Financial Institutions Chip In To Push Region’s Pension Fund Investment In Private Equity

In a bid to deepen the understanding of Private Equity structures among Pension Fund Managers and their trustees, 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.

According to Kenya’s pension regulator the Retirements Benefits Authority (RBA), most pension schemes are still predominantly bond and stock investors. 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.

Pension Low-Intake

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).

Kenya’s Capital Markets Authority says regulators are focused on creating an enabling environment for PE funds including safeguarding 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. Private equity is a catalyst that enables Pension Funds to access growth opportunities in the unlisted African companies. Even so, 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.

Policies and Procedures

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.

Inside a market report titled ‘Private Equity Investing for Pension Funds in East Africa’ 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.