It’s roughly three months since the Cabinet Secretary for the National Treasury and Planning recently gazetted the Capital Markets (Alternative Investment Funds) Regulations, 2023, which took effect sometime last December.
A lot has been written on its potential impact on the existing private equity industry, the timeline to comply, and whether actual enforcement is possible et al. I’d like to add a somewhat distant but possible scenario: the arrival of a new breed of investors the law inadvertently may create: the shareholder activist.
All made possible by the regulations that aim to bring hedge funds and similar entities within the Capital Markets Authority’s (CMA’s) regulatory ambit.
Why you may ask? I see all the right ingredients present. Reading CMA’s last annual report, you see all manner of penalties: “failure to publish profit warning in the year, failure to submit to CMA, failure to submit audited financial statements, failure to publish full/half year interim financial statements, failure to maintain adequate working capital, et cetera.”
While the role of the regulator is to be the market's police, some of this work forms part of what shareholder activism is all about. Get things working again.
Like many others, I view activism broadly: it is simply the actions of investors who are dissatisfied with management’s incompetence, poor decision-making and ill-advised corporate strategy and who, rather than selling their shares, try to force those companies to change boards that are stale, full of political appointees with irrelevant skills, half-clueless blue-eyed boys and girls too chummy with management, and so forth.
Here’s why I think this reality is needed. Allow me to illustrate this with a couple of obvious straw men: in one company, management is firmly entrenched and is using the company to extract economic rents for itself, while the board is completely captive to management and fails repeatedly to do anything about it.
Here, an activist investor that shakes up this dysfunction likely will benefit all investors in general. Who wouldn’t be happy to see their value grow?
Now, creating the legal framework for shareholder activists to exist is a plus, but understanding their modus operandi often requires the cooperation of others. Here, institutional investors, who now hold the lion’s share of equities at the Nairobi Securities Exchange, can make or break an activist intervention — whether through formal votes or through engagement behind the scenes.
This cooperation is necessary to ensure any activist campaign is successful. Of course, some investor activism is not beneficial. Especially, the one that’s focused on short-term gains (read spinning off a profitable division, beginning a share buy-back program, or slashing capital expenditures, etc).
Nonetheless, I am optimistic. The new regulations may bring new fresh viewpoints to bear, challenging some of the existing orthodoxy. Yes, we need outside voices proposing strategic reviews and even board nominations.
I honestly think that only an activist fund manager can push for such improvements at a single company than in stock-picking. Not least because they’re generally driven by the profit motive.
Mwanyasi is MD, Canaan Capital.
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