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 that 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 that 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 reaffirming 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 that a pension fund is comfortable with, in relation to a particular investment, are often critical to determining the 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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