Kenyan PE funds shun small firms despite high returns

A good example is the pension contributions held by Kenyan fund managers. There is about Sh471 billion—enough to build 17 Thika Super highways, under management by fund managers, according to figures released by the Retirement Benefits Authority (RBA) earlier this year.

Each fund manager is allowed to invest up to five per cent of the cash they manage in unquoted securities— this includes investment in private equity and venture capital. But the RBA report showed most managers allocated a paltry one per cent to invest in unquoted securities.

Then there is the aspect of government regulation which keeps away many of local investors from private equity and venture capital deals.

“The local funds are there but they try to stay away from media because they could become targets for government regulation.

That is why they prefer to close everything out of media circles,” said Johnson Nderi an analyst at Suntra Investment Bank, citing some of local fund managers who set up funds to invest in SMEs.

Government regulation of private equity firms in US and Europe has hit headlines for the better part of this year.

The US government had proposed to double the tax rate from 15 per cent to 30 per cent on profit rewards from buyout deals .

Players in the private equity space say this could also be the case in Kenya if the sector grows.

Currently, most of the companies pay corporation tax of 30 per cent and they don’t get taxed on the profit they make from each buyout or deal.

Taxing them as corporations means they have a good advantage of deducting their overall business costs which reduces the size of the pie government has claim to as tax.

But still another challenge has been that Kenya’s well known private equity or venture capital firms only consider deals of a certain threshold.

Centum and Olympia Capital are two listed private equity firms but they focus on large investments, typically in hundreds of million of shillings, way above the thresholds of many SMEs.
— Biasharasme.com