1. Introduction

Tracing its origin to a relatively nascent stage, the Nigerian private equity industry has gradually gained importance by unwaveringly establishing itself as an economic force and a major contributor to the economy. The Nigerian private equity industry is booming to such an extent that in the year 2022, $1.2 billion was injected into the market by international and local investors1. Private equity landscapes typically demonstrate a preference for high-growth industries, ranging from telecommunications and technology to mining infrastructure and primary sectors like agriculture and financial services. The key tenet of private equity lies in the generation of value through strategic investment in non-publicly traded companies. For ease of comprehension of the subject matter, one may define Private Equity (PE) to be a type of business financing pertaining to the purchase and sales of shares in private or unlisted companies that possess characteristics or potential suggestive of a high-yield investment trajectory. In contrast to publicly traded companies, whose shares are readily available on stock exchanges, private companies operate with privately traded equity. Private equity firms, thus, restrict accessibility and investment to high-net-worth individuals (HNIs) and institutional/accredited investors while channelling capital raised from the aforementioned investors towards the said private companies for investment purposes. The funds generated from private equity either fall into the 'Angel Investing', 'Growth/Development Capital', Mezannine Financing, 'Venture Capital' or 'Buyout or Leveraged Buyout' categories, which will be discussed in detail below. Solicitors in PE transactions are, therefore, required to play a significant role in the effective facilitation of the transactions by rendering adequate legal advice, conducting due diligence exercises on the target company, and ensuring strict compliance with the applicable regulations.

Due to the clear complexity of PE transactions, skilled lawyers with requisite expertise in the field are foundational to the successful execution of such transactions of an intricate nature. This paper delves into the workings of private equity transactions while also examining the role of Solicitors in PE transactions.

2. Understanding Private Equity Transactions

When an organization is growing exponentially or demonstrates substantial potential for expansion and value creation, private equity firms would seek out such companies and invest in them. Business owners with companies that possess a high rate of return may search for financing to expand their businesses and as such, would opt for private equity. Private equity is, therefore, a financing arrangement that is funded by investors who donate capital to target companies that are not publicly listed. It is pertinent to note that private equity transactions possess different structures; however, a sole attribute unites them - and that is the provenance of the funds used to support, finance and fuel the transaction. Private Equity Funds, according to section 557 of the Security and Exchange Commission Rules 2013, are "a type of collective investments scheme that invests primarily in private equity/unlisted companies, whether or not in an attempt to gain control of the company"2. Succinctly, private equity funds gather capital for strategic and targeted company investments. The said companies to be invested in would generally display a potential to yield a high return on investment. In Nigeria, a PE financing arrangement could be achieved by the following modes: the acquisition/ purchasing of a majority of the shares in the target company; buyout; venture capital; mezzanine debt financing; and growth capital.

a) Acquisition of bulk shares in the target company: This involves the acquisition of controlling or major shares of the targeted company either through subscription or transfer.

b) Buyout:

A buyout is the PE process wherein an investment team- which could be the existing team or one specifically set up with the objective of the buyout. It could be done by way of share or asset acquisition.

c) Venture Capital:

Venture Capital funds are pools of capital that typically invest in small, early stage and emerging businesses that are anticipated to possess rapid growth rates, but unfortunately have inhibited access to various forms of funding. Start-up firms characterized by audacious value propositions and novel innovations would benefit greatly from venture capital financing – as they would serve as a means of raising the necessary capital required to effectively carry out their business operations.

d) Mezzanine Debt Financing:

This is alternatively referred to as subordinated financing. The terms of this financing structure are tailored and designed to accommodate the borrowers' revenue stream. This financing option allows for flexible repayment schedules that specifically align with the borrower's cash flow cycle.

e) Growth/Development Capital:

This type of business structure caters to already existing, mature and established businesses striving to achieve operational expansion and market diversification. It requires the business to relinquish a portion of its ownership for the purpose of business expansion.

Once a structure of the private equity transaction will be carried out has been chosen, adequate steps will be taken to ensure that the PE transaction is successfully completed.

3. The Steps Involved in Private Equity Transactions

Before a PE investment or transaction takes place, both the investor and the target company must go through and successfully complete the wide spectrum of transaction processes and life cycles. The different stages required to effectively carry out PE transactions are the: Deal Origination/Deal Sourcing stage, Due Diligence Stage, Deal Negotiation Stage, Deal Closing stage, Post-Acquisition Monitoring Stage and the Exit stage (IPO, Trade Sale or Buy Back).

Deal Origination/Sourcing Stage:

This stage is the first step in PE transactions. It requires that a PE investment firm would seek out or source companies that suit the PE's funds investment portfolio and goals. When a target company offering a great investment opportunity has been identified, contact is made and the company owner(s) are given a proposal to harness their interest in an investment or buyout deal. Thereafter, a Non-Disclosure Agreement would be executed by both parties, with the target company divulging the requisite information needed for the completion of the transaction.

Due Diligence Stage:

PE firms are straddled with the responsibility of painstakingly verifying, investigating and handling detailed, private or public and structured information regarding the target company in PE transactions. This process is known as the due diligence process and is used to determine whether the potential transaction with the target company would be a lucrative and worthwhile investment. Legal, tax, financial, compliance and technical due diligence may be conducted by the relevant experts regarding the PE transaction.

