|New laws threaten edge of venture capital firms|
|Written by Steve Mbogo (Business Daily)|
April 10, 2008:
My comments in RED
New rules meant to guide the operation of venture capital firms have introduced high taxation and restrictions on investments that players say may threaten the sector’s survival.
The rules are meant to regulate the venture capitalists — who take stakes in start ups and midsized firms and exit as the businesses near maturity — who have shown unprecedented interest in the Kenyan market over the last two years.
The sector is now raising a red flag over a taxation regime that it says makes resident venture capital funds uncompetitive at the global level. This has seen some firms opt for other countries like Mauritius where the taxation is more favourable.
I have blogged how Mauritius is diversifying its economy using brains... while Kenya... oh, well...
Administration costs are also high as venture capitalists will now be required to have a contracted fund manager to oversee and allocate the investments of the venture capitalist.
How does a small VC fund - managing KShs 100mn - afford a Fund Manager? Many VC funds start off much smaller.
Peter Njoka, a partner at Aureos Kenya Managers which manages a venture capital company known as Acacia Fund, said such a manager is paid a management fee plus value added tax (VAT), yet the funds do not have any “vatable” services to sell.
“The fund absorbs all the VAT of 16 per cent which eats into its resources and increases the cost of doing business here,” said Mr Njoka. He however said the new rules would help the industry grow to international standards faster.
The industry might die or is left to the big boys. Warren Buffet does say that if he was born anywhere but the USA at the time he was born... he might have not been as successful! I can guarantee he would not have succeeded in Kenya with its arcane laws, corrupt judicial system, corrupt & incompetent politicians, the selfish NSE & incompetent CMA!
The new Registered Venture Capital Companies Regulations (2007) define the principal objective of venture funds as provision of risk capital to small and medium size businesses in Kenya.
The regulations however give venture funds flexibility in determining the kind of companies they invest in. They require the fund to have a minimum paid up share capital of Sh100 million shillings and proven history in operating such a fund.
How the hell does a newly established fund have an operating history? The problem is the CMA is full of 'career civil servants' who do nothing better than do nothing! Get serious... Unless you invite foreign VCs how do yo expand the industry since there are only (officially) 9 VC funds. So this means no new local VC funds?
Daniel Muchika of InvesteQ Capital says the regulations automatically lock out start up venture capital funds by demanding that eligible applicants produce audited statements for at least three years.
Go figure... Are these guys born as idiots or did they learn to be idiots?
For a venture capital fund to be registered, it must present the CMA with its preferred mode of divestiture from eligible venture capital enterprises, including details of risk factors that are specific to the chosen investment sectors, or sectors intended to be invested in. The company must also present a bank reference from a commercial bank.
Erm, so if a VC fund is putting its own money into the ventures i.e. not borrowing... why do they need a bank reference? If the bank is lending to the VC then let the bank do its own due diligence!
The regulations restrict venture capital funds from trading in real property; banking and financial services; and retail and wholesale trading services as their primary businesses.
What is this idiocy? Why not let the VC funds do what they like! They are in business to make money! Real property could benefit from VC funds!
“This means that venture funds have narrower options of investments. It means that venture funds have to scout for ideas that promise quite high return on investments, usually of at least 25 per cent per annum to compensate for this,” said Mr Muchika.
So the CMA is raising the cost to the investees. An investee needs to provide 25% p.a. return to get funds from a VC fund. Let the VC fund decide what they want to make. Open the market to VC funds!
Currently, there are nine private equity funds operating in the market, five with a combined capital base of over Sh4.9 billion have targeted SMEs in East Africa. But a 10th fund known as East Africa Development Bank Venture Capital Fund worth Sh2.6 billion will make an entry into the local market later this year.
Others include Business Partners International Limited (BPI) launched in February last year, Grofin East Africa launched in mid-2005, Acumen Fund, InvesteQ Capital Limited and African Agricultural Capital that focuses on agriculture related businesses.
The funds should also preserve transaction records for at least seven years and to verify the sources of their funds as well as investments to ensure they are not used as a conduit for funds sourced from criminal activities including money laundering and corruption. In this respect the regulations are seen as porous.