The Capital Markets (Alternative Investment Funds) Regulations, 2023

Alternative Investment Funds comprised of private equity funds, hedge funds and venture capitalist funds may soon be required to obtain licensing from the Capital Markets Authority in order to pool funds from investors in Kenya and beyond for investment in the Kenyan market. This is following the recent publication of the Capital Markets (Alternative Investment Funds) Regulations, 2023 which propose to regulate collective investment schemes that privately pool funds from at least two but not more than one hundred investors in Kenya or outside Kenya for investment purposes.

The Regulations provide for approval requirements prior to operation, eligibility criteria, investment conditions that shall apply to the investment strategies adopted by the AIFs and the general obligations and responsibilities applicable to the AIFs.

2. Approval 

According to the Regulations, persons seeking to operate an AIF and fund managers shall be required to apply to the Authority for approval to operate as such. Some of the funds provided for under the Regulations include a debt or debt-linked fund, equity or equity-linked fund, hedge fund, property fund, infrastructure fund or any other AIF. The eligibility criteria for approval of an AIF include:

• Formation documents that, do not include provisions that are unfairly prejudicial to the interests of the participants, demonstrate the AIF’s authority to carry out the activities of an AIF and conform to the requirements set out in the second schedule of the Regulations which include the relevant contact information of the AIF and the legal structure of the AIF as a body corporate;
• Confirmation that the AIF shall not make an invitation to the public to subscribe to its securities;
• Fit and proper directors, trustees or partners of the AIF as provided under the Capital Markets Act (the Act);
• Adequate experience of the key investment team of the fund manager with at least one (1) person having not less than five (5) years’ experience in advising or managing pools of capital, fund, asset, wealth or portfolio management, the business of buying of, selling of and dealing in securities or other financial assets and has relevant professional qualifications;
• Adequate infrastructure and human resource to effectively discharge the duties of the fund manager;
• Clear descriptions by the fund manager of the investment objective, targeted investor, proposed scheme assets, investment policy or strategy and proposed tenure of the AIF; and
• That the entity or any other entity established by the fund manager has not been previously denied approval by the Authority.

It is worth noting that family trusts, employee participation or saving schemes, holding companies, and securitisation special purpose vehicles where pooling is by members of a club or association and the members can reasonably be regarded as having common interest with each other and what is to be done with the proceeds of the offer are not considered AIFs within the meaning of the Regulations.

3. Investment Conditions

Fund managers will be required to ensure that each fund they manage states its investment strategy, purpose and methodology in its placement memorandum to the investors and that any material alterations to the fund’s strategy is made with the consent of at least two-thirds of the holders of participatory interests by the value of their investment in the fund.

Investments shall also be subject to the following conditions:

• The funds may be pooled from any investor regardless of their residence by way of issue of participatory interests;
• The fund shall not accept an initial investment of less than one million Kenya shillings from a participant and the participant must maintain the minimum investment in book value throughout the duration of the investment;
• The fund manager may have a continuing interest in the fund and such interest shall not be through the waiver of management fees;
• The fund manager shall disclose its investments in the fund, if any, to the participants of the fund in the placement memorandum and such regular reports as may be required;
• A fund shall not have more than one hundred (100) participants subject to any other applicable legislation; and
• A private fund shall not solicit or collect funds except by way of private placement.

Fund managers pooling funds from investors will be required to submit the placement memorandum to the Authority for approval. The placement memorandum is required to contain, among other things, material information about the fund and the fund manager, background of the key investment of the fund manager, targeted investors, fees and all other expenses proposed to be charged in the duration of the AIF, a statement that the directors, trustees or partners are liable for the correctness of statements contained in the memorandum, the investment strategy, risk management framework, dispute resolution mechanisms, manner of winding up the fund, and such other information as may be necessary for an investor to make an informed decision.

The tenure for each fund shall be as specified in the formation documents and may be extended with the approval of two-thirds of the participants by number and value of investments. If the tenure of the fund is not extended, the fund shall fully liquidate within one (1) year of expiry of its tenure.

