Insights, a podcast with Professor Fabian Ajogwu, SAN Professor Fabian Ajogwu, SAN

In protecting investors interest, it is crucial to understand the role and duties of fiduciaries in private equity (PE), usually the role and duties of a fiduciary is defined in statutes or by courts and varies from jurisdiction to jurisdiction. Fiduciary duties aim to protect PE investors and beneficiaries from grossly negligent, reckless and intentionally harmful acts which might occur in the day-to-day running of the company. Fiduciary roles have been expanded to include any person who has power and discretion over another's interests, coupled with an express or implied undertaking to act exclusively in the other's service. Managers of investment portfolios may be subject to fiduciary law's strict requirements in various capacities such as trustees, agents, financial advisers, or corporate directors?

Conflict of interest refers to a situation in which a person is in a position to derive personal benefits from actions taken in their official capacity. Where there are competing interests, it can make it difficult for a party to fulfil their
duty impartially. It is important, perhaps, that asset managers, given their fiduciary duty to client, identify and implement proper procedures and controls to eliminate or mitigate any real or perceived instances where the firm fails
to put the interest of the client first or where the firm gains an unfair advantage over the client.



Several potential conflicts of interest may arise in the normal course of its business and operations, either on a one-off basis or potentially on a more recurring basis. Material conflicts arise in private equity fund management between the responsibilities the fund manager has to itself (including its owners/staff), the investors in the separate funds/share classes it manages and the companies owned by the funds.

Minority interests, also known as minority investment, refer to the non-controlling share in a company held by an investor or another company. It is an ownership stake of less than 50% in a company and does not otherwise have a controlling interest. This position held gives the investor no influence or an insignificant amount of influence on how the company is run. Ownership in a private equity arrangement can either be minority passive interest, minority active interest or majority stake.



Minority passive interest is when a firm holds less than 20% interest in another firm. It must classify its interest as either trading securities or available-for-sale securities; this means that the firm does not have material influence on the company in which it has this minority interest.  

Stakeholders & The Lack of Adequate Disclosure

 

Stakeholders are not party to the negotiations in private equity agreements and buy-outs. In the case of quoted companies, there are strict rules regarding confidentiality of price-sensitive information that preclude wider involvement of others who
are outside of the company. This means that there is a lot of information left undisclosed.

Stakeholders in a Private Equity arrangement can be protected by
way of partnership agreement or contractual agreement. However, they can be further protected by being kept fully informed on the decisions about the company’s liabilities, job securities and all that may concern them.

Fiduciary duties might be said to grow out of a variety of relationships involving one party's exercise of some measure of control. Fiduciary duties, therefore, are structural in the sense that they arrive from the structure of the parties' relationship rather than from the parties' individual attributes.

The future of private equity, particularly in emerging markets will need to pay close attention to recent trends globally. In Sub-Saharan Africa, the current trends illustrate that many economies are only just starting to recover from a protracted period of slow growth and policy uncertainty.