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CMA to have oversight over Alternative Investment Funds

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In line with its new strategic direction, the Capital Markets Authority (CMA) has published regulations that seek to place funds that raise money from investors under its regulatory ambit.

This is aligned with its investor protection mandate.

The funds classified as Alternative Investment Funds (AIF) are collective investment schemes, which pools capital with a view to investment according to a defined investment policy.

The product requires a substantial investment, and the eligible investors tend to be institutions and high-net-worth individuals.

AIFs can be pooled from at least two, but not more than one hundred investors, who must invest a minimum of Sh1 million.

AIF funds include debt and debt-linked funds; equity and equity-linked funds; hedge funds; property funds; and infrastructure funds.

Speaking during the release of the Quarter One 2024 Capital Markets Soundness Report, CMA chief executive Wyckliffe Shamiah said the Capital Markets (Alternative Investment Funds) Regulation 2023, provides for regulation of the private pooling of funds from domestic and foreign investors.

“The regulations broadly cover several areas including requirements for approval of the funds; investment conditions and restrictions; obligations and responsibilities transparency, inspections; and procedures for action in case of default,” said Shamiah.

He explained that the product allows investors to diversify their investment portfolios, thereby acting as a cushion during a financial crisis or when the market is highly volatile.

Further, the funds are invested in all sectors of the economy, effectively contributing to economic development.

The funds also function as a hedge against inflation thus providing a safeguard against erosion of value for investors.

India, South Africa, Nigeria, and Egypt are some of the markets that have AIF markets.

To protect the investing public, AIFs are barred from public solicitation for securities subscriptions, and are expected to establish governance structures around such funds including fit and proper directors, trustees, or partners, as well as experienced investment teams.

Upon approval, an AIF must provide clear details on investment objectives, targeted investors, scheme assets, and tenure.

Entities such as family trusts and employee participation schemes are exempt from AIF classification.

He added that to realise the full benefits of AIFs, CMA will be partnering with stakeholders to sensitise and build capacity for all participants in this market segment.

The gazettement of the AIF Regulations marks the first step towards growing the AIF industry in Kenya.

The regulations allow for different structural innovations in the alternative investments space to finance property development and infrastructure projects.

It brings funds that were previously outside the regulatory purview of CMA into its perimeter of oversight, while mitigating the risk of retail investors participating in complex fund structures.

Meanwhile, according to the Quarter One 2024 Capital Markets Soundness Report, the domestic capital market remained resilient and registered improved performance in indicators such as equities and both turnover, share volume, NSE indices and market capitalisation.

Investor net-worth increased by Sh370 billion during the period under review.

This was driven by the significant strengthening of the Kenya shilling against the US dollar.

Specific to soundness and health indicators, the market witnessed low volatility of share prices of firms listed on the NSE, improved liquidity and a growth in foreign investors’ market share of equities trading to 60 per cent.

On the flipside foreign investors continued to exit the NSE with net equity outflow of Sh2.20 billion registered in the quarter.

Notably, foreign participation in the equity market has recently attracted global institutional investors such as Blackrock, following recent market recovery and positive developments in Kenya’s foreign exchange market.

The outlook for the next quarter is therefore positive, CMA noted.

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