The Capital Markets (Alternative Investment Funds) Regulations 2023: Transforming Investment Strategies
- Muhoro & Gitonga Associates
- Apr 18, 2024
- 7 min read
Updated: Nov 5
Table of Contents
Background and Purpose of the Regulations
Approval and Eligibility Process
Investment Conditions and Permitted Asset Classes
Governance, Transparency, and Compliance Requirements
Examples of Alternative Investments
Recent Developments and Case Law
Implications for Fund Managers and Investors
Challenges and Practical Considerations
1. Introduction
The Capital Markets (Alternative Investment Funds) Regulations 2023 have ushered in a new era for Kenya’s financial markets. Enacted under the Capital Markets Act (Cap. 485A), the Regulations bring privately pooled investment funds, previously operating with minimal oversightnunder the supervision of the Capital Markets Authority (CMA).
These Regulations are designed to promote transparency, investor protection, and market discipline while expanding Kenya’s investment ecosystem. They cover diverse investment vehicles such as private equity, venture capital, hedge funds, property, and infrastructure funds.
For fund managers, institutional investors, and legal advisors, the Regulations offer both compliance responsibilities and significant opportunities to innovate within a robust legal framework.
2. Background and Purpose of the Regulations
Before 2023, Kenya lacked a clear regulatory structure for alternative investment funds (AIFs). As the private investment landscape grew, particularly in private equity and venture capital; the CMA identified the need for a comprehensive regime to govern fund formation, operation, and investor relations.
Published through Legal Notice No. 170 of 2023, the Regulations aim to:
Protect investors by ensuring proper fund governance and disclosure.
Promote innovation and diversification in the capital markets.
Encourage local and foreign participation in private investment vehicles.
Prevent fraudulent schemes by bringing all pooled funds under CMA regulation.
These objectives align with Kenya’s goal of becoming a regional investment hub and complement other frameworks such as the Capital Markets (Collective Investments Schemes) Regulations, 2023 and the Public Private Partnership Act.
3. Key Definitions and Scope
An Alternative Investment Fund is defined as a collective investment scheme that privately pools funds from two to one hundred investors, whether Kenyan or foreign, for investment according to a defined policy.
AIFs may take the form of:
Debt or debt-linked funds
Equity or equity-linked funds
Hedge funds
Infrastructure funds
Property and real estate funds
Any other fund type approved by the CM
Excluded are family trusts, employee participation schemes, holding companies, and securitization vehicles. This clarity ensures that legitimate fund managers and investors operate within a regulated, transparent environment that safeguards participant interests.
4. Approval and Eligibility Process
A fund manager seeking to establish an AIF must apply to the CMA with the prescribed forms and fees. The application must include:
The fund’s founding documents (trust deed, partnership agreement, or memorandum).
The investment policy statement and target investor profile.
Proof that the directors and key officers meet the fit and proper test.
Demonstration of adequate financial and operational capacity.
Upon review, the CMA may approve, reject, or impose conditions on the application. Applicants denied approval may appeal to the Capital Markets Tribunal.
Existing unregulated funds are required to comply within one year of the Regulations’ commencement.
5. Investment Conditions and Permitted Asset Classes
Each AIF must define its investment policy clearly in its placement memorandum, and any change requires the consent of at least two-thirds of investors by value.
Key conditions include:
A minimum investment of KES 1 million per participant.
A maximum of 100 investors per fund.
Fundraising strictly through private placement, not public offers.
The fund manager must maintain a stake in the fund to ensure alignment of interests.
Permitted asset classes include equities, debt instruments, infrastructure, real estate, private credit, and hedge fund strategies. For example, an AIF might invest in renewable energy projects, housing developments, or technology startups, offering investors new avenues for diversification and higher yields.
6. Governance, Transparency, and Compliance Requirements
Governance lies at the heart of the AIF framework. Each fund must appoint a licensed custodian to safeguard investor assets.
Fund managers must:
Maintain compliance and governance manuals.
Adopt conflict of interest policies and robust valuation methods.
Keep records for at least seven years after winding up.
Provide a detailed placement memorandum outlining objectives, fees, and risk disclosures.
Regular reporting to both the CMA and investors is mandatory. Fund managers owe fiduciary duties to act in investors’ best interests, aligning Kenya’s standards with global best practices seen in markets such as Mauritius and South Africa.
7. Enforcement and Winding Up
The CMA has broad powers to inspect, investigate, and sanction AIFs. It may:
Suspend or revoke a fund’s license.
Order cessation of fundraising.
Impose administrative penalties.
Require refunds to investors in cases of breach or misrepresentation.
A fund may be wound up upon expiry, investor resolution, or CMA direction. Liquidation must be completed within one year, unless the CMA grants an extension.These enforcement tools strengthen investor confidence and regulatory accountability.
8. Examples of Alternative Investments
Kenya’s Capital Markets (Alternative Investment Funds) Regulations 2023 recognize a wide range of investment vehicles beyond conventional securities. These funds allow investors to tap into private markets, real assets, and innovation-driven sectors under a structured legal framework.
