PE funds from pension soon viable

East Africa’s venture capital and private equity industry’s dream of tapping into local sources of capital may be inching closer to fruition.

If Kenya succeeds in loosening regulations that have long held back this aspiration, the industry could soon tap into the country’s pension funds to raise capital.

The Retirement Benefit Authority (RBA) and the Capital Markets Authority (CMA) are spearheading the review of regulations that have over the years, limited the ability of pension funds to invest in the industry.

“Private Equity can complement government’s efforts by stirring up small companies with huge potential to grow and consequently be crucial in Kenya’s entrepreneurial and industrial development targets,” says the chief executive of CMA, Stella Kilonzo.

According to Ms Kilonzo, among the regulations slated for review are those on investment ceilings and collective investment schemes.

Presently, the guidelines indicate that before pension funds can make an investment through a private equity vehicle or fund, they have to obtain the approval of RBA.

Besides, RBA boss, Edward Odundo, told the recent SuperReturn Africa Conference that beyond the East African region, Kenyan pension funds cannot invest in private equity, as only equities and bonds are allowed.

Mr Odundo said RBA has proposed a separate investment category to be created specifically for venture capital and private equity with its own maximum percentage allocated. This review will see private equity and venture capital category join the current 10 categories that pension funds can invest in. It will also see the need to seek prior approval from the authority lifted.

“Financial sector regulators have proposed the elimination of investment guidelines such as pensions, insurance and capital markets, in line with risk based supervision models,” he added.

The review of guidelines is part of a raft of measures that Kenya is putting in place to facilitate the private equity industry.

In the recent past, CMA has announced it will establish a Growth and Enterprise Market Segment within the Nairobi Securities Exchange to enable private equity funds to exit from their investments in Small and Medium-sized Enterprises. Besides, the country has a law that allows venture capital firms operating within to claim a 10-year tax holiday on profits made from their investments.

Ms Kilonzo added that policy incentives for private equity are being considered in the annual memorandum of policy proposals to Treasury. These latest developments in the Kenyan pension industry are set to benefit the entire East African Community, whose common market arrangement allows for free movement of goods, labour and capital.

Presently, venture capital and private equity funds operating in the region rely on overseas sources of capital, usually from development finance institutions.

“Private equity should not rely on international sources when there is local capital,” says Paul Kavuma, the chief executive of Catalyst Principal Partners.

Besides regulations, a section of the fund managers say that another factor that has restricted the harnessing of local capital is the concentration on international investors when raising capital for funds.