BY C.E. NWUDE BEING A PAPER PRESENTED AT THE PRIVATE EQUITY FUND REGISTRATION SEMINAR – NOVEMBER...
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Transcript of BY C.E. NWUDE BEING A PAPER PRESENTED AT THE PRIVATE EQUITY FUND REGISTRATION SEMINAR – NOVEMBER...
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