Role of Pension Funds and Public Money in Private Equity: Regulatory Limits and Opportunities Under CMA and Retirement Benefits Authority Rules
Kenya’s private equity market has matured considerably over the past decade. Fund managers are raising larger vehicles, targeting sectors from agribusiness to fintech, and increasingly looking to institutional investors rather than foreign development finance institutions as a source of long-term capital. Pension funds, which collectively manage hundreds of billions of shillings on behalf of Kenyan workers, represent one of the most significant pools of domestic capital available. The question of whether, and to what extent, those funds should be channelled into private equity is not merely a financial one. It sits at the intersection of regulation, fiduciary duty, and national economic policy in ways that demand careful legal and practical analysis.
The Retirement Benefits Authority (RBA), established under the Retirement Benefits Act, Cap 197, is the principal regulator of occupational pension schemes and individual retirement funds in Kenya. The Capital Markets Authority (CMA), established under the Capital Markets Act, Cap 485A, regulates collective investment schemes and fund managers, including private equity fund managers operating in Kenya. Both regulators have published rules that touch on pension fund investment in private equity, and the interaction between those frameworks creates both opportunity and constraint for market participants.
The central tension in this area is one that regulators around the world have wrestled with: retirement savings are meant to be secure, predictable, and ultimately liquid enough to meet the payment obligations of a pension scheme. Private equity, by contrast, is illiquid, long-dated, and carries meaningful risk of loss. Balancing these realities requires a regulatory framework that protects beneficiaries without denying them access to asset classes that, when well managed, can deliver superior long-term returns. Kenya’s framework attempts to strike that balance, though there are aspects of it that remain works in progress.
The Regulatory Architecture: RBA Investment Guidelines and CMA Licensing
The RBA governs how pension scheme trustees invest the assets under their care through the Retirement Benefits (Forms and Fees) Regulations and, more substantively, through the Retirement Benefits (Occupational Retirement Benefits Schemes) Regulations and the associated investment guidelines. These instruments prescribe asset allocation limits that determine what proportion of a scheme’s portfolio may be placed in any given asset class. Historically, the guidelines were conservative and did not contemplate alternative assets such as private equity in any meaningful way. In recent years, however, the RBA has moved to modernise the framework, and the current guidelines permit limited exposure to alternative investments including private equity.
Under the current RBA guidelines, a pension scheme may invest a portion of its assets in alternative investments, which includes private equity funds, subject to prescribed limits. The guidelines impose an overall ceiling on alternative investments and require that any fund receiving pension money be registered or recognised by the CMA. This means that a private equity fund manager wishing to receive capital from Kenyan pension schemes must, in most cases, hold the relevant CMA licence. The CMA, under the Capital Markets (Collective Investment Schemes) Regulations and related subsidiary legislation, licenses fund managers and registers collective investment schemes, including private equity vehicles structured as collective investment schemes. Fund managers should review the CMA’s licensing requirements carefully, as the documentation, capital adequacy, and governance requirements are detailed.
The interaction between the two regulatory frameworks matters because it creates a two-step compliance obligation. A private equity fund seeking pension capital must satisfy not only the CMA’s requirements as a fund manager but also the RBA’s requirements for an eligible investee fund. In practice, this means that fund documentation, reporting standards, and governance structures must be designed with both regulators in mind from the outset. Funds that are structured offshore, or that do not hold CMA registration, face significant barriers to accessing Kenyan pension capital, regardless of their investment merits. This has implications for deal sourcing, fund structuring, and the overall cost of capital for private equity managers operating in or targeting Kenya.
Investment Caps: What the Rules Actually Permit
The quantitative limits imposed by the RBA on pension fund investment in private equity are a practical starting point for any analysis. The specific percentages are set out in the investment guidelines and are subject to periodic revision, which means market participants should always verify the current limits directly with the RBA rather than relying on older publications. At the time of writing, the guidelines permit investment in alternative assets, including private equity, within an overall cap that forms part of a broader asset allocation framework. Within that overall limit, there are sub-limits that restrict concentration in any single fund or manager, which serves to enforce a degree of diversification.
