The game changers

  • Surely there are Nepali versions of Steve Jobs waiting to be spotted out there
- SUMAN JOSHI

Jun 25, 2014-

Steve Jobs wouldn’t have become the most admired innovator of the modern era had he not received financial support from equity investors like Mike Markkula and Arthur Rock during his early days as an entrepreneur. As they say, the rest is history, and today Apple means much more to us than a fruit or just an object that fell on Newton’s head when he was sitting underneath a tree.

In Nepal, we have our own stories where great ideas have remained somebody’s pipe dream due to lack of money. And then there are companies like Finaccess, owner of Hello Paisa, an interoperable mobile payments platform, which are on the verge of tasting commercial success after multiple doses of capital injections over the five years of their being. Nepalis are generally entrepreneurial by nature. Double that with Nepal having a young population, technology having reduced our planet to a global village, a good number of migrant returnees, and we have a good pool of ideas, skills and energy.

One would say that there’s no dearth of money either, judging by the amount of our remittance inflow. But we tend to point a blaming finger at banks for not channelling enough investments to start-ups or entrepreneurs with no background. Increased competition has encouraged banks to take greater risks, but one must understand that their risk appetite will always be limited given their fiduciary responsibility as the trustees of people’s savings.

Enter the world of Private Equity (PE) and we will find answers.

Private Equity is an asset class consisting of equity and debt in companies that are not publicly traded on a stock exchange. A private equity investment provides risk capital to a target company to support expansion, product development or restructuring of its operations, management or ownership.

Private Equity firms are owned and managed by seasoned fund managers with sound track records. They tap into investors who are savvy in terms of understanding the associated risk and also ensure access to better management capability. PEs invest typically up to 20 percent of the capital in a business and seek to exit in three to seven years.

A few PE-type funds have been raised and are at various stages of deployment in Nepal. However, given the lack of legislation, our PE market is currently extremely shallow. The ones that have been deployed are only in the form of single company Class B shares with all management control surrendered to primary owners, and very limited possibilities of exit without the owner’s involvement. A foreign direct investment (FDI) oriented fund, namely Dolma Impact Fund, is currently scoping the market for investment targets and simultaneously working on legal and operational modalities to move funds into and out of Nepal. An IFC sponsored SME fund is expected to commence operation soon. There are micro and small funds operating at informal levels as well. As aforementioned, all these funds are compelled to work around and deviate from standard PE concepts as there are no appropriate regulations.

Recent World Bank reviews suggest that there is a “positive, first-order relationship between financial development and economic growth” and “countries with better-developed financial systems grow faster over longer periods of time”. Nepal’s formal financial landscape is dominated by banks, notwithstanding their limited risk appetite. Moreover, the size of the informal financial market is believed to be significant. It’s time we adopted and introduced well functioning components of the financial market from more successful economies with a view to offering people more legal choices and releasing banks from excessive moral hazards.

Undoubtedly, there is a strong case for Nepal to create space for a private sector-led PE market. Consider these facts:

Notwithstanding a wide gap between the haves and have-nots, Nepal has seen a significant increase in private wealth over the last decade. There is more money and assets at people’s disposal for consumption and investment.

Rapid evolution of IT capability makes it possible for people to access ideas and technology more readily. Globalization is now irreversible and businesses can be scaled up much more conveniently that ever before.

The political climate has improved significantly. More importantly, there is now consensus among the political class with respect to the need to push the economic growth agenda. Nepali youth are generally entrepreneurial and reasonably skilful.

PEs can help aspiring, new and not-so-new entrepreneurs scale up to the next level of their business by providing risk capital, management support and network.

The value proposition is really quite obvious. For investors, it offers a new avenue of investment. Business owners and aspiring entrepreneurs have a new, robust source of (a) Risk capital (b) Management support (c) Better credit-readiness for bank borrowing, therefore, an incentive to innovate and grow business. Borrowers with PE investments are a better credit risk for banks. It will help banks build meaningful SME loan portfolios. Above all, the government will benefit from improved transparency, wider tax net, increased revenue collection and a boost to economic growth.

So, in order to facilitate the flow of formal investments from Nepal’s private sector, wealthy individuals and institutions like pension funds and insurance companies, steps must be taken to introduce basic legislation to recognize PE as an asset class [— just like mutual fund (MF) is now an asset class. PE is similar to MF in many ways except for the fact that PEs generally invest in equities that are not publicly traded. They do, however, use the stock market as the most viable exit option. There is a need to deepen our financial market by encouraging small cap companies and, of course, foreign investment in the secondary market. There are a number of smaller issues that need to be addressed, but the first step is to recognize PE as an asset class. A formal space for Private Equity will certainly be a game changer for our economy.

There is evidence to suggest a strong interest among the private sector, market players and development partners alike to contribute to improving the equity investment climate in Nepal. The Ministry of Finance needs to take half a step and invite inputs from experts and interested parties to set the ball rolling. A one-line policy announcement in the upcoming budget will be a good place to start.

Surely there are Nepali versions of Jack Ma, Warren Buffet and Steve Jobs waiting to be spotted out there.

(Joshi is former CEO of Laxmi Bank)

 

Published: 26-06-2014 09:14

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