PenCom said Nigeria’s pension fund assets have remained
concentrated in Federal Government Securities as the rapid growth of the assets
has not been matched by a corresponding increase in domestic investment
outlets.
The current concentration of pension assets in government
securities could lead to distortions in asset prices within the domestic market
as Pension Funds continue to chase the same limited investble asset classes
within the domestic market.
Sequel to the above, innovative solutions are therefore
required to address the dearth of investment outlets and encourage the
diversification of pension fund portfolios.
One of the asset classes with the lowest asset allocation by
pension funds is Private Equity (PE), this asset class has remained significantly
below the maximum limits. Consequently, investing in specific transactions
under a Co-Investment arrangement has been identified as a viable option to
improve pension funds’ allocation to this asset class. Co-Investing alongside
the main PE Fund is expected to provide PFAs flexibility and greater choice in
the type of projects/companies in which pension funds are invested, thereby
further enhancing returns and increasing exposure to PE.
Based on data tracked by Pension Nigeria, Private Equity
(PE) is one of the asset classes with the lowest pension fund investment
percentage. As at 31 March 2022, only N39 billion (0.28%) was invested in PE
out of N13.88 trillion total Pension Fund asset, while the top 7 places where
pension funds were invested as at 31 March 2022 are;
- FGN Securities N8.50 trillion (61.26%)
- Local Money Market Securities N2.25 trillion (16.21%)
- Corporate Debt Securities N1.01 trillion (7.26%)
- Domestic Ordinary Shares N944 billion (6.80%)
- Cash & Other Assets N473 billion (3.41%)
- State Govt. Securities N172 billion (1.24%)
- Real Estate Properties N156 billion (1.13%)
According to the report, Pension Nigeria shall continue to
track where pension funds are invested and release the reports showing the
percentages invested in each asset classes, once available.
To dive deeper into the Framework, you can check below for
the Objectives, Structure, Investment Limit, Disclosure Requirements, Reporting
Requirements and Authorization of Co-Investment Transactions.
Objectives of the Framework
- To establish standards and procedures for Co-Investment of Pension Funds by licensed PFAs.
- To further enhance the diversification of Pension Fund Assets under management.
- To improve returns on pension fund investments in PE.
Structure of the Framework
- PFAs shall only enter into Co-Investment arrangements for a specific transaction(s) following a PFA’s investment in the main PE Fund.
- Co-Investment arrangements shall be made through Special Purpose Co-Investment Vehicles (SPCV). The SPCV shall be set up by the General Partner (GP) of the PE Fund with clearly defined legal status, rights and rules of the SPCV.
- The Governance Agreements under Co-Investment shall clearly delineate the roles and responsibilities of the GP and the investors in the Co-Investment arrangement. This includes governance rights, risk management, pre-emotive rights, liquidity and exit arrangement in the Co-Investment arrangement.
- Co-Investment arrangements for pension fund investments shall not be on less favourable terms than the main PE fund.
- PFAs shall not be allowed to buy off the Co-Investment interest of other investors who may want to exit before maturity.
Investment Limit
A PFA’s exposure under any Co-Investment arrangement shall
not exceed 50% of its investment in the main fund.
Notwithstanding the statement above, a PFA’s exposure under
any Co-Investment arrangement shall form part of its global PE exposure and be
subject to the maximum limits stipulated by the Regulation on Investment of
Pension Fund Asset (the Investment Regulation).
Disclosure Requirements
All categories of fees under the Co-Investment PE
arrangement shall be clearly defined in the Co-Investment Agreement.
The Pension Fund shall not be liable for any cost or fee not
stated in the Co-Investment Agreement.
PFAs shall ensure that relevant documentation required for
the initial and ongoing due diligence is provided by the GP, including but not
limited to board meeting minutes, human capital information and deal pipeline
development to enable the PFA to undertake its due diligence.
Issues related to conflict of interest shall be in line with
Section 6.0 of the Investment Regulation.
Reporting Requirements
The PE Fund manager shall provide a quarterly valuation of
pension fund investments under any Co-Investment arrangement, clearly stating
the value of a PFA’s investments.
The valuation of pension assets deployed under a
Co-Investment arrangement shall be based on quarterly valuations reported by
the PE Fund Manager.
The PE Fund Manager shall also provide the valuation
methodology alongside the valuations of pension fund investments under any
Co-Investment arrangement
Authorization of Co-Investment Transactions
Due to the additional risks involved in Co-Investment
arrangements, PFAs shall ensure adequate due diligence before committing
Pension Funds to Co-Investment arrangements.
PFAs seeking to enter into a Co-Investment arrangement with
an eligible PE Fund Manager shall write to the Commission for a “No Objection”.
Co-Investment arrangement shall only be executed with a Fund
whose key principals are, at least, on their second PE Fund.
The key principals of the PE fund must have successfully
exited at least one investment from the previous PE Fund. The key principals
shall include the Chief Executive Officer, Chief Investment Officer and any
other applicable Principal Officer of the PE Fund.
PFAs shall ensure that all requirements for PE investments
stipulated in the Regulation on Investment of Pension Fund Assets and those
specified in this operational Framework have been duly satisfied before any
application for “No Objection”.