The Law & Practice of Private Equity

Entrepreneurs rarely have the capital to see ideas to fruition and must rely on outside financiers or external funding options. It might be thought that the entrepreneur would turn to traditional financing sources such as bank loans and issuance of public stock to meet their needs. However, varieties of factors are likely to lead to some of the most potentially profitable and exciting firms not being able to access these traditional financing sources. Private equity investors are almost invariably attracted to firms that find traditional financing difficult to arrange. Private equity investors are looking for companies that have the potential to evolve in ways that create value. Consequently, private equity deals and transactions have emerged strongly as a financing options in emerging markets, especially in the area of infrastructure development.

Private Equity is, therefore, one of the main alternatives necessary for bridging the funding gap in many of these developing countries in Africa due to the lack of access to capital or lack of adequately developed routes to obtaining capital. The book examines the practice of Private Equity extensively as it provides this much needed alternative funding to businesses as well as contributing to the country’s Gross Domestic Product (GDP). Private Equity has been defined variously by scholars and researchers leading to some sort of misconception as what Private Equity means. Despite this many competing definitions, it has to be noted that Private Equity is a major subsection of a much larger, multifarious part of the financial landscape known as the private markets and private equity investors are looking for companies that have the potential to evolve in ways that create value.

This book, therefore, examines the concept of Private Equity as undertaking investments in Equity and quasi-equity mainly (though not exclusively) in non-listed companies in order to generate high risk adjusted returns over a specific period of time, by backing entrepreneurs. The book highlights the significance of Private Equity as an alternative financing model that helps to bridge the funding gaps for businesses and companies. The book presents The Law and Practice of Private Equitya practical approach to private equity investing and deal-making so that the interest of stakeholders to the deal will be protected and profit returned to investors. At all material times and relevant chapters, applicable legal framework is examined to ensure that those engaging in Private Equity deals do so within the provisions of the law and regulatory requirements and regulatory provisions.

The book has eleven chapters, with appendices and a comprehensive bibliography. The chapters are interrelated with some form of overlap where necessary. Chapter One is the introductory chapter which laid the foundation for the discussion in the rest of the chapters of the book. This chapter examines the Concept of Financing Types, Sources of Financing, History and Basis for Private Equity, Evolving Practices. It is in this chapter the meaning of Private Equity is unpacked. Chapter Two analyses Private Equity in Capital Funding with specific emphasis on Capital Raising, Debts and Hybrid Financing. Chapter three examines Private Equity Funds which include Venture Capital and Managed Funds.

The Fourth Chapter took a more practical approach in discussing Deal Making and Deal Structuring in Private Equity under the following sub-heads: Matching the Portfolio Company and Private Equity Fund; Steps to Deal Making, Preliminary Stage (Term Sheets and Head of Agreement); The Deal State; Completion and Post Completion Issues. Due diligence is a very important aspect of Private Equity Deal. This is examined in Chapter Five with practical steps and issues to watch out during due diligence in structuring private equity deals. Chapter Six looks at Investment Arrangement in Private Equity which covers the Investment decision, Basic Terms and Conditions, Exits and Dispute Resolution.

The Seventh Chapter is dedicated to Tax Aspects of Private Equity which covers a critical analysis of the applicable Tax legal framework. Chapter Eight Examines Management and Ownership of Investee Companies in Private Equity. Fiduciary issues in Private Equity formed the major discussion in Chapter Nine, while Chapter Ten discussed extensively Corporate Governance in Private Equity Portfolio Companies. The last chapter offers an assessment of the Impact of Private Equity in National Development and Preface the State of Nigeria Private Equity Market with recommendations on the Regulatory outlook and reforms.

The book rightly points out that although Private Equity is still at infancy stage in a number of emerging markets, for instance, Nigeria, there is a positive impact of private equity deals in economies with potential to add to the Gross Domestic Product (GDP) and Foreign Direct Investments (FDI) and that Private Equity is more suitable for Small and Medium Enterprises (SMEs) to raise funds relative to obtaining debt capital. All of these have brought depth and meaning to this book. This book ‘The Law and Practice of Private Equity’ lays no claim to perfection, and I, therefore, take full responsibility for errors of omission and commission that may be found herein.

