By the standards of emerging market investing, East Africa’s institutional portfolios have long resembled a monoculture. Pension funds, insurance companies, endowments, and foundations have for decades planted the overwhelming majority of their capital in government securities.
It was rational because sovereign paper offered double-digit yields, near-zero default risk, regulatory comfort, and the kind of liquidity that keeps trustees sleeping soundly. When one asset class pays 18 percent and nothing else comes close, diversification feels less like prudence and more like sacrifice. For years, the trade-off made sense.
But that field’s allure is thinning. Yields are compressing and as they fall, from 18 percent toward 14 percent, and eventually lower, the return premium that justified concentration disappears.
Dr Adam Mugume, the director of research and policy at the Bank of Uganda, has noted that Uganda expects at least Shs1.8 trillion annually from oil revenues, a figure that could rise gradually to Shs6 trillion over the next five financial years. Should that materialise, the government would have less need to borrow domestically.
“Yield compression will always make other options more attractive,” says Mr Mubbale Mugalya, General Manager at Sanlam Allianz Uganda, a fund manager.
Is there a look-through problem?
The deeper issue, though, is that this concentration was never as safe as it appeared. Consider the equity allocation. The most liquid listed equities across East African exchanges are commercial banks, dominant in market capitalisation, trading volume, and analyst coverage. An institutional investor seeking diversification would naturally gravitate toward them.
But regional commercial banks hold substantial proportions of their assets in government securities, in some cases approaching 40 percent.
An investor who buys bank shares has not diversified away from sovereign risk. They have instead purchased a leveraged, equity-wrapped version of it.
“There was a time when private equity was a fashionable thing to do. But now we are moving there because we actually have to do it,” Mr Mugalya notes.
According to the 2024/2025 annual report of Uganda Retirement Benefits Regulatory Authority (URBRA), 80.25 percent of Uganda’s Shs30.7 trillion in pension assets sits in government securities.
The Capital Markets Authority’s 2025 quarter four data show fund managers have pushed that figure even higher, to 86.8 percent of all segregated assets by December 2025, up from 78.3 percent just 12 months earlier. Think of a unit trust as a shared pot. Segregated management is your own pot, managed by a professional on your behalf.
Compounding the concentration problem is a currency dimension, which is a second axis of risk that traditional portfolios rarely price correctly.
Government securities across Uganda, Kenya, and Tanzania are predominantly local currency instruments. When those currencies turn volatile, like what happened to the Kenyan shilling’s turbulence in recent years, local currency exposure morphs from a return question into a risk question.
“For those that have access to dollars, or that can convert to dollars, they’re looking for investments where they can invest in dollars. We’ve seen a lot of dollar funds coming out of Kenya, coming out of Uganda and even in Tanzania, it’s starting,” says Linda Tsarwe, who leads alternative investment fundraising at the Asset Management Division of the Trade and Development Bank (TDB).
As dollar-denominated collective investment schemes grow across the region, their mandates push naturally toward dollar alternatives, which are acting as both diversification and currency hedging tools.
Why is it harder than it sounds?
The first obstacle is taxation. Uganda imposes a 30 percent capital gains tax on private equity exits, among the highest in the region, and significantly above Kenya and Mauritius. Private equity funds face potential taxation at three levels: at the investee company, at the fund, and again at the shareholder level. This layered structure makes the asset class structurally unattractive against a government bond that carries no such friction.
The second obstacle is liquidity misunderstanding. When pension trustees hear “alternatives,” many still hear “locked up for seven years with no exit and no price.” That perception, while increasingly outdated, is not entirely wrong for the private equity category that dominated early regional conversations.
The third, and most stubborn, obstacle is the quarterly evaluation cycle.
“I would want to see trustees look at longer-term horizons. Right now, we are evaluated almost on a quarterly basis,” says Mr Mugalya. Alternative investments, even the liquid ones, require a different mental model of time. The illiquidity premium cannot be captured in 90 days. But as long as trustees are measured quarterly, fund managers will be pressured to perform quarterly, and the long-duration bets that alternatives require will remain structurally disfavoured.
Are there governance scars?
The most instructive case is Abraaj. Once managing nearly $14b (Shs52.3 trillion) across Africa and beyond, its founder was arrested for fraud in 2019. Thereafter, investor money commingled, valuations inflated by half a billion dollars, and a $1b (Shs3.7 trillion) healthcare fund whose proceeds never reached Kenya, Pakistan, or Nigeria as promised. In the year after its collapse, African private equity fundraising fell to a third of its five-year average, according to data from the Africa Private Equity and Venture Capital Association. The scar tissue is still visible in every due diligence conversation.
