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Pension schemes to benefit from PE investment guide in East Africa

Africa Global Funds
Oct. 15, 2019, 9:19 p.m.

Word count: 783

The East African Venture Capital Association (EAVCA) in partnership with Financial Sector Deepening Africa (FSD Africa) and International Finance Corporation (IFC) have launched an investment guide to enable regional pension schemes to invest in Private Equity (PE) Funds.

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The East African Venture Capital Association (EAVCA) in partnership with Financial Sector Deepening Africa (FSD Africa) and International Finance Corporation (IFC) have launched an investment guide to enable regional pension schemes to invest in Private Equity (PE) Funds.

Named Private Equity Investment Guide, the objective of the tool is to deepen the understanding of Private Equity structures among Pension Fund Managers and their Trustees to unlock more investment into the asset class.

The guide mainly covers three key areas – understanding the asset class and where it sits alongside other asset classes, why and how to invest in PE’s and an overview of the benefits and risks of investing in Private Equity.

 The development of the guide was informed by a market study report that sought to investigate the low uptake of investment by Pension Schemes.

In Kenya, for instance, PE allocations by Pension Schemes account for only 0.08% of the total industry assets under management.

From a regulatory perspective, there are provisions allowing Pensions to invest in PE funds across East Africa (Kenya, Uganda Rwanda, Tanzania, and Ethiopia).

According to Kenya’s pension regulator the Retirements Benefits Authority RBA, though the country has had regulations that provide for diversification of Pension Funds away from traditional instruments most pension schemes are still predominantly bond and stock investors.

“The Guide will be important in bridging the existing knowledge gap by trustees on investing in Private Equity whose uptake has been very low in the pension scheme investment portfolio. As a regulator we are positive and open to new ideas in broadening pension growth and continue to review the legal framework to keep pace with emerging trends and expand the investment horizon for Pension funds,” said RBA Chief Executive Officer Nzomo Mutuku.

Kenya’s Capital Markets Authority said regulators are focused on creating an enabling environment for PE funds including safe guarding capital gains when they exit various ventures.

“As a regulator we supported the PE sector in retaining the Capital gains tax at 5% for PE exits. An increase in Capital gains tax from 5% to 12% as proposed by the Finance Bill would create uncertainty in the tax policy environment affecting middle to longer term PE investment appetite in the country,” said CMA Regulatory Policy and Strategy Director Luke Ombara.

Across developed markets the pension industry is the backbone of investments, supporting asset classes such as Private Equity with the patient capital to deploy in growing businesses.

Eva Warigia, EAVCA’s Executive Director, said: “We are excited to be part of the evolution in Africa’s private equity industry. EAVCA has decided to proactively support regional capital markets through capacity building and investor education that empowers local institutional investors.”

“Private equity is a catalyst that enables Pension Funds to access growth opportunities in the unlisted African companies,” she added.

FSD-Africa’s Director of Financial Markets, Dr. Evans Osano noted that Private Equity investments facilitate active participation in the growth sectors of the real economy by Pension Funds, generating returns for investors while contributing to the creation of jobs and improving access to basic services.

“However, there is a need to upskill regulators, fund managers and pension trustees to foster a greater understanding of the benefits, risks, and process of investing in PE funds,” he said.

 “Pension Schemes are guided by their Investment Policy Statements (IPS), which provide guidance for Strategic Asset Allocation for Pension Schemes. To boost Trustees, ability to make informed decisions about investing in Private Equity, the investing guide provides more information on policies and procedures to assist with risk management of the asset class,” addd IFC SME Ventures Senior Operations Officer, Samuel Akyianu.

Alongside the PE Investment Guide, EAVCA also released a market report title ‘Private Equity Investing for Pension Funds in East Africa’ which notes some of the macro trends that have influenced the uptake of PE assets in the region.

The report cited the knowledge gap on both pension fund and regulatory side and the absence of regulatory oversight of the PE Fund Managers by local regulators as some of the key impediments for Pensions seeking to invest in PE Funds.

The study surveyed 18 Pension Schemes from Kenya, Rwanda, Tanzania, and Uganda alongside 15 PE General Partners from Ethiopia, Kenya and the United Kingdom as well as 3 Pension regulators in Kenya, Uganda, and Tanzania.

Of the five Eastern African countries Rwanda has the highest provision for Pension Fund investment in PE funds at 20% followed by Uganda at 15% and Kenya at 10% while Tanzania and Ethiopia have no defined limits.

Uganda has the highest rate of Pension Fund investment in PE funds at 2.2% followed by Kenya at 0.07% while no data is available for the other countries.

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