Transaction Negotiation Stage:

At this stage, the PE investors must have indicated interest in the target company and reached out to the said company with the aim of executing the PE objective. The information obtained from the due diligence exercise would be used to negotiate the terms and conditions of the agreement. Once the parties come to a mutual agreement, there would be the execution of contracts including Purchase Agreement, Management Agreement, Letter of Intent, Investment Agreement etc.

Transaction Closing Stage:

The PE transaction, at this stage, would come to a close – with the parties jointly finalizing and concluding the transaction. It includes the execution of all relevant agreements central to the PE transaction. This is either done by way of the PE fund or Private Placement. As reiterated, a PE fund is a collective investment scheme that targets a myriad of unlisted companies, with varying degrees of control acquisition strategies. Alternatively, private equity firms may utilize Private Placements to offer ownership stakes in acquired companies to select individuals possessing niche expertise and investment preferences within particular sectors.

Post-Acquisition Monitoring Stage:

Within the post-acquisition phase, the PE firm would implement a multifaceted monitoring framework encompassing careful evaluation of the target company's operational efficiency and financial performance. This would allow for the growth and improvement of the business through various strategies put in place, such as corporate governance, internal audit, financial reporting etc.

Exit Stage:

Following optimization and value creation, after a few years, typically, the PE firm initiates measures to divest its stake in the mature and already established company. This is an exit strategy of PE firms and is a crucial component of private equity transactions. The exit stage could be done by either an Initial Public Offerings (IPOs), by a trade sale or by a share repurchase or buy-back. The PE fund will thereafter disburse the revenue generated from the liquidation of the investments amongst the investors and relevant parties.

The Role of Solicitors in Private Equity Transactions

The Private Equity cycle requires a dedicated and skilful legal team to mitigate the risks connected to complex PE capital-intensive transactions while ensuring success. This is to be done by providing assistance to the parties to the transaction and offering legal advice on capital structures, legal/regulatory compliance requirements, contracting, management incentive structures, strategic matters etc. Solicitors, therefore, play a pivotal role in the successful execution of PE transactions.

Successful engagement within the complex private equity sphere requires a highly competent and experienced legal team or solicitor equipped with specialized knowledge and demonstrably superior expertise regarding private equity transactions. In view of the complexity of legal agreements, negotiations and the various activities inherent to private equity transactions, solicitors to the transaction must depict a comprehensive grasp of each stage of the PE process, consisting of regulatory compliance, corporate structuring, due diligence, and execution – to maximize outcomes on behalf of their clients. At every stage of the PE cycle, legal representatives must effectively represent the parties involved in areas such as:

1) The Structuring of the Deal: Solicitors to a PE transaction may aid with the transaction's arrangement, by establishing a sturdy legal framework for the transaction. The roles of the lawyers would include (but not be limited to) the drafting and negotiating of the terms of the share purchase agreements; rendering legal advice regarding tax, and finance structures, and ensuring regulatory compliance. Furthermore, Solicitors, working closely with the financial advisory and project management team, would also conscientiously scrutinise the management team's past successes and qualifications, while simultaneously analyzing the current and anticipated performance of the target industry, to ensure optimal alignment with the intended investment goals.

2) Due Diligence Exercise: Solicitors to the transaction conduct due diligence reviews of potential investments to identify legal risks. The solicitors to the transaction would embark on a careful examination of the PE transaction, especially in matters relating to: contracts, tax, regulatory compliance, litigation risks, intellectual property, corporate governance, employment, and so on.

3) The Establishment of the Private Equity Fund: Solicitors to the transaction may help with the formation of the PE funds. This may include the creation of the legal structure of the fund, developing the legal framework for the fund's operation, and ensuring conformity with all the relevant regulatory bodies and regulations.

4) Maintaining adherence to Regulations: Private equity transactions require the observance of all laws and regulations that go to the core of PE. The solicitor to the transaction will ensure that all industry-specific laws and regulations are adhered to while establishing a good connection and relationship with the regulatory bodies governing the industry.

5) Exit Strategies: should a private equity fund seek to liquidate its investment options, solicitors to the transaction may play a significant role in facilitating these exit transactions.

In addition to the above, solicitors to the transaction provide ongoing support for portfolio management, offering clients expert guidance on diverse investment strategies, such as asset allocation, risk mitigation – thereby contributing to an efficient portfolio performance.

Conclusion

Characterized by illiquid assets and long-term holding periods, private equity involves pooling capital from diversified investors acquiring and actively managing unlisted/private companies for the purpose of creating value through operational improvements and strategic restructuring – with the end goal of generating returns upon exit. The private equity developmental stages consist of the different processes pertaining to PE transactions - from the deal originating/sourcing stage, to the transactions' operating stage, to the exit stage. When operating within the complex and multifaceted private equity life cycle, solicitors in PE transactions must demonstrate proficient knowledge across diverse legal issues and must display comprehensive expertise during the entire life cycle of PE transactions, catering to diverse client needs and fostering a high-performing legal team. Effective legal representation by private equity solicitors necessitates safeguarding investments, proactively mitigating inherent risks and delivering comprehensive legal services tailored to suit the diverse and evolving needs of the PE clients.

Footnotes

1 Samson Akintaro, 'Top 10 Nigerian Startups by Funds Raised in YtD 2023' (Nairametrics 9 Nov 2023) https://nairametrics.com/2023/11/09/top-10-nigerian-startups-by-funds-raised-in-ytd-2023/?amp=1 accessed 31 January 2024

2 Security and Exchange Commission Rules and Regulations 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.