Ngatia Kirungie is a seasoned finance and investment expert. Mr Kirungie has accumulated vast experience working with reputable financial institutions in New York, London and Nairobi. He is the Founder and Managing Director of Spearhead Africa Asset Management, an infrastructure and alternative investment firm
In this interview, Mr Kirungie shares his expertise on the potential of alternative investments, Real Estate Investment Trusts (REITs), private equity, and private credit in expanding investment opportunities amidst the rising market uncertainties within the global marketplace that have dented investor confidence.
He also talks about affordable housing and opportunities available to investors within the housing sector in the country.
For starters, what are alternative investments, and what investments classify as alternative?
Without using financial jargon, alternative investments are generally anything that is or financial investments that are not within the traditional category. So, everything that’s not stocks, bonds, and if you extend that to cash. In this category, property is an obvious alternative investment. We are more familiar with property, but it extends to areas such as infrastructure, private equity, private debts, commodities, and even areas like collectibles, arts, and wine. Today, we are also seeing more investments in areas like cryptocurrency.
Is today a better time than it was ten years ago to invest in institutional portfolios?
I think you can argue that. I know it’s definitely easier to invest in alternatives right now. If you think about the last ten years, alternative investments have often outperformed traditional investments. If you look at private equity, it has consistently returned about 15% on investment. On the other hand, public equities have not only been volatile but have also returned an average of around 10%. Additionally, markets like ours have been developing, there have been new compelling opportunities that are coming across, including economic development through situations like our infrastructure funding gap that needs to be funded. So those weren’t available maybe ten years ago.
Can you break down how some of these investment instruments are structured, particularly on the REIT side and on the infrastructure investment trust side?
Both examples you have given are collective investment schemes at the very heart. And the way they work is similar to if you have invested in a money market fund. It’s where you are channeling or pooling investor capital to achieve sufficient scale to execute your strategy. And that scale is important in the case of real estate and infrastructure because the underlying assets are pretty large – to the tune of billions of shillings, if not billions of dollars – which would be very difficult for single investors or even a club of investors to participate in.
Which alternative investments have you seen the most action recently within the Kenyan market?
I know REITs have been massive recently in regard to uptake. REITs have been growing in terms of our understanding of the structure. There’s been a significant spotlight that has been put on them. Other alternative assets, such as infrastructure, have also been growing. One of the hats that I wear is the head of the secretariat of an initiative called KEPFIC – the Kenya Pension Funds Investment Consortium – where we have brought local pension schemes together to jointly assess and invest into these infrastructure assets. And then now we’re also understanding that there’s more to the private markets than private equity. There has been a lot of interest in private debt as well, both from a return perspective and on the risk side.
Tell us about the work your firm is doing on the infrastructure trust side.
Two years ago, we got our fund management license. We also got product approval from the CMA to launch our first fund – the infrastructure debt fund. Again, it’s an infrastructure investment trust. So, just like a REIT, this is an infrastructure investment trust. And the difference is, with the REIT, the underlying is property while with the with the infrastructure investment trust, the underlying is infrastructure.
What kind of information do investors and key players need to be privy to within the market?
There are three levels. First, there is the governance structure that is required by regulations. And that governance structure includes having a trustee, custodian, and then you have you have various other elements there, like evaluation agent and the likes. And then now you move to the fact that it’s going to be listed. So it’ll have full, you know, transparency. So, you can even have visibility on the underlying assets, the underlying loans themselves, especially when you’re coming to the market to fundraise.
For those of us in the media, how do we talk to people about these complex products for them to understand?
It’s upon us as the market to create products that are simpler to understand. What you’re saying is that it’s easier to buy a Company X share, but that doesn’t mean Company X’s business is not complex. So just because you have bought the equity and it’s easy, it doesn’t mean you’re not dealing with a complex investment. So, I would argue that the same applies to alternatives. The challenge is for us to create products that are simple to understand, and the strategy is also one that can be easily explained. I like to say that complexity is the enemy. And especially if you’re trying to achieve scale, which is important. You might have a very complex structure, and you’ll find one or two people who will invest in it. So, the simpler, the better.
Ngatia Kirungie Reflections on REITs And Affordable Housing
Beyond investment trusts and REITs, is there any other particular vehicle that you have your eye on in seeing mass change and mass adoption over the next ten years?
That’s a challenge because of the format. Think about the typical private equity pitch to someone who is not an investment expert. What they will hear is ‘give me your money and in ten years’ time I’ll give it back to you.’ And that may be a stretch too far for retail investors who probably want liquidity and simplicity. A lot of institutional investors want the same thing. They want some underlying liquidity because they also have cash flow needs themselves. Think about a pension scheme that needs to make regular pension payouts. Just look at how property is invested in the US; Oftentimes, it’s not direct. It just naturally follows a direction.
For a discerning investor looking at some of these new vehicles on the market, are there any red flags that they should identify when reviewing potential investments?
There are a number of red flags to look out for. They are not limited alternatives. One of them is returns that are significantly higher than the market where the manager, whoever it is, is unable to explain what their competitive advantage is. If the market is 15 and you’re offering me 35, for example, you need to explain how you get that 20% pickup.
The other thing is if there’s a mismatch between the fund life and the underlying asset. For example, let’s say you have a fund life of five years. How does that work? It means that, you know, before you have really truly enjoyed the economic benefit of the investment, you have to get out. That’s a concern. It means you might be leaving a lot of upsides on the table. I mentioned complexity. If you can’t understand or if the strategy can’t be simplified or explained in a simple manner, that’s usually something to pay attention to.
You also need to know who the people behind the opportunity are. Do they have the expertise and the track record that they’re claiming to have?
On affordable housing, why would an investor then now put their money into it regardless social good it brings and the need?
Private sector investors are not looking to subsidize the government. We are already investing. We’re already giving the government our money through treasury bills and bonds. So if I’m an investor and I can get 18% on an infrastructure bond, it’s hard to convince me to then now put money into an affordable housing project where I’m going to get anything less, let alone negative. The biggest challenge is that the projects themselves, the government set a sales price per square meter that wasn’t financially attractive for developers. And then the developers could not get funding from their banks or from other sources. So, you have a great program on paper, but the money just wouldn’t flow to the developers who were then meant to execute the program. So the government got around that by creating the levy.
This is a transcript of the discussion between Ngatia Kirungie and Andrew Barden during the 2nd Edition of the Teja Speaker Series.
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