These caps reflect the regulators’ recognition that while private equity can generate strong returns, concentration risk is a genuine concern. A pension scheme that placed a large proportion of its assets with a single private equity manager would be exposing its beneficiaries to fund-specific risks that are entirely avoidable through proper diversification. The sub-limits therefore serve a protective function that aligns with the fiduciary duties of trustees discussed below. Fund managers should understand that even where a pension scheme wishes to make a larger commitment, its trustees may be legally unable to do so if the applicable cap would be breached. Structuring a fund’s minimum commitment size with these constraints in mind is a practical step that can make the difference between a successful capital raise and an unsuccessful one.
It is worth noting that the RBA also applies limits based on the nature of the pension scheme itself. Defined benefit schemes, which guarantee a specific payout to beneficiaries regardless of investment performance, are generally subject to more conservative limits than defined contribution schemes, where the ultimate benefit depends on investment returns. This distinction is logical from a risk management perspective: a defined benefit scheme bears the investment risk itself and cannot pass shortfalls to members, whereas in a defined contribution scheme the member bears the investment risk. Fund managers raising capital from both types of schemes may find that the effective allocation available from defined benefit schemes is considerably smaller, and this should inform fundraising strategy and investor targeting.
The Approval Process: Practical Steps and Common Challenges
Beyond the quantitative limits, both the RBA and CMA impose process requirements that pension trustees and fund managers must follow before a commitment to a private equity fund can be made. On the RBA side, pension schemes are generally required to obtain prior approval or, in some cases, to notify the RBA before making investments in alternative assets above a certain threshold. The approval process requires the submission of documentation that demonstrates the investment falls within permitted limits, has been subjected to appropriate due diligence, and has been approved by the scheme’s investment committee and trustees in accordance with the scheme’s investment policy statement.
The investment policy statement (IPS) is a foundational document in this process. Under the RBA framework, every pension scheme is required to maintain an IPS that sets out the scheme’s investment objectives, risk tolerance, and permitted asset classes. A scheme that wishes to invest in private equity must ensure that its IPS expressly contemplates alternative investments. Where the IPS does not do so, trustees must first amend the policy, which typically requires trustee board approval and notification to the RBA, before any commitment can be made. Fund managers who engage with pension scheme investors early in the fundraising process should be prepared to assist trustees in understanding how a private equity allocation fits within, or requires amendment to, the scheme’s existing IPS. This kind of technical support can meaningfully accelerate the investment decision timeline.
On the CMA side, the approval process is primarily relevant to the fund manager. A manager that is not already licensed by the CMA must apply for the relevant licence and register its fund vehicle before marketing to Kenyan investors. The CMA’s process involves a review of the applicant’s governance structure, key personnel, track record, and fund documentation. Applicants can expect a thorough review, and the CMA has in recent years become more active in enforcing compliance requirements for both new and existing licensees. Fund managers from other jurisdictions who operate under regulation in their home markets should engage early with the CMA to understand whether their existing regulatory status is recognised or whether a full licence application is required. The CMA has published guidance on its regulatory sandbox and on equivalence considerations that may be relevant to international managers.
Fiduciary Duties of Pension Trustees: The Legal Framework
The concept of fiduciary duty is central to understanding why pension trustees approach private equity investment with caution. A fiduciary is a person who holds a position of trust and is required by law to act in the best interests of another party, in this case the scheme’s beneficiaries. Under the Retirement Benefits Act and common law principles that form part of Kenya’s legal framework, pension trustees owe their beneficiaries a duty of loyalty and a duty of prudence. The duty of loyalty requires trustees to act solely in the interest of beneficiaries when making investment decisions. The duty of prudence requires trustees to invest with the care, skill, and diligence of a reasonably prudent person who is familiar with such matters.
These duties have practical consequences for private equity investment. The duty of prudence does not prohibit investment in risky or illiquid assets, but it does require that any such investment be made only after proper due diligence, that the risk profile of the investment is consistent with the scheme’s obligations and investment policy, and that the trustees have either the relevant expertise themselves or have obtained competent professional advice. This is why many pension schemes retain investment consultants or rely on their scheme administrator to assist with due diligence on alternative investment opportunities. Where a trustee approves an investment in a private equity fund without adequate due diligence and the investment subsequently results in loss, the trustee may face personal liability under both the Retirement Benefits Act and general trust law principles. The courts have not yet produced a substantial body of Kenyan case law specifically on pension trustee liability for alternative investments, but the general principles of trustee liability drawn from trust law and the Act would apply.
