October 12, 2020

Braving the challenges of foreign private equity investment in Nigeria

For DSO, a new life in a season of expectations

By Oluyomi Martins

Nigeria has witnessed a steady decline in Foreign Direct Investment, FDI, in recent time. According to data from the National Bureau of Statistics, FDI was $1.19 billion in 2018, while only $934.34 million was received in 2019.

Several reasons account for this trend, including drop in global oil and commodity prices, poor macroeconomic policies, insecurity and currency volatility.
One recent concern is management conflict that has been witnessed between Nigerian companies and their Foreign Private Equity Investors. A recent example of such conflict is that of Health Plus and Car45. These conflicts have become matters of litigation and arbitration.
When conflicts like this occur, it sends a wrong signal to other prospective investors who may tag Nigeria as an unsafe investment destination and avoid any investment in our economy.
Foreign private equity funds normally have an average span of between five and ten years. The legal structures most commonly used as a vehicle for private equity funds are: limited companies under the Companies and Allied Matters Act chapter C20 Laws of the Federation of Nigeria 2004 and general or limited partnerships, or the newer limited liability partnerships under the Partnership Law of Lagos State 2009 (as amended). Offshore registered funds can only solicit investments from investors in Nigeria with SEC approval.
There are transaction documentations which must be in place, including non-disclosure 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 lay the foundation for a proper transaction.
If all the processes stated above are in place, there should normally be a seamless transaction. The issue we have with conflict arising thereafter are actually two sided. One, on the part of the Nigerian company which receive the foreign private equity and the foreign private equity company.

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Let us start with the Nigerian companies. Sometimes, at the point of drawing up the investment agreements, all relevant terms to ensure needless conflict, including exit strategy, etc., are not properly drawn up. You also have cases of diversion of funds from the intended investment by the Nigerian firms.
When funds are received from the foreign investors, some Nigerian companies will prefer to divert the funds to other businesses than use them for what was stated in the agreement. There is also the issue of poor corporate governance and management structure.
On the part of the foreign private equity firms, our research shows that some of them actually do not fulfil their obligations as stated in the agreements regarding milestone fund injection. This may be due to breach of agreement on the part of the Nigerian partners as well.
 The issue of greed also comes in at the point of exiting transactions. Knowing the size of the Nigerian market, some may be reluctant to relinquish their holdings when they should.
Failure to structure regular audit of Nigerian firms also lead to foreign private equity investors losing track of the businesses they invested in and how their money was deployed.
Whatever the case, trust remains sacrosanct to effectively pull through a profitable partnership. As much as possible, Nigerian business owners must first be committed to abiding by the contract as agreed.
For instance, in the on-going case of HealthPlus Limited, comments from both sides point to poor corporate governance as a major factor affecting the fortune of the business.
While the founder said enough money has not been provided for the operations, the investors insisted money has been provided, with more to come only if KPIs are met, hence the appointment of a chief transformation officer for the company.
Venture capitalists and private equity investors want to invest their monies where the prospects are high.
The Nigerian economy presents a veritable platform for such investments. The successes of some Nigerian businesses that have such foreign partnerships speak to the fact that it is not all gloomy.
What is required is diligence and deliberate efforts at following through on the agreements.
It always takes two to tango in any business transaction to avoid unnecessary and avoidable conflicts. It is important to adhere to rules as agreed and speedily put transaction monitoring strategies in place to nip any variation in the bud.
Oluyomi Martins is a financial services advisory consultant and the MD/CEO, Black Martins & Company Limited.