Private Equity (PE) or Venture Capital Funds (VC) fill the gap between entrepreneurs and access to finance. In many cases when business ideas are innovative, but lack conventional methods of financing from Banks due to lack of collateral, PE/VCs fund them. This can either be in the form of Angel financing or help scale up an existing business that already has equity value to it. Angel financing is riskier as it deals with incubators and startups.
Until recently, Private Equity (PE) and Venture Capital (VC) funds have been in existence in the most rudimentary structures in Nepal. In the past, funds were harnessed by entities from their circle of friends and families to invest in projects that are promoted by them selves. Rarely have there been cases of investments in third party promoted projects, if at all. Between 2003 and 2009, Nepal saw an unprecedented boom in stock market and real, family, friends, and business partners established plain-vanilla private investment companies. These companies did not follow the Limited Partner and General Partner Concept prevalent in PE financing. Instead they would select a group of investors in the board to decide the investments while other partners remained as silent investors. The Limited Partner in a PE set up provides the funds while the General Partner takes care of managing the day-to-day affairs of the fund. In order to make PE/VC funding effective the internationally accepted methods should be structured and implemented.
However, the concept of PE/VC is beginning to gain importance in Nepal’s market especially in the areas of Small and Medium Enterprise (SME) funding. The SME sector plays a significant role in the Nepali economy. There are estimated 111,442 registered SMEs operating in Nepal, which accounts for 22% of the value added to the country’s GDP in 2012. The existing SMEs have generated over 1.75 million employment opportunities. However, there is a huge funding gap that exists as banks do not have the risk appetite to deal with SMEs that are not involved in retail or wholesale markets. It is estimated that there is a funding gap of $2.5 billion. Therefore this untapped market has great potential to be served by PE funds.
A few international organizations have entered the SME market in Nepal by investing PE Venture funds into SMEs that are in need of scaling up their businesses. The International Finance Company’s (IFC) of the World Bank Group was the first to introduce the concept of PE Venture fund in Nepal. The uniqueness and the differentiator of this fund is the technical assistance component that enables capacity building of the SMEs to be competitive and transparent. Countries like Nepal are known as frontier markets in the PE world. Where there is risk and great opportunities. PE funds, such as the ones mentioned above, will not only develop the market, but will provide opportunities to a market that is starved for alternative methods of financing.
As we move ahead, there is need to create a PE environment with the new players in the market that will act as a lobbying force to press for a regulatory environment and call for harmonization of rules.
*Siddhant Raj Pandey is the Chairman of White Lotus Centre Pvt. Ltd.
WLC is a Private Sector Development company that bridges the world of development and finance.