Saturday, May 28, 2022

NBIFRA tightens regulation on exotic funds

Botswana is aiming to tighten regulation of the ivy league of funds, such as private equity and hedge funds, in an attempt to enhance corporate social responsibility on the part of the assets classes, the Non Banking Financial Institutions Regulatory Authority( NBIFRA) has said.

Juliana White, head of Capital Markets at NBIFRA, said the rate at which Private Equity Funds are mushrooming calls for the tighter regulation of the sector given the potential turmoil that they can bring about.

Her call is in line with what is happening in the developed countries where authorities have been raising the Chinese Walls on some sophisticated funds following the global credit crunch. The recent financial turmoil was largely blamed on the banking sector, hedge funds and, to some extent, the private equity fundsÔÇöwhich were regarded as less regulated.

“The increased levels of public funding being directed towards the less regulated private equity market necessitates increased public policies to monitor such funds as their managers and advisors,” White told a gathering at the Southern Africa Private Equity Roundtable that was held at GICC.

The shrewdness of Private Equity Funds— driven by the lust for super returns above the normal benchmarks and their idea of haste exit from venturesÔÇöhas largely resulted in some social mayhem in companies which they stage take-over moves.

The funds are largely blamed for being notorious of asset stripping that result in job losses as soon as they complete take-over as they are geared towards quicker returns before exiting the venture.

The moves become more relevant as the country is positioning itself for privatization while on the other hand there are no guides or legislation that protect strategic assets, employees and the retail investors in the country.

“Risk associated with Private Equity include, inter alia, excessive leverage, reduction in overall capital markets efficiency, market abuse, conflict of interest and market access constrains. All these risks converge in one way or the other into the financial market,” she added.
She said the legislation that is in the offing will come up with a road map that will guide the country on how to rein in Private Equity and hedge funds. The Private Equity Funds normally use pension funds and other collective investment funds to invest in unlisted companies which they feel can bring super profits than the listed ones.

The proposed regulation will further try to protect retail investors whose money could be mismanaged as the Private Equity Funds pour their money into unperforming entities with the hope of super profits at the end.

“As effective regulation increases investor confidence and more institutional funds flow into Private Equity, it would be important that retail investors should have access to more information, for example, investment strategy of these firms, and more importantly, some form of recourse in the event that the funds are mismanaged,” White said.

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