“Are you regulated? Do you have a board? Do you have an investment committee? Do you have controls managing risks? Are you even rated?” says Ms Tsarwe, adding, “All these things have been asked because it’s very important for their risk management.” URBRA’s own supervisory findings for 2024/25 show that scheme risk management functions across Uganda suffer from inadequate reporting, failure to comply with internal policies, and poor oversight of outsourced services. These are the actual conditions on the ground from which trustees are being asked to make their first alternative investment.
What is actually gaining traction, and why?
Private equity, long synonymous with “alternatives” in regional conversations, is losing ground. Long lock-ups, opaque valuations, and uncertain exits have made it a hard sell for pension boards that cannot explain mark-to-model pricing to their members or their regulators. Three categories are finding more willing buyers. Infrastructure has the broadest appeal and the most intuitive investor communication story because it involves assets a trustee can visit, see, and explain to beneficiaries.
“If you have a toll road, it’s very easy to get your clients into a bus and take them to see how the money is being collected. The business is not complicated,” says Mr Mugalya, adding that large institutional funds will allocate 10 to 20 times more capital to infrastructure than to private equity, precisely because the story is simple and the asset is visible.
Private credit and trade finance are where the structural shift is most pronounced. Trade finance assets are short-dated, typically six to 12 months, self-liquidating, and continuously recyclable. In there, capital does not lock up because the exit is a notice period, not an initial public offer. TDB’s trade finance fund, launched in 2019 and now managing $450m (Shs1.6 trillion), exemplifies the model.
“Our funds are open-ended. The need for trade finance funding is evergreen,” says Ms Tsarwe. Ratings matter here beyond signalling quality. Insurance companies, with a substantial capital pool, are often required by their regulatory frameworks to invest only in rated instruments or face punishing capital charges on unrated ones.
“The moment there’s a rating, the capital charge becomes much less, sometimes it’s not even there. Ratings expand the universe of investors you can target,” says Ms Tsarwe.
What about the fragmentation wildcard?
Economic nationalism is tightening capital flows globally. The abrupt funding freeze of the United States Agency for International Development (Usaid) in early 2025 triggered immediate job losses across East Africa’s health, education, and food security sectors.
Uganda’s pension regulator documented that total benefits paid for the twelve months ending June 2025 rose 16 percent to Shs1.62 trillion, with withdrawal benefits, the category that captures workers exiting formal employment, accounting for 18.4 percent of that total, blamed on Usaid project withdrawals.
External funding for Africa, already insufficient, is becoming scarcer and more conditional, meaning development finance and concessional capital, long the implicit subsidy beneath African investment, are under pressure. Is this an opportunity for African assets? Not yet.
“We are still being given a high-risk premium, even when it is not justified,” says Ms Tsarwe.
But the fragmentation creates a different kind of internal pressure. If external capital is retreating, African institutional capital must fill the gap. “African savings need to be pooled to fund African projects,” says Tsarwe. “Everybody else is looking inward. We need to do the same.
The raw material exists. Pension assets across East Africa are growing at 20 to 30 percent per annum. Uganda alone closed 2024/2025 with Shs30.7 trillion under management, up 21 percent in a single year. The infrastructure deficit, the trade finance gap, and the private sector funding shortfall are equally real and equally expanding.
The question is whether the institutional architecture that involves governance frameworks, fund structures, investor education, and regulatory flexibility, can develop fast enough to connect the two.
What changes are needed?
The first is time. Quarterly performance evaluation is fundamentally incompatible with alternative investing. The illiquidity premium cannot be captured in 90 days, and the pressure to show returns every quarter will always crowd out the patience that alternatives require. Until boards adopt multi-year evaluation frameworks for alternative allocations, the full benefit of the asset class will remain structurally out of reach.
The second is capacity. Pricing a government bond requires calling a bank. Pricing an infrastructure equity stake or evaluating trade finance collateral requires internal models, stress-tested cash flows, and granular business analysis.
“The way you look at traditional assets is not the same way you look at alternatives,” says Mr Mugalya, noting that capacity must be built, internally or through specialist advisors, before the first alternative allocation is made, not after.
The third is philosophy. The goal of alternative allocation is to break the chain that runs from government fiscal policy through sovereign bond yields through bank equity prices through pension fund performance.
“That chain is the concentration risk. Every link in it is the same risk wearing a different name.
“It is important to add other asset classes to hedge against the risks of being concentrated in one,” says Ms Tsarwe.
The case for alternatives in East Africa is moving slowly because the governance infrastructure, the evaluation frameworks, the tax environment, and the institutional memory that governs every due diligence conversation are all, simultaneously, works in progress. That is what makes it a complex bet.