‘A Hand Full of Aces’: Investment Options in Private Equity and Venture Capital Firms for Pension Schemes in Kenya

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Over the recent past, there has been a notable shift by pension schemes towards seeking alternative investment options arising out of diversification considerations. This move has seen the percentage of investments in private equity and venture capital (PEVC) firms in the asset management register of pension schemes increase, indicating a positive reception of these alternative investment avenues by pension schemes.

PEVC firms offer viable investment options to individuals, companies and entities seeking to expand their portfolio. Although PEVC firms are normally used as a generic term for entities involved in investing in private equity, this misconception stems from the lack of appreciation of the different roles they play.

First, private equity firms inject capital in companies whose operations are deeply rooted in the economy, that is, mature companies with some level of established market accessibility. On the other hand, venture capital firms usually assist companies that are seeking to breakthrough at the initial stages.

Ideally, for an entity to fall within the radar of venture capital firms, it would first have to create a base, by either using seed capital and later turning to angel investors (if necessary) and finally resort to venture capital firms when growth is constant. Thus, as is discerned from the foregoing, venture capital is in fact a subset of private equity.

In Kenya, private equity firms unlike venture capital firms, are largely unregulated.

Investing Pension Funds

Pension provides some level of security upon retirement which in turn helps maintain and sustain the standard of living after retirement. Due to their very nature, pension fund assets require a high degree of management to guarantee returns for retirees. For the longest time pension funds were limited to fixed securities or government securities, which resulted in a stable return for the assets invested. However, this also meant low returns as most fixed investments usually have a low return rate.

Changing market conditions and the need to improve the range of income generating sources, have seen a diversification in the range of pension fund investment classes. Consequently, most pension schemes have started allocating a portion of the pension fund’s assets to alternative investments, which are essentially investments that do not form part of the orthodox asset types such as listed equity, government securities, bonds or cash.

Unlike the traditional forms of investments, alternative investments come with an element of high risk-adjusted returns, meaning that whereas there is a higher risk in specific investments, the same comes with the possibility of better returns.

Sections 37 and 38 of the Retirement Benefits Act (RBA) lists the range of permissible investments and the restrictions in dealing with retirement funds. The said sections of the RBA provide that scheme funds shall be invested with a goal of securing market rates of return on the investment, and to do so, schemes should formulate a provident investment policy. However, pension schemes are prohibited from using the funds in the scheme for advancing loans, or investment that goes against the guidelines prescribed by the Cabinet Secretary, National Treasury.

The RBA is supplemented by several guidelines and regulations, including the Retirement Benefits (Forms and Fees) Regulations, 2000 (the Regulations). The Regulations provide a category of permissible investments for pension schemes under Table G. PEVC firms are included under the table at part 13 and the extent of investment in percentage is also specified for such firms to be ten percent (10%) of the total scheme funds.

It is important to note that the Regulations do not provide the type of PEVC firm that a pension scheme can invest in. Therefore, it is upon the trustees of schemes to identify the most suitable PEVC firm and proceed to invest the funds to the extent of statutory limits.

The steady growth of investment in PEVC by pension schemes is remarkable, as was noted by Charles Mwaniki when writing in the Business Daily on 2nd October 2020. With the expansion of pension funds, it is almost certain that investment in PEVC by pension schemes will similarly grow.

PEVC firms come with inherent and unique risks, hence an investment which initially appears appealing on paper, may result in substantial loss. It is important for pension schemes to review a company’s performance, financial position and portfolio and to assess the chances of a positive return on an investment.

This would create a level of predictability which aligns with the pension scheme’s investment plan. However, it is noteworthy that companies are often susceptible to unforeseeable factors including market forces which may make it difficult to project the company’s business performance based on previous years’ financial yields.

Regulatory Framework

A look at the regulatory framework is necessary to understand the environment in which PEVCs operate in Kenya and whether the law offers enough protection to safeguard the retirement benefits of retirees.

PEVC firms are subject to several laws depending on the structure of the legal entity. If the private equity firm is a company, then the provisions of the Companies Act, 2015 and regulations thereunder will govern the conduct of business, whereas if it is a partnership, then the relevant partnership laws will apply depending on the structure of the partnership. However, there are no sector specific laws that govern private equity firms.

Venture capital firms on the other hand, have been under the regulatory ambit of the Capital Markets Authority (CMA). To operate as a registered venture capital firm, one must satisfy the eligibility requirements as set out under the Capital Markets Act (Cap 485A Laws of Kenya) (CMA Act) and the Capital Markets (Registered Venture Capital Companies) Regulations, 2007. Once the prerequisites for qualification are met, the venture capital firm is then required to lodge an application for approval with the CMA.

It is important to note that private equity firms were recently brought under the control of the CMA. Section 30 of the Finance Act 2020 amended section 11 of the CMA Act to include PEVC firms that have access to public funds in the list of entities that must be licensed or approved by the CMA. This followed the CS National Treasury’s remarks while reading out the 2020/2021 Budget Statement whereby he proposed an amendment to the CMA Act to subject PEVC firms to the oversight of the CMA due to the risk factor posed by such firms especially in relation to public funds.

Subsequently, the CMA Act was amended to provide that the CMA shall have authority to license, approve and regulate PEVC firms that have access to public funds. However, this amendment still leaves a lot to be desired as what constitutes public funds has not been defined and is therefore ambiguous.

Furthermore, there are no provisions detailing the requirements, procedure for approval and obtaining of licences by PEVC firms that have access to public funds. It is hoped that this might become clearer upon promulgation of the relevant regulations.

PEVC stakeholders have however advised against the move to regulate PEVC in Kenya stating that the current regime is already sufficient. Speaking through their representative, the East Africa Private Equity and Venture Capital Association, PEVC firms have stated that this would amount to “overregulation”, noting that pension schemes are already governed by the Retirement Benefits Authority.

It is important that a balance is struck to ensure that PEVC firms operate with the business flexibility plans that have thus far been the success of these type of alternative investments. It is also noteworthy that at a very basic level, PEVC firms are governed by the law relating to contract.


In the coming years, depending on the performance of PEVC firms and the returns made for pension schemes, the discussion is likely to move towards increasing the share of funds deposited with PEVC firms. Currently, however, the laws governing investments in PEVC by pension schemes are inadequate to facilitate proper security for pension funds while at the same time allowing diversification of investments by pension schemes.

It is for this reason that there is need for better regulation on investment of pensions funds in PEVC firms in Kenya. The regulations should indicate, amongst others, what amounts to public funds, the threshold for approval for PEVC firms to handle public funds and the prerequisites to be met before the CMA issues trading licenses. This is likely to translate to increased confidence in PEVC firms and higher investments in them by pension schemes.