Trustees must also be alert to conflicts of interest, which are a particular concern in private equity transactions. Where a trustee or a connected person has a relationship with a private equity fund manager or a portfolio company, that trustee must disclose the conflict and should not participate in the investment decision. The RBA’s governance guidelines address conflicts of interest and require schemes to have policies in place for their management. Fund managers should be aware that pension trustees who are presented with a conflict will typically recuse themselves from the decision, and fund managers should not attempt to use personal relationships to influence trustees to override appropriate conflict management procedures. Doing so could expose the manager to regulatory scrutiny and potentially invalidate the investment decision.
Risks for Pension Funds Investing in Private Equity
The risks of private equity investment for pension funds can be grouped into three broad categories: liquidity risk, valuation risk, and governance risk. Understanding each of these is important for trustees, their advisers, and fund managers who want to demonstrate a mature understanding of the pension investor’s perspective.
Liquidity risk arises from the mismatch between the long-dated, illiquid nature of private equity and the ongoing obligation of a pension scheme to meet benefit payments. A pension scheme that has committed capital to a private equity fund may find that it cannot access that capital for years, even if the scheme faces an unexpected surge in benefit claims. This risk is particularly acute for smaller schemes with fewer members and a less predictable claims profile. Trustees should model the scheme’s projected cash flows carefully before making any commitment to private equity, and the overall allocation to illiquid assets should be sized to ensure that the scheme can always meet its obligations from liquid assets without needing to call on the private equity portfolio. The RBA’s investment limits help enforce this discipline at a system-wide level, but the individual scheme’s cash flow analysis is ultimately the trustee’s responsibility.
Valuation risk is a subtler but equally significant concern. Unlike listed equities or bonds, private equity investments are not marked to market on a daily basis. Fund managers typically provide quarterly valuations, and the methodology used to arrive at those valuations involves significant judgment. This means that the value reported in a pension scheme’s accounts may not accurately reflect the amount the scheme would receive if it sought to sell its interest in the fund. During periods of market stress, the gap between reported value and realisable value can be substantial. Trustees should understand the valuation methodology used by any private equity fund in which the scheme invests, and should request that the fund’s auditors provide an opinion on the reasonableness of the valuations as part of the annual audit process. The CMA’s requirements for fund managers include provisions on valuation, and trustees should verify that those requirements are being met by any CMA-licensed fund they consider.
Governance risk encompasses the risk that the fund manager fails to manage the fund responsibly, or that the interests of the manager diverge from those of the pension fund investors. Private equity fund structures, which are typically organised as limited partnerships or similar vehicles, give the manager (acting as general partner) considerable discretion over investment decisions, portfolio management, and the timing of distributions. Pension trustees, as limited partners, have limited ability to intervene in day-to-day management. This makes the selection of a fund manager with a strong track record, sound governance, and clear alignment of interests particularly important. Trustees should scrutinise the fee structure, carried interest arrangements, key-man provisions, and removal rights in any fund agreement before committing. Where fund documentation contains provisions that materially limit investor rights or concentrate power in the manager without adequate checks, trustees should seek legal advice on whether proceeding is consistent with their fiduciary duties.
Opportunities: The Case for Pension Capital in Private Equity
The regulatory framework, though cautious, does permit meaningful investment in private equity, and there are compelling reasons why pension trustees should consider the asset class seriously. Kenyan private equity has historically generated returns that compare favourably with listed equity markets over the long term, and the illiquidity premium, which is the additional return investors expect for accepting illiquidity, is a genuine source of value for long-dated investors like pension funds. A pension fund that does not need to access its entire portfolio immediately is well positioned to accept illiquidity in exchange for higher expected returns, and the regulatory limits ensure that this exposure remains within manageable proportions.
From the perspective of fund managers, Kenyan and broader East African private equity managers have an opportunity to build a more domestically funded industry if they can demonstrate to pension trustees that the risks are well managed. The current dependence on foreign development finance institutions and offshore limited partners creates vulnerability, and a deeper domestic investor base would make the industry more resilient and better aligned with local economic conditions. The RBA and CMA have both signalled, through their modernisation of relevant frameworks, that they support the development of this domestic institutional investor base. Fund managers who invest in building relationships with pension scheme trustees, who provide clear and transparent reporting, and who structure their funds in a manner compliant with both RBA and CMA requirements are well placed to benefit as the market develops.
