The Pensions Industry Association of Jamaica (PIAJ) is cautioning start-up companies seeking to benefit from the new pension regulations, which lifts the restrictions on pension funds investing in such entities.
The amendments to the Pensions (Superannuation Funds & Retirement Schemes) (Investment) (Amendment) Regulations, 2019, which was passed by Parliament and gazetted recently, allows pension funds to invest in private equity and venture capital for the first time, up to a limit of 5 per cent of their portfolio. This 5 per cent is estimated at $25 billion being available for investment in these two areas.
Start-up companies and venture capitalists see the move as the door being opened for the channelling of much-needed financial resources flowing in their areas of business. However, the PIAJ, which is the lobby group for pension fund managers, is already sounding the caution bell.
Speaking at the Jamaica Observer Monday Exchange, representatives of the PIAJ emphasised that while the door has been opened for pension funds to invest in start-up companies and venture capital entities, pension funds managers are going to be extra cautious in making investments decisions in these companies.
The representatives sought to explain that the 5 per cent cap comprises not only venture capitalists and start-up companies, but also private equity and debt. Therefore, the pool of funds is not just limited to start-ups and venture capitalists, but extend to all private equity options and debt.
PIAJ director and vice-president and chief investment officer for asset management at Scotiabank, Brian Frazer, encouraged start-up companies and venture capitalists to temper their expectation regarding the lifting of the restrictions on investments in their area of business.
Speaking with journalists at the Jamaica Observer, Frazer advised start-up and venture capitalists, “you may not see the effect that you want in the venture space that have much more risk that an established private firm, which is looking to go public or is just looking to raise additional equity.”
In his caution to start-up and venture capitalists, Frazer continued, “So we should temper our expectation about most of this 5 per cent flowing through start-ups and the venture capital, which more or less is the early stage and the more risky stage. My expectation is that the impact will be more capital flowing to the more established companies, which produces financial statements, which will allow pension fund managers to be more prudent in how they manage their (pension) fund.”
For her part executive Director of Pensions at the Financial Services Commission (FSC), Cornelia Harper-Peck doesn’t expect that pension funds will now be investing most of this pool of funds from the 5 per cent cap in start-ups and venture capital funds. She emphasised that pension funds managers will be more vigilant when making investment decisions in these entities.
According to Harper-Peck, “they (pension fund managers) will have to do the required due diligence to ensure that there is proper risk management that the company (start-ups or venture capitalists) is a viable one that manages risk and manages its operations in such a way that it would not be detrimental to members of the fund for them to invest.”
She adds that “we do expect strong degree of due diligence to be undertaken before any investment is done.” The FSC is the regulatory body for the pension industry valued at $700 billion in investments.