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The East African : June 30th 2014
36 P≥ivate Equity has good investment oppo≥tunities fo≥ pension funds T he latest published asset class statistics by the Retirement Benefits Authority (RBA) says that in 2001 the pension fund assets invested in unquoted equity relative to total assets averaged 0.77 per cent. Fast forward to 2011 and the figure is a still a paltry 0.91 per cent. It is therefore safe to assume that the figure will not have materially changed in 2014. There are two kinds of pen- sion funds in Kenya. The first kind is the traditional defined benefit scheme, where both employees and the employer make contributions to a fund, with the employer bearing ultimate investment and financial risk as he promises to pay the employee a guaranteed benefit, based on factors such as length of service and final salary. The employer though, through a board of trustees, delegates mitigation of this risk to professional advisors such as fund managers and other consultants. In the second, newer and more popular scheme with employers — the defined contribution scheme — employees and employers make joint contributions, but with the investment and financial risk borne by the employee, thus absolving the employer of any obligation to make good of any deficits that may be occasioned by the occasional spell of bad runs in the investment markets. Fortunately, the capital mar- kets in Kenya over the past few years have been strong in terms of transactions, turnover and investment performance, with fairly strong cumulative returns over the past three to five years. With this in mind, many pen- sion funds have been content to invest in a combination of listed equities, fixed-income and money markets with a not-too- infrequent dabble in the property market. And why not, with returns on average of between 12 per cent and 15 per cent per annum? However, as the economy has grown and more pension funds have been set up, contributions flowing into the investment markets have increased many times over. Couple this with the public sector pension fund reform, not least the ongoing restructuring of the National Social Security Fund, investment flows headed into the capital and investment markets are set to reach an all time high. While the contribution side of the equation has picked up steam, the asset or investment side has been left behind. With less than five listings on the stock exchange a year, even fewer on the corporate bond side and a monthly mid to long term public debt auction, it has become more challenging for pension funds, boards of trustees and their advisors to profitably find a home for these funds so as to generate long term sustainable performance. As fund sizes have increased, the need to mitigate risk through diversification into different assets has come into focus. An international poll carried out by investment firm RisCura, the African Private Equity and Venture Capital Association (AVCA), and the South African Venture Capital and Private Equity Association (SAVCA) showed pension funds expected their portfolio allocation to African private equity to rise to three per cent in two years from an average of one per cent now. Further afield, research from the London Business School’s Coller Institute and Adveq, a private equity investor, suggests that between 2005 and 2012 public pension funds allocations Hello Developments Ltd director Ashton Towler (R) with Kenya Tourism Board MD Muriithi Ndegwa (L) during the launch of Mandharini Property Development. Picture: File COMMENTARY KENNETH KANIU “While the contribution side of the equation has picked up steam, the asset or investment side has been left behind” to private equity increased, on average, from 4.5 per cent to 5.64 per cent while private pension funds allocations increased, on average, from 4.99 per cent to 5.33 per cent over the same period. The data concludes that while schemes’ allocations to the asset class have grown significantly, they are still lagging behind other sophisticated investors. As a theme, both in Kenya and abroad, the need for diversification of fund strategy has taken centrestage with private equity beginning to show up on the investment radar. The potential that the asset class has for bolstering the economy is considerable. While the Nairobi Securi- ties Exchange boasts of above 55 listed companies, the potential market on the private equity side makes that a drop in the ocean at tens of thousands. Not all are likely to be anywhere near suitable investment candidates but looking at the sheer numbers and the diversified sector exposure does make for interesting investment. Providers of capital to many small, medium and large companies in Kenya have traditionally been commercial banks with a small balance of equity typically coming from the business owners themselves in the form of savings or retained earnings built up over the years. Funding model This, as a funding model, has made growth expensive, expansion slow and has generally constrained productivity and ultimately, growth in revenues, profits, taxes, benefits and development for all stakeholders involved. Pension funds are not the solution to this capital struc- The EastAfrican BUSINESS JUNE 28 - JULY 4, 2014 ture problem but they do provide an alternative in terms of provision of alternative, long term and sustainable pools of capital that every business owner craves. Pension funds, however, by nature do not like to deal directly with business owners and entrepreneurs. They like to invest through intermediaries who are able to pool together the providers of capital with those who need it the most, the entrepreneurs, hence the entry of the private equity fund. Private equity funds typical- ly raise funds from long term institutional investors such as pension funds, sovereign wealth funds, development finance institutions, family offices, endowments and others and deploy them into private businesses over a period of five to 10 years for purposes of investment returns, primarily dividends and capital gains. Target companies are selected through rigorous analysis and need to pass stringent tests to ensure that funds invested will be prudently managed to generate strong returns on investment and capital over the long term. It is not all bells and whistles, unfortunately, and there have been instances where private equity funds have either not been successful in raising funds, have not been able to deploy funds in good time into investment opportunities and where they have, have invested in companies that unfortunately have not done very well. Fortunately, however, as with any other investment, these have tended to be the exception and not the rule and while the RBA is urging pension funds to invest in private equity, a strong and rigorous investment case needs to be made justifying investments, with strong risk mitigation measures built in as well to ensure that the forecast outcome is what is achieved at the end of the day. For pension funds looking to match long-term assets with their liabilities and for those looking to generate strong, stable investment returns relative to the listed equities, the asset class certainly should warrant further investigation. Kenneth Kaniu is the Chief Investment Officer at Stanlib Kenya Ltd Bank of Uganda makes CBR ≥elease schedule bi-monthly By BERNARD BUSUULWA The EastAfrican UGANDA’S CENTRAL Bank has switched to a bi-monthly policy rate release cycle beginning next financial year in a move intended to improve inflation and growth forecasts, reduce volatile movements in short term interest rates and harmonise policy practices with its regional peers. A major policy announcement made last week indicated that the new release schedule will widen access to updated economic data among policy experts before considering changes in the Central Bank Rate (CBR). This will eventually improve quality of inflation and growth forecasts that rely on highly accurate data covering commodity prices, tax collections, exports and loans disbursed by commercial banks and other regulated lenders, Bank of Uganda (BoU) said. Under the old system, the CBR was reviewed every month while policy announcements were scheduled not later than the fifth day of the new month; a factor that made it difficult to capture latest data in policy analysis sessions. For instance, a policy rate decision taken in May would rely on data collected at the end of March due to routine delays encountered in compiling economic and financial statistics for the preceding month. By contrast, the new bi-monthly schedule sets the announcement date for key policy decisions on the 10th working day after two months from the last CBR review, thereby creating more time for compiling and analysing latest economic data. Consequently, the next CBR an- nouncement has been moved to August 2014 while the subsequent one is set for October. This move brings Uganda’s monetary policy regime in line with that of Kenya, which already operates a bi-monthly CBR release schedule. However, minutes of Monetary Policy Committee meetings remain confidential, an issue that has bothered offshore and local institutions interested in deeper interpretation of policy actions and matching their outlook on interest rates with BoU expectations. “The old schedule posed serious risks of rushed and less accurate economic forecasts. The new arrangement offers us more time for analysing economic data while improving inflation forecasts over 18 to 24 months. We also anticipate more certainty in interest rates due to a longer reaction cycle for CBR decisions,” explained Dr Charles Abuka, director of BoU’s Financial Stability Department.
June 23rd 2014
July 7th 2014