Inside the Cytonn, CMA woes

Cytonn Investments, a prominent real estate fund in Kenya, has recently come under fire from the Capital Markets Authority (CMA) after the regulator announced that Cytonn is not a licensed and approved entity. The announcement by the CMA has sparked controversy, with Cytonn Investments calling the move malicious and an attempt by the regulator to distance itself from the fund that has been in operation for over eight years. CNBC Africa spoke with George Bodo, the CEO of Call Street Research and Analytics, to shed more light on the situation. Bodo explained that Cytonn's funding structure, which involved financing long-term assets using short-term liabilities, was a risky strategy that left the fund vulnerable to market shocks. The COVID-19 pandemic served as a major market shock, causing Cytonn to face liquidity challenges as their usual sources of funding dried up. This led to the fund being unable to redeem its maturity gaps, ultimately resulting in an illiquidity crisis. While Cytonn's investment in real estate itself was legal, Bodo highlighted that the fund took advantage of regulatory loopholes to offer certain products, such as the high yield solutions, through private placements. This allowed Cytonn to operate within the regulatory framework, albeit in a slightly integrated manner. Despite the legality of their operations, the fund's reliance on short-term funding and a yield-driven approach exposed them to risks that materialized during the pandemic. As CMA distances itself from Cytonn, investors are left in a state of uncertainty. Bodo emphasized the importance of due diligence for investors, urging them to scrutinize where their money is being invested and to ask tough questions about the associated risks. This episode with Cytonn serves as a cautionary tale for investors, highlighting the pitfalls of fixating on yields without fully understanding the underlying risks. Moving forward, investors need to assess asset allocation, credit risks, and market factors to make informed investment decisions. For investors who have funds tied up in Cytonn, Bodo advised focusing on the liquidity aspects of their investments and ensuring they have emergency reserves in place. Additionally, he recommended that Cytonn seek a long-term cash injection to stabilize their business. The Cytonn saga serves as a wake-up call for investors and fund managers alike, underscoring the need for greater transparency and risk management in the financial market.