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November 15, 2018

Pension Funds Should Diversify Investment

Investment company Centum this week issued a Sh6 billion bond for investment into its various business interests.

In so doing, it allowed investors a peek into just how diversified the company has become in just five years.

It also offers insight into why Kenyans should think of investing in other sectors other than land.

In 2009, the company formerly known as ICDCI, the investment arm of the state-owned Industrial Credit and Development Corporation, had accumulated just Sh9 billion in assets over its 40 years of existence.

Today, the company has Sh36 billion in assets.

It has gotten here by savvy investment decisions including exiting underperforming ventures like Rift Valley Railways where another investment firm, TransCentury burnt its fingers by lingering too long.

While the company is investing in real estate where it is building the largest mall in East and Central Africa, Two Rivers, at Ruaka, it has its eyes on other areas that should guide any prospective investor.

Centum will in five years, be producing close to or more electric power, than state-owned KenGen.

It is building a 70Mw geothermal power plant at Ol Karia and is involved in the construction of the 1,050MW Amu coal power plant at Manda Bay in Lamu.

Kenya’s total installed capacity is just over 2,000MW.

It is easy to see why it would be investing in energy.

With a power purchase agreement signed with Kenya Power, the company is guaranteed to make 12.5 per cent return on equity every year meaning it would be able to repay its capital investment in eight years.

Power purchase agreements are usually for a period of 25 years meaning an investor would continue to make money for 18 years after recouping their initial investment.

In contrast, most of the real estate development taking place are not only overpriced but not too many people can expect to repay the cost of purchasing a house over 25 years from rent income.

This should cause pause in thousands of Kenyans who are busy sinking their money in housing projects.

Not least should be some of the leading asset managers in this country especially pension funds.

Pension funds in Kenya are very conservative and besides government bonds, they have only recently started buying property.

It is time they perhaps began to think of mobilising these funds to put into energy projects given the returns they are guaranteed to get and the extended time frame over which those returns would be made.

Many of the power projects planned for this country have to await either foreign investors or Chinese loans before they can take off.

Yet in this country we have the resources which can get these projects up and running tied up in government bonds or office buildings.

Pension funds and Saccos should be among the leading investors in such power projects giving their members an opportunity to grow wealth and also contribute in developing the country.

And this is not restricted to the energy sector.

Nairobi recently endured flooding because of poor drainage. It is no secret that at some point, a proper sewerage system will have to be built in the county.

Such funds can be mobilised to build a water and sewerage system and the returns would be guaranteed as Nairobians would be paying for these services on a monthly basis.

The same goes for roads. Pension funds can build toll roads where the returns would be made back from the charges that motorists pay and so on.

There are very many projects that these sort of funds can go into to develop this country, while creating wealth for members.

It is high time the government through bodies such as the Retirement Benefits Authority encouraged these funds to diversify their investments into areas that help this country grow.

Centum which has taken the path of taking other investors’ money and investing it along its own in its diversified projects has managed to grow by 400 per cent in five years from Sh9 billion in assets to Sh36 billion.

It expects to grow to a Sh120 billion company in assets by 2019 demonstrating, perhaps, the value that life insurance companies, pension funds and Saccos could create by also diversifying their portfolios into high growth areas that are begging for investment.

Mbugua is a communications consultant and comments on topical issues.

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