Private equity (PE) and venture capital (VC) funds have set their sights on attracting up to Sh50 billion investments from pension schemes in five years, signalling an intensifying scramble for workers’ savings.
Investment guidelines under the Retirement Benefits Act 2016 allow pension fund managers and trustees to sink up 10 per cent of assets under their watch in PE and VC funds.
That followed four years of agitation by the PE funds for a change of rules to facilitate increased investments by pension schemes, creating a pool of domestic cash which will reduce their reliance on foreign funds.
The PE funds controlled a paltry 0.09 per cent, or Sh1 billion, of the nearly Sh1.1 trillion pension industry last year against regulatory ceiling of 10 per cent enforced in 2016, statistics by the Retirement Benefits Authority (RBA) show.
The uptake by PE funds was, however, low in the first year at Sh220 million in December 2016, but rose four and a half times to Sh1 billion last December, according to the RBA data.
“Pension schemes are keen to invest in the real economy and in emerging sectors not currently represented in the capital markets,” RBA chief executive Nzomo Mutuku said.
“As private equity funds invest in small and medium enterprises, particularly in the manufacturing sector, they can be a vehicle to enable (pension) schemes to contribute to development, employment creation and the Big Four Agenda.”
Nairobi is a major destination for private equity and venture capital firms with deals estimated at $430 million (Sh43.36 billion) in 2017 compared with $340 million (Sh34.28 billion) a year earlier, according to East African Private Equity and Venture Capital Association (EAVCA), a lobby for the fledgling industry.
Kenya, a regional investment hub, accounted for 89.5 per cent of the $480.4 million (Sh48.44 billion) deals that were inked in East Africa — Kenya, Uganda and Tanzania— a jump from 70.23 per cent of the $484.1 million (Sh48.81 billion) deal book in 2016.
EAVCA co-executive director Eva Warigia said the number of pensions which have invested in PE firms has grown to 13 presently from two in 2015.
Investment in PE firms by retirement schemes was previously done under other assets category which had a limit of 10 per cent of total portfolio and required approval from the RBA.
“For East Africa, the (PE) asset is still young. But our target is $500 million (Sh50.42 billion) for five years. We are currently working on a capacity building programme to build the knowledge base of the asset, targeting different stakeholders including trustees, fund managers, and administrators as well as advisors,” Ms Warigia said.
“We are actively seeking to make available data and information on fundraising and investment activity in the region to create a baseline reference point for our local investors.”
PE and VC funds operating in the six-nation East African Community, most of which are foreign-owned, target deals largely in high-growth sectors such as financial services, manufacturing and retail trade.
PE firms usually invest for five to 10 years targeting an average annual return of 25 per cent.
“Very often we (PE funds) speak to ourselves. We need to embrace pension industry and bring them closer. We need to invite key decision makers and bring them into our forums,” AfricInvest Capital Partners East Africa managing director George Odo said on March 6.
“Unless we invite them (pension schemes) and make them comfortable because they may not understand private equity, they will continue putting their money in government securities and real estate even though it is flooded.”
Pension funds controlled 27.2 per cent of Sh2.42 trillion domestic debt as of June 14, latest statistics by the Central Bank of Kenya show.
The RBA investment rules allow pension schemes to invest 90 per cent of their assets, with a window of up to 100 per cent, in government securities within EAC bloc.
The rules limit retirement schemes to invest up to a third of assets in real estate, up to 70 per cent in preference shares and listed stocks, 100 per cent in guaranteed funds, 15 per cent in offshore investments, five per cent in private equity and 10 per cent each in private equity and venture capital.