Sunday, October 25, 2020

Facing the challenges of foreign private equity investment in Nigeria

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By Oluyomi Martins

Nigeria has witnessed a steady decline in foreign direct investment, FDI, in recent times. According to data from the National Statistics Office, FDI was $ 1.19 billion in 2018, while only $ 934.34 million was received in 2019.

Several reasons explain this trend, including falling world oil and commodity prices, poor macroeconomic policies, insecurity, and currency volatility.

A recent concern is the management conflict that has been observed between Nigerian companies and their foreign private equity investors. A recent example of such a conflict is Health Plus and Car45. These conflicts have become the subject of litigation and arbitration.

When conflicts like this occur, it sends the wrong signal to other potential investors who may label Nigeria an unsafe investment destination and prevent any investment in our economy.

Foreign private equity funds typically have an average duration of five to ten years. The legal structures most commonly used as a vehicle for private equity funds are: limited partnerships according to chapter C20 of the Companies and Allied Affairs Act, laws of the Federation of Nigeria of 2004 and general or limited partnerships, or liability companies Newer Limited under the Lagos State Companies Act 2009 (amended). Funds registered abroad can only apply for investments from investors in Nigeria with the approval of the SEC.

There is transaction documentation that should be in place, including nondisclosure agreements and term sheets; offer documentation; due diligence reports (legal, financial, tax and technical); share purchase or subscription agreements; shareholders agreements; and disclosure letters. Each of these documents lays the foundation for a proper transaction.

If all the processes listed above are in place, there should normally be a smooth transaction. The problem we have with the conflicts that arise thereafter actually has two faces. One, by the Nigerian company that receives the foreign private capital and the foreign private equity company.

Let’s start with Nigerian companies. Sometimes at the time of writing investment agreements, not all relevant terms are drafted properly to ensure unnecessary conflict, including exit strategy, etc. It also has cases of diversion of funds from the investment planned by Nigerian companies.

When receiving funds from foreign investors, some Nigerian companies will prefer to divert the funds to other companies rather than use them for what is stated in the agreement. There is also the problem of poor management and corporate governance structure.

On the part of foreign private equity firms, our research shows that some of them actually fail to meet their obligations as set out in the agreements related to the injection of milestone funds. This may also be due to the breach of the agreement by the Nigerian partners.

The issue of greed also comes up at the time of exiting transactions. Knowing the size of the Nigerian market, some may be reluctant to give up their properties when they should.

The lack of structuring of the regular audit of Nigerian companies also leads foreign private equity investors to lose track of the companies they invested in and how their money was distributed.

Whatever the case, trust remains sacrosanct to effectively achieve a profitable partnership. To the extent possible, Nigerian business owners should first commit to honoring the agreed contract.

For example, in the current case of HealthPlus Limited, comments from both sides point to poor corporate governance as a major factor affecting the fortunes of the business.

While the founder said that not enough money has been provided for operations, investors insisted that money has been provided, and that there will be more to come only if KPIs are met, hence the appointment of a director of transformation of the company. company.

Venture capitalists and private equity investors want to invest their money where the prospects are high.

The Nigerian economy presents a real platform for such investments. The successes of some Nigerian companies that have such foreign partnerships show that it is not all bleak.

What is required is diligence and deliberate efforts to comply with agreements.

Two are always needed to tango in any business transaction to avoid unnecessary and avoidable conflicts. It is important to adhere to agreed rules and quickly put transaction monitoring strategies in place to nip any variation in the bud.

Oluyomi Martins is a financial services consultant and CEO and CEO of Black Martins & Company Limited.

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