4. General Obligations and Responsibilities

According to the Regulations, fund managers shall be required to, among other things, develop and review policies and procedures on a regular basis to ensure their appropriateness, appoint a custodian licensed by the Authority for safekeeping of the funds’ assets, ensure that the funds comply with the duties and responsibilities under the Act and the Regulations, address all complaints from participants and provide the Authority with any information required.

Fund managers shall also be required to, appoint a duly qualified auditor to audit the books of accounts of the funds annually, disclose all conflicts of interest to the participants of the fund as and when they arise or are likely to arise and establish and implement policies and procedures to identify, monitor and appropriately mitigate conflicts of interest. In order to foster transparency, fund managers will be required to furnish information to the investors of the funds they manage relating to financial, risk management and transaction information, fees ascribed to the fund manager, enquiries or legal actions by legal or regulatory bodies in Kenya all on a quarterly basis as well as any material liability arising during the fund’s duration or tenure, any breach of a provision of the placement memorandum, if any, and any change of control in the fund manager as and when they occurs.

According to the Regulations, fund managers will be required to maintain a valuation policy for valuation of assets including discount rates and reference prices, where applicable, and notify the Authority of any changes thereto. Fund managers will also be required to ensure that the calculations of the net asset value are done at least quarterly and disclosed to the Authority and the fund participants and that a valuation report of each fund’s investments is prepared annually by an independent valuer and submitted to the Authority and the fund’s participants. Fund managers will also be required to maintain records of the assets under management of the fund, valuation policies and procedures, decisions of the investments committee and investment strategies, particulars of participants and their contributions and rationale for investments made.

5. Winding Up

The Regulations provide for winding up of AIFs set up as either a trust, limited liability partnership or company by the fund manager. Instances when an AIF may be wound up include where the Authority revokes the approval of the AIF, where the fund manager, trustee or custodian requests for revocation of the Authority’s approval of the AIF, on expiration of the tenure of the fund, if the fund manager or trustee is of the opinion that winding up is in the best interest of the participants or if the Authority directs as such in the best interest of the fund’s participants. According to the Regulations, each fund shall be wound up depending on its corporate structure such that a trust or limited liability partnership shall be wound up in accordance with its formation documents and a company shall be wound up in accordance with the Companies Act, No 17 of 2015. The fund manager shall thereafter be required to submit a final account to the Authority upon conclusion of the winding up process.

6. Temporary Exemption

The Regulations provide for temporary exemptions limited to a period of twenty-four (24) months to be availed to any person or class of persons furthering innovation in the capital markets in a live environment of the regulatory sandbox in the securities market subject to compliance with the conditions specified by the Authority.

7. Conclusion and What it Means to You

AIFs are regulated differently in different jurisdictions with most AIFs lacking unified regulations governing their operations. Some countries like the United States of America, Singapore and Canada regulate AIFs through a combination of regulations that prescribe registration requirements, ongoing compliance obligations and exemptions from regulation. In the foregoing jurisdictions, AIFs are not required to obtain a license from a regulatory body prior before commencing operations.  However, other countries have in the recent past, promulgated specific regulations to govern the operations of AIFs including India through its Securities and Exchange Board of India (Alternative Investment Funds) Regulations in 2012, the United Kingdom through its Alternative Investment Fund Managers Regulations, 2013 and Brazil through Resolution No. 175 by the Brazilian Securities and Exchange Commission which became effective on 2^nd October 2023.

The move to regulate AIFs is perhaps precipitated by the rapid growth in the private equity space and related concerns relating to money laundering, terrorist financing and consumer protection thereby necessitating regulatory oversight. According to the National Assembly, the Regulations are intended to provide a regulatory framework to regulate the constitution and operation of AIFs in Kenya in a bid to provide for emerging issues in the capital markets investment ecosystem as well as provide for investor protection and market integrity. The Capital Markets (Alternative Investment Funds) Regulations, 2023 are therefore noteworthy especially considering the growth in private investments in Kenya by both Kenyan and foreign investors.

This means that as a private equity fund, hedge fund, infrastructure fund, real estate fund or venture capitalist fund, you will soon be required to apply to the Authority for approval to operate as such and comply with the provisions of the Regulations through among other things, preparation and submission of necessary policies and procedures relating to your operations and regular disclosure of information to the Authority regarding your operations.

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