SBL Private equity seminar highlights entry/exit strategies for private equity investments

Participants at the recently held Private Equity Seminar organised by the Committee on Mergers, Acquisitions and Corporate Reorganisations of the Nigerian Bar Association, Section on Business Law (NBA-SBL) have established that ‘Exit’ strategies and considerations might very well be one of the most critical elements when entering a private equity investment deal.
During the engaging discourse, which took place at the Radisson Blu Anchorage Hotel in Victoria Island, Lagos, the panel stated that it was typical for an investor to plan for its fund’s exit from the onset, as this plays a significant role in the decision to make such an investment. Highlighting the potential of exit opportunities, Dr. Timi Austen-Peters, explained that the types of exits available to investors were critical to whether a Private Equity investment will be made in the first place.
“Our experience has mostly been of investments coming in, current troubles and maturity will bring discussion of exits to the fore,” he said.
Reiterating this point, Baba Alokolaro of ‘The New Practice’, one of Nigeria’s fast rising commercial law firms, established that the private equity investor’s primary consideration before investing in any business, is the quantum of returns that can be made from the proposed investment. Thus, he noted that ‘Exit’ is one of the most critical elements in the mind of the private equity investor before making an investment. Quoting Henry Kravis, he said, “Any fool can buy a company. You should be congratulated when you sell.”
According to him, investors put their money in a business with the intention to exit at a higher equity value than was initially invested. “So it is typical for an investor to plan for its fund’s exit from the time the decision to go ahead with the investment is made. In this light, investors have to ensure they have necessary controls and liquidity; and are very clear about their exit strategy at the time of entry,” he said.
Alokolaro further listed common exit strategies such as, Initial Public Offerings, Trade Sales and Secondary buyouts among others. “Our role as solicitors is not just to understand the exit strategies a private equity investor intends to implement, but also the contractual mechanisms required to make the most appropriate exit options viable and legally enforceable at the time of exit. In doing this, extensive transfer restrictions are often placed on the shares in the investee company, aimed at achieving an orderly exit,” he stated as a matter of clarification.
Anchored by distinguished faculty of renowned, knowledgeable and accomplished Speakers and Resource Persons drawn from the leading Private Equity sector in the country, the seminar was specifically designed for private equity practitioners. Hence the large attendance of experts in private equity deals and transactions, including In-House counsel, External Lawyers, Private Equity investors, etc., who discussed and shared their experiences in the private equity sector.
Structured into two Sessions, the first session focused on ‘Entry Issues in Private Equity Investments’; covering “due diligence”, warranties, carve outs, preferred equity (with or without super-normal returns), use of foreign vehicles, valuation, issues of capital importation, non-compete (by GPs and founders); pre-closing covenants, sector-specific regulations, default and re-pricing. While the second Session focused on “Exit Issues in Private Equity Investments” as well as listings, IPOs, drag along, tag along, right of first refusal and first offers, pre-emption, put option redemption of preference shares, roll over into new funds, refinancing, etc.
Speaking on Entry Issues in Private Equity investments, Aelex Partner, Theo Emuwa, explained the role of Valuations in private equity transactions; highlighting three general approaches to estimating the fair value of an investment, namely: Asset-based approach, Market approach and Income approach.
According to him, Valuation should involve one or more of these approaches, so as to estimate a fair value of investments. He noted also, that because Valuations were complex, experienced judgment is necessary to ensure accuracy.
Olufolake Elias-Adebowale, a Partner at Udo Udoma & Belo-Osagie (UUBO), who also spoke on Entry Issues, highlighted critical factors to be considered at the point of entry. These considerations according to her would include, due diligence, Carve outs, foreign vehicles, Pre-closing covenants, Non-compete, Approvals, and Sector specific regulations.
‘Folake explained that in conducting due diligence, there was need for the investor to understand the nature and value of the business and its assets; and to also identify the required corporate, contractual and regulatory consents. She noted that there was
also need to ascertain titles to assets and encumbrances, as well as 3rd party rights; verification and adjustment of representations, warranties and indemnities, escrow/ancillary agreements; Quantify risks and liabilities and understand impact of disclosures/liability caps and quite importantly, the consideration of Post-acquisition integration.