There is also a broader economic policy dimension to this discussion. Kenya’s Vision 2030 development framework and the government’s Big Four Agenda both identified infrastructure, manufacturing, affordable housing, and food security as priority sectors. Private equity is a natural vehicle for investment in many of these areas, and pension capital is among the most patient and long-term in orientation. Regulatory frameworks that facilitate the flow of pension savings into domestic private equity can therefore serve both the commercial interests of pension beneficiaries and the development interests of the country, provided that the investments are made with appropriate rigour and governance.
Guidance for Fund Managers Seeking Pension Capital
Fund managers who want to attract Kenyan pension capital should approach the process with a clear understanding of the regulatory and fiduciary environment within which pension trustees operate. The starting point is ensuring that the fund is structured and licensed in a manner that makes it eligible under the RBA’s investment guidelines. This means engaging with the CMA early in the process and obtaining the necessary registration before approaching pension investors. Fund managers who attempt to shortcut this process by relying on offshore structures or informal arrangements risk not only regulatory action but also the loss of pension investor commitments once trustees carry out their due diligence.
Transparency is a significant determinant of whether pension trustees will proceed with an investment. Trustees have a legal obligation to conduct due diligence, and they require detailed information about the fund’s strategy, team, track record, fee structure, valuation methodology, governance arrangements, and risk management framework. Fund managers should prepare comprehensive due diligence materials and be prepared to engage in substantive discussions with trustees and their advisers. Where a fund manager has a limited track record in Kenya, it may be helpful to point to comparable transactions, to introduce key team members with relevant regional experience, and to provide references from existing investors in other markets. Building trust takes time, and fund managers who engage with pension trustees consistently over a fundraising period rather than approaching them only at the point of a final close are more likely to succeed.
Fund managers should also consider the practical realities of pension fund governance when structuring their investor engagement. Pension trustees typically meet quarterly, and investment decisions require board approval. This means that the investment process will rarely move quickly, and fund managers should plan their fundraising timeline accordingly. It is also worth understanding that pension trustees are often advised by investment consultants who play a significant role in recommending or vetoing alternative investment proposals. Building a relationship with the consultant community, and ensuring that consultants have access to the same quality of information as trustees, can be an important part of the capital raising strategy.
Conclusion: Building a Framework Fit for Kenya’s Future
The intersection of pension regulation and private equity law in Kenya is an area of growing importance. As the pension industry grows and as domestic private equity matures, the regulatory frameworks governing their interaction will come under greater scrutiny, and their adequacy will be tested by real market transactions. The current framework, centred on the RBA’s investment guidelines and the CMA’s licensing regime, provides a workable foundation, but there are areas where greater clarity, modernisation, and coordination between the two regulators would benefit market participants.
For pension trustees, the key practical implication of the current framework is that private equity investment is permissible but demands a high standard of governance, due diligence, and documentation. Trustees who approach alternative investments with the same rigour they apply to listed assets, who ensure that their investment policy statements are updated before any commitment is made, who manage conflicts of interest with care, and who engage competent advisers when they lack internal expertise, will be in a defensible position if investments do not perform as expected. Trustees who cut corners or who allow the enthusiasm of a fund manager or a connected party to override proper process face meaningful personal and legal risk.
For fund managers, the opportunity is real but the path to pension capital requires investment in compliance, in relationships, and in the quality of investor communications. The Kenyan market is not yet at the scale of more developed private equity markets in terms of pension fund participation, but the direction of travel is clear. The RBA and CMA have both demonstrated a willingness to modernise their frameworks, and the government’s interest in mobilising domestic long-term capital for development investment creates a favourable policy environment. Fund managers who position themselves correctly now, by obtaining the right licences, building the right governance structures, and investing in transparent investor relations, will be well placed as the market continues to develop.
Looking ahead, it is reasonable to expect that the RBA will continue to refine its investment guidelines to reflect best practice in pension fund governance, potentially raising or adjusting the limits on alternative investments as the regulator gains greater comfort with the asset class. The CMA is likely to continue tightening its oversight of fund managers, with particular attention to reporting standards and investor protection. Greater regulatory coordination between the two authorities would benefit the market, and there are signs that both regulators are aware of the need for this. Practitioners in banking and finance law should monitor developments in both regulatory frameworks and advise clients accordingly, recognising that the rules in this area are not static and that the strategic decisions made today will be judged against the regulatory landscape that exists at the time of any future dispute or regulatory review.