One of Kenya’s leading banks, Equity Group, is planning to set up venture capital and private equity funds through its fintech subsidiary, Finserve. The fund will make investments in startups in Kenya and within the East African region, writes the group’s CEO, James Mwangi in Global Innovation Index 2020 (.pdf), which is co-published by the World Intellectual Property Organisation (WIPO), Cornell University of the US and non-profit private university INSEAD.
“Equity Investment Bank (EIB) is expected to grow as Kenya and other African economies shift from low-income to lower middle, upper middle, and, eventually, high-income economies. This will see the bank launch private equity and venture capital funds to offer equity investments for innovators and micro, small and medium sized enterprises (MSMEs),” said Mr Mwangi in his paper on financing innovation in Kenya .
“The group’s fintech arm, Finserve, is expected to set up a fund to invest in innovative ICTs for the development start-up sector providing digital solutions to Africa’s most pressing problems.”
Here Is What You Need To Know
- Mwangi who did not disclose any information about the timeline for the setting up of the fund, however said the move was informed by the company’s realisation that there is still high unmet demand for financing innovation in developing countries such as Kenya.
- The holding company’s decision to use EIB to set up investment funds signals a change in how banks use their investment arms, which many of them bought or developed between five and ten years ago with the intention of earning money from stock and fixed income trading.
- After buying the trading licence of the defunct stockbroker Francis Thuo & Partners for a record Sh150 million in 2013, Equity formed EIB, hoping to use its large bank customer base to push business to the unit.
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Pension Funds In Kenya To Set Aside 5% Of Their Funds For Investment In Local Startup Ecosystem
Last year, Kenya launched National Information, Communications and Technology (ICT) Policy which spells out a new set of policy guidelines intended to assist the East African country achieve its Vision 2030, which among many things, is anchored on helping Kenya attain the status of an industrialized information society as well as a knowledge-driven economy by 2030. Part of the policy is the encouragement of pension funds to set aside 5% of their funds for investments in local startup ecosystem.
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This is a deal breaker, which if properly implemented, will unlock funding for startups in Kenya. Although the language of this rule is not compelling, this will most definitely be the right push for pension funds in Kenya willing to invest in early startups.
However, it should be noted that, already Kenya has allowed private equity and venture capital firms to raise funds from pension schemes after amending the Retirements Benefits Authority (RBA) Act in 2015. Since then, this has allowed pension schemes to invest up to 10 per cent of their assets in private equity and venture capital firms (firms which, most times, invest in startups and SMEs). The new 5% rule under the new policy, however, will encourage pension funds to invest directly in startups or venture capital firms investing in early stage startups, out of the permitted 10%.
Apart from the 5% rule, there are other funding plans considered under the policy, such as a proposed “anchor fund” that will invest in qualifying Kenyan ventures for a proportionate equity consideration on a first-loss basis, thereby motivating co-funders to commit significant capital to qualified entities.
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Also to be created is “a rotating venture capital fund” to be chaired by a person to be determined by the Cabinet Secretary for ICT with membership of a representative of the Kenya Sovereign Fund; the Kenya Private Sector Alliance; the CEOs of the three largest private sector pension funds at any one time; and four other members with ICT expertise as the Cabinet Secretary for ICT may from time to time determine.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer
Equity Group venture capital fund Equity Group venture capital fund