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Opinion

New guide to boost private equity investing by pension schemes in Kenya

Gerald Gondo, Business Development Executive, RisCura
Nov. 7, 2019, 9:45 p.m.
249

Word count: 732

RisCura’s findings in a private equity (PE) market study dispel the misconception that PE is a new asset class in the East African market.

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RisCura’s findings in a private equity (PE) market study dispel the misconception that PE is a new asset class in the East African market.

The Private Equity Investment Guide and Market Study Report, which contains these findings, was launched in October by the East Africa Venture Capital Association (EAVCA), Financial Sector Deepening Africa (FSD Africa) and the International Finance Corporation (IFC). RisCura served as the technical partner in gathering the relevant information and documentation, which resulted in publishing this Private Equity Investment Guide and Market Study Report.

It will serve as a one-stop-shop for pension scheme trustees in East Africa to understand private equity investments. An understanding of PE investing will assist these pension schemes to gain exposure to opportunities that are not available in their current investment universe. Presently, African listed markets remain skewed to certain industries like financial services and telecoms, while the average pension scheme’s investment allocation remains skewed towards government bonds. The long-term liability profile of pension schemes makes them ideally suited to provide much-needed capital to drive the real economy.

Private equity is an asset class now afforded regulatory allocation across East African countries, so, what’s stopping pension scheme trustees from allocating more funds to PE? EAVCA consulted with RisCura because of our unlisted investment expertise and two decades of experience in providing solutions and advice to pension schemes, mainly in Africa. Here’s what we found.

Eyeing East Africa

We studied the regulatory framework within which pension schemes in East Africa operate. Through this we were able to identify whether limitations were driven by regulation (exclusively) or whether there were other factors that contributed to the currently low allocation to PE as an asset class.

We found that of the five countries surveyed in East Africa:

• Rwanda allows for the highest provision allowing pensions schemes to invest up to 20% in alternative assets, including PE.

• Uganda allows 15% and currently has the highest actual investment in the East African region (yet only has 2.2% of assets are allocated to PE).

• Kenya regulation allows up to 10% but is sitting at an approximate 0.07% allocation.

• Tanzania and Ethiopia have no defined limits.

Mind the gap

We further studied the market to formulate a gap analysis between the demand and supply of PE investment, and to make recommendations to bridge this gap. While the allocations were low, some data was missing, and the need for education was highlighted, the guide does, however, prove that PE is well-established in East Africa, where developmental finance institutions (DFIs) like the International Finance Corporation and Commonwealth Development Corporation have been investors of East Africa-focused funds for several years.

Our findings also disprove the notion that pension schemes will be introducing outsized risk by allocating to PE. By simply addressing the knowledge gap, it removes a large quotient of risk from the capital allocation decision to PE. Further, pension scheme trustees in East Africa are in the fortunate position of being able to leverage off DFIs in terms of knowledge-sharing and upskilling.

Foundations for the future

The guide aims to be a common reference document, or educational tool for trustees to use. It serves almost as a “Google translate” in that it provides commonality in terms and understanding across pension scheme stakeholders. It articulates fundamental learning points related to better understanding of PE as an asset class, enabling and empowering pension scheme trustees to make impactful, informed decisions.

Building on a good base

Importantly, by investing in private equity, pension schemes are participating in the creation of future listed companies. When PE funds contemplate exit opportunities, pension schemes have a vested interest in lobbying for listing these investee companies in this way, and can remain invested in these companies by virtue of them now being listed.

One of the proposed outcomes from the market study was for the publishers to contemplate commissioning a further study to examine the multiplier effect resulting from PE funding. A larger sample size of pension schemes will be important to review in time to come for a clearer view on how PE is performing in the East African market.

Evident from the findings is that East Africa remains poised for robust and sustained growth. The allocation to PE by East African pension schemes will only serve to accelerate the entrepreneurial spirit already self-evident in this region, which is a critical component of any growth model.

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