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Dealing with fund managers

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Every business opportunity offers the entrepreneur two possibilities; either a profit or a lesson that will prepare him for the next opportunity. My experience with the D-Reit offered many of the latter.

One of the lessons I learned, and which has instilled in me the confidence to be willing to go back to the market and list another Reit is that Kenya has no shortage of brilliant people. The team I was working with had never handled a D-Reit before. Like me, they were learning on the job.

Yet, these men and women conceptualized, crystallized and executed Kenya’s pioneer D-Reit from scratch. If the listing had succeeded as intended, it would have brought a uniquely Kenyan product to the market.

However, I could not help but notice the rivalry among the team members, including the core staff at Fusion Capital. Some of them were very possessive of the project because they wanted to go down in history as the brains behind the country’s first D-Reit.

Whereas there is nothing with holding high ambitions, some of the staff, especially the more youthful ones, saw the D-Reit as an opportunity to polish their professional profiles in the hope of using this as a stepping stone to bigger opportunities. The only problem was that their ambitions caused friction within the bigger team and this often led to distraction and rivalries.

As a result, some started taking their colleagues for granted to the point of undermining each other. I must say, however, that when the teams were focused and set their eyes and energies on a particular aspect of the project, they achieved spectacular results. They had a capacity to negotiate that I had no idea they could summon whenever push came to shove.

The other reason why I would not hesitate to take on another D-Reit challenge has to do with the opportunities I think exist to raise money through this method to develop counties.

For the devolved units of government, floating D-Reits can help them attract private investors to put their money in property and infrastructure development. That way, counties will hit two birds with one stone. First, they will achieve their ambitions of expanding infrastructure and opportunities without having to spend their own money directly.

Secondly, they will get the money to do so without borrowing. What is more, local investors and property owners will get an opportunity to partner with external investors to develop their regions.

What the first experience taught me, however, is that any entrepreneur who finds himself walking down the D-Reit Road would be well-advised to ensure that his team remains cohesive at all times. How your team works will influence the success or failure of your opportunity.

It can even affect the entrepreneur’s relationship with potential partners because they will always seek to find out how well your team is working and whether they have what it takes to successfully executive a large-scale business project.

With the benefit of hindsight, I now realise that we at Fusion Capital should have invested more in educating investors. We had assumed that the market would be bullish and that there would be an enthusiastic response to our D-Reit, especially from fund managers. We learned too late that this assumption was built on quicksand.

When we eventually listed, we had no takers. In my view, my team and I were ahead of the market with the D-Reit. We ought to have engaged more with the players so that they could understand what exactly it was that we were offering and what the value proposition was for them.

Curiously though, I found that some of those willing to educate investors had taken a position on the D-Reit, meaning that they were already an interested party and could not be relied on to give a more objective assessment of what we were trying to achieve. And as I quickly learned to my detriment, the market can be easily influenced even by one player.

The fund managers, for instance, took a position and shared it widely among their circles. And because they are, by nature, averse to risk, the common position that they adopted was that investing in the D-Reit was too risky. Trustees took their word for the gospel truth and so decided to let the opportunity pass.

It would help a great deal in future if the Nairobi Securities Exchange and the Capital Markets Authority play a greater role in educating both the investors as well as the public, especially though engaging the media more robustly. The two are best suited to lead the education and marketing of products being listed because they do not have vested interests. But where they lack the capacity to do either, they can still help by engaging objective analysts to give information that is both accurate and timely.

One of the setbacks we suffered was that the very first mention of the D-Reit in the media was far from rosy. Indeed, the journalist categorically reported that it was a high-risk venture. This, of course, colored many people’s judgment and would have been avoided if the regulators as well as my team, had had a more targeted media campaign to educate the journalists who would in turn educate the public and other players interested in the D-Reit. But that is now water under the bridge for me.

This is not to say that there was nothing that the regulators could have done to make our experience with the listing smoother. Oh, there was a lot. Although both the NSE and CMA were generally supportive, they had put too many regulations in the way of the listing.

No sooner had we complied with one than another came up. In the end, the regulations became hurdles and traps.

We had to keep jumping and going round to avoid falling foul with the raft of rules that we had to abide by. For instance, the rules gave trustees too many powers and, truth be told, they were more than happy to exercise them, to the detriment of our goals. Since more players will be coming to the market to list similar products, it would make their experiences less traumatic if some of these powers can be trimmed.

One of the ways in which this can be cured is by allowing non-bank trustees into the market. Banks, it must be said, are interested players in the real estate market.

Therefore, allowing them to act as trustees amounts to giving leverage to a business rival. They can use this leverage to starve other projects of cash as they themselves continue with their own. This can frustrate both the players and the market and is counterproductive in the long run because the flip-flopping by banks eventually erodes investor confidence as happened in our case. The role of trustee, in my view, can be discharged as effectively by a pension fund since by their very nature, pension funds are discouraged from making direct investments in real estate. Again, pension funds are less averse to risk compared to banks.

What I am still grappling with is the fact that although the essence of business is to take risks, I found that many of the big players in the money market – including banks themselves – were averse to taking risks. From where I sit, I think that my team and I dared to walk where even angels would have needed courage to tread. Ironically, we were punished for daring to take a risk.

I do agree, looking back now, that our preparations were far from sufficient, especially when it came to building relationships with fund managers. We would have had greater success with pension fund manager for instance, if we had involved them while we were working on the model of the D-Reit. One of the questions that kept coming up in our meetings with them was what was in it for them and what they stood to gain by putting their money in the D-Reit.

We had all along assumed that the return on investment would be sufficient incentive but they still wanted to know what would happen to them in the four years when they would not get direct income from the investment. We had no answer for this question especially because all other agencies, including the regulator, were earning their fees. Not surprisingly, they chose to vote with their feet and stay away. Our goose, so to speak, was cooked.

However, one must understand that both fund managers and the banks were dealing with third party money. They cash they were holding was, strictly speaking, not their own, so they could not take risks unless they were convinced that the money would be safe in the first place. Still and all, there is a big difference between caution and skepticism and they chose to err on the side of skepticism.

The Writer is an investment analyst and an entrepreneur, the views are his. 

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