Cytonn’s glass house cracks

Cytonn Investment Limited is a brick baked in the kiln of defiance; that it takes to hitting people’s heads even when it contains structural weaknesses within, may have it crack and crumble at the behest of the capital markets regulator. 

While the real estate company has been fending off angry investors who claim they have defaulted on their payments while at the same time battling the regulator over the affairs of its real estate funds, one company which shares an origin story with Cytonn has been making one of the most exclusive property sales in the Kenyan market.

Acorn has been selling a Sh4 billion real estate trust for developing new units through D-Reit and another Sh4.1 billion for an I-Reit, equity investments in its projects.

Accorn has delivered Qwetu student accommodation and is now targeting bachelors with proposed development of first time home owners. It has been able to raise money from the world’s top institutional investors including issuing the first green bond in Kenya and listing it on the London Stocks Exchange and the Nairobi bourse.

How the two companies ended up with very different fates may be a matter of execution, disparate fortunes and how their top men chose to bounce back from the 2013 gamble that set them on their current path.

What many do not know is that these two real estate developers have some things in common, the concept, owners and a history that dates back to 2013 when they were first mooted to the country’s Murang’a billionaires from the famous Rwathia village.

Mr Edward Kirathe CEO Acorn and Edwin Dande, chief executive Cytonn were working together under very different circumstances for a partnership to deliver housing projects to Britam. At the time, Dande was managing director for British-American Asset Managers Limited.

Less confrontational manner

In November 2013 the two upstarts eager to make their mark and their fortune presented their joint venture ideas to the older owners of capital, Dr Benson Wairegi, Peter Munga and Mr Jimnah Mbaru among other top Britam owners at a two day reclusive retreat.

“The express purpose was to understand the real estate industry and business context and the opportunity to discuss and agree on the strategy and structure to unlock the opportunity; to review the expectations, roles and responsibilities of each party in this partnership,” court documents in court cases against Cytonn reads.

The partnership led to the first attempt to bring high yielding real estate products through selecting locations in Nairobi with mezzanine funding, a hybrid of debt and equity financing.

EvenDale Development, Starling Park properties, Crimson Court Development, Sinopia Properties and Mikado Properties were supposed to be the first of the projects.

But the older billionaires would develop cold feet at the complexity of the projects, the mezzanine financing while disagreeing on structure of control and ownerships.

Dande led a group of fellow young upstarts Elizabeth Nkukuu, Patricia Wanjama and Shiv Arora eager to make their money, out of Britam in a huff in late 2014 to form Cytonn.

The older Britam billionaires, however, decided to exact their vengeance when they paraded Cytonn and Acorn in court and accused them of theft in civil and criminal suits.

While Acorn learned to play the game in less confrontational manner negotiating a consent with Britam to return the properties rather than fight publicly, Dande was more confrontational taking on the big boys in scathing public attacks in what became a mudslinging court contest.

Fighting regulations

Perhaps he had had a taste of blood and had developed a stomach for it, seeing that now he has taken up a crusade against bankers who control the capital markets structures for fundraising.

Dande has taken the Capital Markets Authority to court twice this year petitioning for a judicial review challenging rules of the established game.

He says he is fighting regulations that require only one bank to act as custodian of a fund, only five banks being allowed to act as trustees for a fund and wants specialised funds to be allowed to operate in the market.

He claims he is also crusading against conflict of interest at CMA where parties who own banks are in charge of the regulator and says as a result, he is facing arbitrary or selective application of regulations against him.

“You can’t just wake up and write to people letters that contradict what are in your regulations,” he said.

Perhaps by chance or design, activist Okiya Omtatah has picked his cue and is openly challenging the appointment of the CMA board and accusing its chairman James Ndegwa of conflict of interest.

Mr Omtatah claims Mr Ndegwa is conflicted for allegedly being chairman of First Chartered Securities (FCS), which owns ICEA Lion. ICEA Lion owns ICEA Lion Asset Managers, which manages the ICEA Money Market Fund, a body regulated by CMA.

ICEA Lion acquired Stanlib, hence Stanlib Money Market Fund, which is also regulated by CMA while FCS owns a 12 percent stake in NCBA, which is listed on the Nairobi Securities Exchange and runs the NCBA money market fund, which is also regulated by CMA.

Signs of collapse

But Cytonn is living in a glass house while throwing stones, the regulator says that the company is in several breaches and is already showing tell a tale signs of collapse and defaults on its unregulated funds.

When coronavirus hit this year, Cytonn investment invoked Force Majure- Act of God clause, in their contracts saying the pandemic saw their own clients default on Sh1.5 billion in two real estate projects the Ridge and the Alma, which meant they could not service their loans and repay investors.

Correspondence shows that Cytonn sought to default on its maturing debts of Cytonn project Notes and 19 percent interest payments and principal on one Cytonn High Yield Fund, and had asked investors to pick one of three options.

Clients would either extend maturities by 12 months, those with over Sh10 million would have the option of taking up units in the company’s real estate or they would enter into a two year standstill during which no payments will be made.

“We were getting 1,000 withdrawal a day. Of course when there is negative publicity you will always get withdrawal. We just provide information and in the fullness of time we believe investors will get the information,” Dande said.

Cytonn’s other regulated funds are also facing a crisis since CMA demanded it reduces exposure of its high yield fund in two of its real estate properties, the Alma and Applewood citing breach of investment guidelines.

Cytonn put Sh123 million in the real estate properties which is 64 percent of the money pooled by investors in the Cytonn High Yield Fund, a Collective investment scheme (CIS).

This is contrary to CMA regulations that only allow pooled fund to invest less than 25 percent in one single entity. Further the law prohibits CIS funds from investing more than 10 per cent in related parties which means Cytonn has breached both limits.



%d bloggers like this: