Regulation of Investments by Pension Funds and other Investors into Private Equity

The CMA does not currently regulate the investments made by PEVC funds themselves (assuming that they are not made into listed companies or entities specifically licenced by the CMA); however, such investments may fall under other industry-specific regulators in line with their respective statutes and regulations.

As a general premise, investment funds or other entities that pool funds from the public are regulated as collective investment schemes under the Capital Markets Act, and their general partner or other management entity must be licenced by the CMA as a fund manager. General partners or the management entities of PEVC funds that do not fit within the definition of a collective investment scheme remain regulated as either investment advisers or fund managers, depending on the size of the funds under their management.

Pension funds are only allowed to invest in certain specific asset classes, with the proportions of such assets prescribed under the Retirement Benefits (Individual Retirement Benefit Schemes) Regulations, 2000 and the Retirement Benefits (Occupational Retirement Benefit Schemes) Regulations, 2000. Under these regulations, pension funds may invest a maximum of 10% of their assets under management in PEVC funds.

Beyond the restrictions on pension funds, PEVC funds offering securities to the public or a section of the public in Kenya would need to comply with the provisions of the Capital Markets Act and the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 (the “Public Offers Regulations”), which require the PEVC fund to submit a prospectus for the CMA’s approval prior to making any public offer. The law does not define the term “section of the public” and hence any offer to any section of the public by a PEVC fund for the purpose of procuring investors is caught. That said, the CMA has the power to exempt a public offer from the requirement to submit a prospectus; however, the procedure and requirements for such exemption are not defined, and there is no developed jurisprudence on this point.

In addition, the Capital Markets Act provides for restricted public offers, where a public offer of securities is restricted to sophisticated investors or directly communicated to a prescribed category and number of persons. Where a PEVC fund’s offer falls under a restricted public offer, the PEVC fund would be required to submit a short form prospectus to the CMA for approval. While a short form prospectus is a simpler document, it is nevertheless a time consuming and costly process to pull together.

For a PEVC fund’s fundraising activities to be fully exempted from the application of the Public Offers Regulations, the PEVC fund would need to show that the subscription to the fund by Kenyan investors is made pursuant to a private offer. Private offers are not subject to any prior authorisation from the CMA, the disclosure requirements set out in the Public Offers Regulations will not apply and consequently no information memorandum or prospectus need be filed with the CMA. However, the PEVC fund will be required to file an approved information notice with the CMA.

In general, the CMA’s mandate is to protect investments made by the wider public and specifically less knowledgeable or sophisticated investors who might invest in a collective investment scheme in reliance on a fund manager’s expertise without necessarily having a full understanding of the associated risks.

Drawing the line between investors who need protection and those who do not is inevitably more art than science, especially where offers often cut across corporates and individuals with different income and expertise, but a pension fund operating under its own pensions regulator should not be subject to the same regime. In seeking to define and draw the line between those investors who are sufficiently knowledgeable and those who require a regulator’s protection, it is increasingly important for the CMA to work with stakeholders such as the East Africa Venture Capital Association and the African Venture Capital Association, as well as private sector groups to ensure that the development of the existing regulatory framework encourages investment while ensuring public protection when required.

Should you have any questions regarding the information in this article, please do not hesitate to contact Partner Dominic Rebelo

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Contributor
Principal Associate – Maureen Chepkoech

This article was first published in the AVCA Legal & Regulatory Bulletin March 2022 Edition.