Cytonn fights new order on its investment fund

Cytonn Investments Management CEO Edwin Dande.

File | Nation Media Group

By  Edwin Okoth

What you need to know:

• Mr Dande has accused CMA of engaging in an economic crime, terming the order ‘malicious, unreasonable, irregular and illegal,’ that will fold the high-yield fund he started running in December 2019.
• Cytonn asset managers had invested about 80 per cent of the Cytonn High Yield Funds into Cytonn’s Alma and Applewood properties, drawing the attention of CMA and the June directive.

Investment and real estate company Cytonn is embroiled in another fight for its survival after the Capital Markets Authority moved to enforce regulations that the firm says will wipe out its high-risk investment fund.
The company moved to court for the second time this year to challenge a new directive from the market regulator that requires it to reduce investment of unit holders’ funds into its own property projects in line with rules that allow for only 10 per cent of such funds to be invested in insider-owned projects.

Cytonn says the directive will require it to offload almost all the Sh860 million pumped in two property projects managed by another arm of the firm, a move that may trigger a run on its investment and possible collapse.
Cytonn chief executive and managing partner Edwin Dande said in court papers that the CMA directive did not give the company a chance to engage its board to make such a decision that would also affect unit holders.

Mr Dande has accused CMA of engaging in an economic crime, terming the order ‘malicious, unreasonable, irregular and illegal,’ that will fold the high-yield fund he started running in December 2019.
“The directive will cripple the operations of the fund, plunge the fund manager and the investment scheme into chaos resulting into unnecessary legal suits due to breach of contract and lead to massive walkout of the unit holders. It will also plunge the fund manager and the scheme into a financial quagmire as the unit holders will require an immediate return of funds,”Mr Dande said in an affidavit.
The fight with the market regulator comes on the back of another battle in January after CMA gave Cytonn an ultimatum to find a trustee for its fund mobilising arms; Cytonn Asset Managers Limited and Cytonn Unit Trust or cease operations.

In the latest squabble, CMA had pegged its directive on the regulations contained in the Capital Markets (Collective Investment Scheme) Regulations 16(2) which limits investments to a maximum of 10 per cent on portfolios where fund manager, the trustee and custodian are related parties and subsidiaries of one another.
Cytonn asset managers had invested about 80 per cent of the Cytonn High Yield Funds into Cytonn’s Alma and Applewood properties, drawing the attention of CMA and the June directive.
The CMA order was followed by another freeze from the National Bank, which is the fund’s trustee, asking Cytonn to cease any investments into affiliated property and schemes until clearance was received from the regulator.
This, Cytonn says will affect the investment capabilities of the fund negatively and damage its ability to deliver the returns promised to the investors, who had been assured of returns prior to incorporation of the fund.
Mr Dande argues that Cytonn High Yield Fund is a special fund and does not belong to the category where the law limits the investment of the funds to 10 per cent where the fund manager, trustee and custodian are related parties

“It is commercially impractical or even near suicidal for the fund manager to withdraw funds it has already invested in its real estate projects. Funds once invested needs time to mature,” said Mr Dande.