limited) or to international or regional businesses looking to expand into the Nigeria market (e.g. AfricInvest’s sale of its 77% indirect shareholding in Mansard Insurance Plc to the Axa Group of France).