It is possible that public markets are in a secular downward trend – read zero new listings and more de-listings to come.
Initial Public Offers (IPO) have taken a back seat since peaking in the late 2000’s. It is, however, not unique to the Nairobi Securities Exchange (NSE). Indeed, stock markets the world over, at first designed to fill the capital-raising needs of the 19th century, now appear out of step with capital formation in the 21st century.
The result; retail investors are getting shut out of the most lucrative deals. As this is happening, private capital markets continue funding unlisted entities in effect keeping them away from public hands.
Granted, public markets are doing their best to remain attractive and prevent the current exodus. However, true recovery is expected to be a long and a drawn-out process (some predict 15-20 years). The big question is; how should small investors get involved in private markets?
Although choices are limited, one possible way is via pension fund investments into private equity.
Since 2016, the Retirement Benefits Authority (RBA) has allowed pension schemes to invest up to 10 percent of their assets under management in this class, with investment to date totaling 0.09 percent of the Sh1.3 trillion assets under management (December 2020).
As at June 2020, 43.99 percent of pension scheme funds were invested in government securities. Properties (18.6 percent), guaranteed funds (16.7 percent) and equities (14.2 percent) followed in that order.
There is, therefore, still ample room for pension schemes to invest more funds in the asset class. In fact, Kenya’s allowable weighting is the lowest in East Africa –as markets such as Rwanda have an allowable weighting as high as 20 percent.
Perhaps, scheme members should start demanding increased allocation towards private equity.
If applicable, they should advise additional trustee education if that would eventually steer the portfolio towards this alternative asset class.
Why should pensioners make this push? One, many private businesses are now choosing to remain private to avoid the usual rigors of going and staying public. In fact, some will never make it to the NSE, choosing instead to be acquired.As a result, public markets are no longer providing adequate access to the various sectors of the economy.Two; multiple studies now show that alternatives such as private equity far outperform public traded stocks. It’s a source of differentiated returns.Three; there is ample evidence showing that when individuals retire, they have not accumulated enough assets in […]
