For the past five years, Cytonn Investments, led by its suave founder Edwin Dande, has been one of the hottest investment firms in town.
With its sweet tongued salespeople, glitzy media adverts and sharp analysts, Cytonn has made money market funds cool.
And Kenyans have fast bought in, especially lured by the promise of high returns of even up to 20 per cent annually.
Cytonn has raised over Sh15 billion and from Karen to Machakos, it boasts of an ambitious and futuristic real estate portfolio – real and on paper.
The model has been simple: pool funds from the public and deploy the monies raised for investments mainly into real estate projects.
However, the Capital Markets Authority has sounded the alarm on the safety of investors’ funds warning that should anything happen to Cytonn, investors risk losing their money in the Cytonn High Yield Fund (CHYF) that it regulates. Dozens of investors have also complained that Cytonn has failed to pay them on maturity of their investments.
Cytonn has had to extend maturities for some of the investments for up to two years, arguing that the coronavirus pandemic had hurt its cashflows. Some critics have likened the investment company to a Ponzi scheme due to its promise of giving returns way above the market rates.
Dande has come out strongly to defend the activities of his firm, touting it as a genuine Kenyan success story.
“A Ponzi scheme has no underlying assets; we do,” he said in response to The Standard as he dismissed claims he was running a pyramid scheme that promised high returns but failed to pay on maturity.
“We pay around 15 to 16 per cent per annum in returns, blended across all our products,” he added.
The projects include off-plan housing projects which are sold to investors or homeowners. And from the sales made, Cytonn then pays investors the “high yields.”
Most of the investor money has been sunk into their own real estate projects, one of the red flags its critics are now raising.
Being private placements, the funds have been largely unregulated except one which is now exposing Cytonn especially after picking up a nasty legal battle with the Capital Markets Authority (CMA).
Among its successes, Dande says, include the creation of high yielding products, developments where Kenyans can live with “dignity” and creation of over 1,000 jobs.
“Most importantly, showing young people that entrepreneurship is possible, you don’t have to be a tenderpreneur,” buttressed Dande.
But how did Cytonn get here?
The fight between CMA and the real estate investment firm’s CHYF, which is exposing Cytonn’s soft underbelly, is over a request that the CHYF lessen its investments into Cytonn-related projects to 10 per cent of the fund’s total assets under management (AUMs) as per set regulations.
This is meant to minimise risks and protect investors in the investment.
CHYF is authorised by CMA to invest in real estate assets with a maximum limit of 80 per cent of the total assets under management, which should not be in Cytonn related entities to reduce concentration risks.
The AUMs consist of publicly pooled funds. Cytonn High Yield Fund made losses of Sh394,000 in the year ended December 2019 with an investment income of Sh1.5 million.
The CHYF is a collective investment scheme (CIS) regulated by CMA but the sponsor is Cytonn Investment Management, which is not regulated by the authority.
The regulator warned that failure to comply might lead to the loss of investor money. CMA said that 13 investors owed Sh122.8 million have approached CMA with complaints. CMA was responding to Cytonn, which curiously moved to court seeking to fight the 10 per cent limit, in a case that still ongoing.
These funds are held in investment schemes that the authority does not regulate but termed them “high risk.”
The complaints were from investors on the Cytonn High Yield Solutions and Cytonn Project Notes – these are the ones that Cytonn now says have been impacted by the coronavirus.
In an annexed letter, CMA Acting Director, Marketing Operations, Abubakar Hassan Abubakar wrote to Dande for a quick resolution to the outstanding complaints.
In a rebuttal last week, Cytonn says that out of 4,000 investors only 13 were unhappy with a unanimous decision hence the complaints.
It says that CHYS is a fund invested in real estate and its board of investors approved an extension of maturities by 12 months for pre-Covid funds in a binding decision.
Fighting the 10 per cent limit, Dande had told the court that the directive was an economic sabotage.
And last week, Cytonn received a reprieve from the High Court after it suspended CMA’s attempt to limit CHYF from not investing more than 10 per cent of funds in its portfolio and freezing any investment of the funds held in SBM Bank, pending the determination of the case.
CMA, in its petition, further says that following a review, it allowed CHYF to invest up to 25 per cent of its AUM in Cytonn related entities, but Cytonn still went to court and has refused to divest.
The Authority says the CHYF is already in breach of the maximum investment limit of 25 per cent in related parties. Investments by CHYF in Cytonn related entities are currently at 64 per cent of its AUM as at August 2020.
“The failure to comply the aforementioned provisions of CIS regulation exposes the investors to the risk of losing the hard earned money they have invested,” warned CMA.
CMA said it had agreed with Cytonn that the CHYF be converted into a regulated investment vehicle, but Cytonn had been slow in meeting the regulatory requirements.
In its defence, Cytonn says the CMA directive was purportedly based on regulation 16 (2) of the Collective Investment Schemes Regulation, which it says is only applicable to a Fund where the Fund Manager, the Custodian and the Trustee are related, with the view that given the relatedness in the governance of the Fund, it is prudent to limit investments into in-house projects to 10 per cent.
Last October, Kenneth Kasinga was approached by a Cytonnn representative and presented with an offer he couldn’t refuse.
Here was a product tipped to return a 19 per cent interest annually for just one year.
Kasinga then invested Sh3 million into the Cytonn High Yields Solutions. A year later he has sued the investment firm telling the court that the money was at risk. The investor says that Cytonn “purported” to be offering private offers in order to remove themselves from CMA regulation, but their offer was public and requires approval from CMA.
He had been told that the investment was a private placement with not more than 100 investors, but Cytonn had raised money from 3,000 investors.
Kasinga now wants a declaration that the CHYS is a public offer subject to regulation and approval of CMA. He also wants it audited.
The investor wants a permanent injunction preventing Cytonn from extending the maturity date of his investment. He says Cytonn unilaterally gave him the option of extending his investment by 12 months after the date of maturity or enter an agreement for an additional two years after the date of maturity, a decision he had to make within 30 days.
Cytonn said the CHYS and the Cytonn Real Estate Project Notes (CPN) had been impacted by the virus causing reduction of labour force translating to longer development periods, slowdown in building approvals as well as in collections from those who’ve purchased off-plan real estate on installment plans.
One of its products, Cytonn Cash Management Solution lost over Sh50 million in collapsed supermarket Nakumatt. It was part of commercial paper holders owed Sh4 billion who went home with nothing.