Professor Fabian Ajogwu, SAN
Lagos Business School
June 23, 2020

I am pleased to write the foreword to this book, ‘The Law and Practice of Private Equity’ that discusses conceptual and practical issues relating to Private Equity in emerging markets.

For a long time now, different sources of funding have been available to companies and businesses as a means of raising capital to achieve the set objectives of the companies and return profit to the investors. Due to the peculiar nature or characteristic of each company, not all sources of funding might be available, appropriate or appealing to a particular company in that specific circumstance. It, therefore, behoves on the business to identify the particular funding option that is most suitable for it. This can only be done through an informed choice of what type of financing will be suitable for a particular purpose, which aligns with the vision of the company as well as serves the overall interests of the business. The book presents a practical approach for adopting Private Equity as a funding option for businesses drawing examples from businesses that have benefited through private equity. The book shows that Private Equity is an effective funding option for start-up businesses as well as businesses that cannot afford debt financing arising from the inability to meet the requirements of debt financing like lack of collateral.

This is a very unique book that deals with practical issues that are very important to emerging markets. This is because of the rise in Private Equity transactions in emerging markets as part of much needed Foreign Direct Investments (FDI). Many years ago, Private Equity was not as relevant as it is today. However, with the increasing need for infrastructure development, and the shift towards Private Equity deals and transactions particularly in Sub-Saharan Africa, this book ‘The Law and Practice of Private Equity’ provides the much needed practical information on Private Equity as a potent funding option that can fill the funding gap for some businesses and deliver profitability for the investors and owners of businesses.

As noted in the book, Private Equity is a major subsection of a much larger, multifarious part of the financial landscape known as the private markets.

The Law and Practice of Private Equity  The concept refers to a form of financing where capital is invested in a company, typically mature businesses in conventional industries, in return for equity. However, Private Equity is often confused with other funding options that may be available to businesses. The author, Professor Fabian Ajogwu SAN, skillfully deals with the concept of financing models, expertly dispelling any confusion or misunderstanding between Private Equity and other financing options and other sources of finance that may be available to businesses.

It is pertinent to note that the author showcases the other financing options available to business and the peculiarity of each financing option. The author is right to espouse Private Equity as undertaking investments in equity and quasi-equity mainly (though not exclusively) in non-listed companies in order to generate high risk-adjusted returns over a specific period of time, by backing entrepreneurs. The purpose of such investments is to provide financial stability for the portfolio companies and improve company management.

The book can be described as a “magnum opus” by the Learned Professor in the field of Investment and Financing Sources with an in-depth research and analysis of concepts, legal principles, relevant laws and legislation. The author does not limit himself to local laws and scenarios alone, he examines and analyses Private Equity transactions and deals in other developed and developing countries and jurisdictions. The author should be commended for his insightful analysis of the making of Private Equity deals and by providing practical instances of Private Equity deals within and outside Nigeria. It is indeed a show of hard work and pursuit of excellence in this masterpiece.

The Law and Practice of Private Equity is worthy of commendation for its insightful analysis of deal-making in private equity and corporate governance issues arising from private equity transactions. The Learned Author provides a practical step by step guide to successful deal-making applying private equity, including due diligence which is at the soul of private equity transactions. The book not only answers the question of what Private Equity is, but also deals exhaustively with the question of “how”

Foreword to structure successful private equity deals from the negotiation to the exit stage. The book can best be described as years of practical experience reduced to a book. With close to thirty years of legal practice experience (including structuring private equity deals and legal advisory services in private equity transactions) as well as teaching and research experience, it is not surprising to see that this book portrays practical principles and recommendations that will assist the practitioner in private equity deals and transactions.

The Learned Author, Professor Fabian Ajogwu, SAN, has produced a reference book for the Private sector, public sector, banking sector, technology companies, government and regulators, judicial officers, legal practitioners, academics, students, the media and all who wish to see the continued growth of private equity transactions in emerging markets and indeed Sub-Saharan Africa. I must commend this practice guide – The Law and Practice of Private Equity and this invaluable addition to the body of literature on Private Equity in such an area where little or no research exists in Nigeria.

Derrick Roper
Chief Executive Officer
Novare Equity Partners (Pty) Ltd
Cape Town, South Africa
June 23, 2020