REGULATION OF PRIVATE EQUITY AND VENTURE CAPITAL FUNDS IN KENYA IN LIGHT OF THE FINANCE ACT, 2020

By Johnson Kariuki

Wednesday 08, 2020

The Finance Act, 2020 was assented into law on June 30th, 2020. The Act amends the Capital Markets Act to include private equity (PE) firms and venture capital (VC) firms that have access to public funds in the list of entities that must be licensed/approved by the Capital Markets Authority (CMA).

According to the “Private Equity Sector Survey of East Africa for the period 2017 to 2018” by KPMG and the EAVCA published in June 2019, 190 PE backed deals in East Africa were reported during the period 2007 to 2018, with an estimated value of over USD 2.7 billion. 84 PE backed deals were reported at an estimated value of USD 1.4 billion over both 2017 and 2018. The Survey also indicated that Kenya remained the most popular investment destination in East Africa with agribusiness, financial services and fast-moving consumer goods being the dominant sectors.

We note that PE and VC firms play a major role in the Kenyan economy. In this Alert, we look at the impact of the amendment on these firms.

Target

The Amendment applies to PE and VC firms that have access to public funds. In our opinion, pension funds are at the crux of this amendment. The Retirement Benefits Authority in its Investment Regulations & Policies caps investment by pension funds in VC and PE funds at 10% of the aggregate market value of total assets of scheme or pooled funds. The Kenya National Bureau of Statistics in its Economic Survey, 2020 noted that pension funds in Kenya rose to KES 1.3 Trillion as at December 2019 from KES 1.17 Trillion as at December 2018. Therefore, this brings the funds to be accessed by PE and VC funds circa KES 130 Billion.

The Finance Act has not indicated whether this threshold will be revised, but with increased oversight on PE and VC firms with access to these funds by the capital markets regulator, translating to increased confidence in these firms, we see this being a viable conversation point for the stakeholders in future.

Implications on PE and VC funds

The CMA prescribes the threshold of what is considered a private offer. This includes raising funds from institutions such as pension funds. Raising of funds through private offers, regardless of whether the investors have access to public funds, has not been regulated until this amendment. PE and VC firms raising funds privately are only required to file an information notice when fundraising.

While we note that the commencement date of the Amendment was 30th June, 2020, there are obvious challenges to implementing it, specifically the inadequacies of the legal framework. The amendment empowers the CMA to “license, approve and regulate” PE and VC firms that have access to public funds. However, it is not clear at the moment the form this regulation will take

PE and VC firms may either be required to obtain a license before accessing public funds or obtain approval of the particular products through which they access public funds. We foresee the CMA issuing regulations or guidelines to provide clarity on issues such as:

the form of regulation, whether licensing the firm or approving the product;

the requirements for registration/approval of the firms, including eligibility criteria, fees payable, corporate governance and continuous obligations; and

the transition of firms that already have access to public funds.

The CMA already has a framework for the registration of VC firms, the Capital Markets (Registered Venture Capital Companies) Regulations, 2007, but the application for registration was optional. With the requirement being mandatory in relation to firms raising funds from the public, it remains to be seen the extent to which the CMA will borrow from these Regulations. However, we foresee increased oversight on PE and VC funds’ Board rooms and operations to the extent that they access public funds.

We will keep an eye on the developments and keep you updated.

This Legal Alert is for your information only. It should not be relied upon without legal advice on its contents. Should you require further information on any of the discussions above, please feel free to reach out to Johnson Kariuki.

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