8.1 Private Equity and Venture Capital Funds
These funds pool money from institutional and high-net-worth investors to acquire stakes in private companies with growth potential. Examples include Helios Investment Partners and Novastar Ventures, which have invested in firms like Twiga Foods and Equity Group Holdings. CMA regulation now ensures proper disclosure and investor protection in this growing segment.
8.2 Infrastructure Funds
Such funds finance roads, power, logistics, and digital infrastructure; key drivers of Kenya’s development. Examples include private funds investing in solar parks or logistics centers. They align with Vision 2030 and the PPP framework, offering investors long-term, stable returns.
8.3 Property and Real Estate Funds
These AIFs invest in residential, commercial, and mixed-use developments, often via private placement. They can fund student housing, affordable housing, or business parks, offering flexibility beyond traditional REITs while maintaining transparency and custodianship.
8.4 Hedge Funds
Hedge funds employ sophisticated strategies such as derivatives, short-selling, or event-driven investing to achieve absolute returns. The Regulations create a pathway for their responsible growth in Kenya, targeting institutional and sophisticated investors.
8.5 Debt and Private Credit Funds
These funds provide mezzanine and project financing to companies and infrastructure ventures. They fill the gap left by traditional banks and offer investors consistent income and portfolio diversification.
8.6 Impact and Green Funds
Impact AIFs focus on renewable energy, sustainable agriculture, and inclusive finance. Kenya’s Green Economy Strategy and participation in the Africa Carbon Markets Initiative make such funds critical for ESG-aligned investment.
8.7 Commodities and Natural Resource Funds
These funds invest in agriculture, minerals, and forestry, helping to modernize value chains. A commodities AIF may, for instance, finance coffee or avocado cooperatives, enhancing export competitiveness and farmer income.
8.8 Technology and Innovation Funds
As Kenya emerges as the Silicon Savannah, these funds invest in AI, fintech, health-tech, and e-mobility startups, driving innovation and job creation.
8.9 Private Infrastructure and Real Asset Funds
Focused on tangible, income-generating assets such as energy plants, ports, or data centers, these funds appeal to pension and insurance investors seeking stable, long-term cash flows.
8.10 Summary of Strategic Importance
Together, these categories expand Kenya’s investment frontier and promote regulated participation in high-growth sectors, balancing innovation with investor protection.
9. Recent Developments and Case Law
In 2024, the CMA reinforced that all privately pooled funds must comply with the AIF Regulations. This followed past incidents, such as the Cytonn Investments case, where unregulated collective schemes led to investor losses.
The Regulations now prevent such occurrences by ensuring licensing, disclosure, and custodial safeguards. Though no major court rulings have yet interpreted the AIF Regulations, their enforcement marks a significant evolution in Kenya’s investment landscape.
10. Implications for Fund Managers and Investors
Fund Managers must meet licensing, reporting, and governance standards.Investors enjoy enhanced protection, transparency, and structured recourse in case of default. Legal Advisors play a key role in structuring funds, preparing placement memoranda, and ensuring compliance.
Overall, the framework strengthens market integrity and investor trust, positioning Kenya as a leading regional destination for alternative investment.
11. Challenges and Practical Considerations
Despite its strengths, the framework presents some challenges:
The KES 1 million minimum investment limits access for smaller investors.
Private placement restrictions reduce fund marketing flexibility.
Compliance costs may deter smaller fund managers.
Limited local expertise in alternative asset valuation and fund administration.
Nevertheless, these hurdles are outweighed by the benefits of market transparency, investor confidence, and international alignment.
12. Conclusion
The Capital Markets (Alternative Investment Funds) Regulations 2023 are a transformative development for Kenya’s financial ecosystem.They offer a comprehensive, transparent, and forward-looking approach to private pooled investments, enhancing governance and unlocking capital for sectors such as infrastructure, property, and green finance.
For Kenya, this framework lays the foundation for sustainable growth, investor confidence, and innovation, solidifying its role as East Africa’s financial hub.
13. Frequently Asked Questions (FAQ)
1. What is an Alternative Investment Fund (AIF)?
A privately pooled investment scheme that collects funds from 2–100 investors for investment under a defined policy.
2. Who regulates AIFs in Kenya?
3. What is the minimum investment per investor?
At least KES 1 million.
4. Can AIFs raise money publicly?
No, they are limited to private placement only.
5. Are foreign investors allowed?
Yes, AIFs can include both resident and non-resident investors.
6. What are examples of AIFs?
Private equity, infrastructure, property, hedge, and debt funds.
7. What happens to unregistered funds?
They must comply within one year or face sanctions and closure.
8. What role does a custodian play?
A licensed custodian safeguards fund assets and ensures separation from the manager’s accounts.
9. What is the duration for winding up a fund?
Assets must be liquidated and distributed within one year of winding up.
10. Why are the Regulations important?
They promote transparency, investor protection, and innovation, fueling Kenya’s economic growth.
To learn more, see the Capital Markets (Alternative Investment Funds) Regulations, 2023.
