Society

FINAL

PAPER

A CASE FOR PRIVATE

EQUITY INVESTMENTS

BY PENSION FUNDS IN

KENYA

RESEARCH TEAM

KOOME KATHURIMA

KIPANGA BEN

MAY 2013

1.0 INTRODUCTION

1.1 Background Information

Private equity is considered by institutional investors globally to be one of the most

important alternative asset classes. Investment in private equity offers significant

opportunities for returns enhancement well beyond that offered by the public equity

markets. A growing proportion of institutional investors including pension funds now

consider it to be an essential element of their investment portfolio, based on the

perceived ability to provide diversification and generate superior returns (The Centre

for Management Buyout Research, 2005; TUC, 2007).

Various definitions have been put forward to describe private equity. Beer and Nhleko

(2008) define private equity to refer to medium to long term shareholder capital

investment in private companies as opposed to publicly listed companies. TUC (2007)

on the other define private equity to refer to equity investment in an asset that is not

tradable on public markets. Chandrasekhar (2007) posits that private equity involves

investment in equity linked to an asset that is not listed and therefore not publicly

traded in stock markets. The term private equity has also been used to cover a range of

types of company financing ranging from venture capital to large scale public to private

buy outs1.

There are three ways in which investors can typically invest in private equity (TUC

(2007); through a limited partnership, through a fund of funds or through an

investment trust. In a limited partnership, the limited partnership retains the ownership

and management in the company and is managed by an independent management

Venture capital can take any of following strategies; start up financing; other early

stage; expansion; refinancing bank debt; and secondary purchase while the Buy Out or

Non Venture Capital can take any of the following strategies;...