Private Equity Co-Investments – The New Regulations for Pension Funds
Nigeria’s Pension Regulator, Pencom, has recently issued regulations permitting pension funds to co-invest in private equity funds with the expectation that, allowing pension funds to co-invest with qualifying private equity funds will increase pension fund exposure to private equity. Expectedly, the Regulations prescribe minimum co-investment requirements, with the intent of ensuring the safety of retirement savings. This update summarises some of the regulatory highlights of the Operational Framework for Co-Investment by Pension Fund Administrators ( the “Regulations”)
1.Prior Experience of Key Principals
Pension funds are prohibited from co-investing with first time private equity fund managers. Pension funds can only invest in private equity funds whose key principals have raised a second fund and whose principals have successfully exited one investment from a previous fund. It appears that the “experience” requirements track the experience of the “key principals” as opposed to that of a private equity fund, suggesting that pension funds can still co-invest with first time private equity fund managers in so far as the key principals of a first time private equity, have exited a prior investment and closed a fund, prior to their current engagement
2. Investment Limits
A pension fund cannot invest more than 50% of its investment in the main fund, in a co-investment arrangement. Additionally, pension funds are prohibited from entering into co-investment arrangements which contain “less favourable terms” compared to the terms in the main fund. Pension funds are also prohibited from buying the co-investment interests of other investors, who may want to exit before maturity.
3. Fee Transparency
All fee categories have to be stated in the relevant co-investment documentation. A pension fund does not have any obligation to pay fees not stated in the relevant co-investment documentation
4. No Objection
Pension funds are required to obtain a No-Objection from the pension regulator before closing a co-investment arrangement with a qualified private equity fund
5. Reporting Requirements
Qualifying private equity funds who enter into co-investment arrangements with pension funds must provide a quarterly valuation of the pension fund investments to an investing pension fund and must also provide information on the valuation methodology adopted
6. The Use of SPVs
Co-investment arrangements can only be implemented using a special purpose vehicle set up by the general partner of a private equity fund, with clear provisions around the roles and responsibilities of each party. The Regulations require a general partner to provide all documentation, including (board meeting minutes, human capital information and deal pipeline development) required by a pension fund to conduct initial and ongoing due diligence on the target of a co-investment arrangement
Comments
The Operational Framework for Co-Investment by Pension Fund Administrators assumes that pension funds will increase their allocations to private equity, if pensions are allowed to co-invest with client private equity funds. We think there is little correlation between both events but welcome the Regulations as re-affirming the expectations of Pencom around the need to increase pension investments in private equity.
We think that institutional investors should retain the flexibility to decide which co-investment structures work for them. In practice, issues around the tax efficiency of a co-investment structure as well as the level of ongoing involvement which a pension fund is comfortable with, in relation to a particular investment, are often critical to determining the most optimal structure for private equity co-investments. For instance, a pension fund may decide that investing directly or through an SPV entirely controlled by it, may provide greater tax efficiency or control.
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