Private Equity/ Venture Capital Fund: Special Investment Vehicle Bridging Investors and Entrepreneurs

"Ideas are cheap, execution is everything. It takes a team to win."
John Doer

Possessing business ideas is not enough to commercialize business ideas, proper financing source and a team of experts to operate the business is a must for the success of every business.

In this growing business world, we have a pool of entrepreneurs at one end who are seeking funds to materialize their ideas with potential business opportunities or looking up to scale up their business but lack financing options for further investment. On the other end of the spectrum, there exist potential investors possessing the competency of funding the projects and ideas on a medium to large scale that has lucrative business opportunities.

In between the spectrum a special investment vehicle acts as an intermediary to fill the financing gap by connecting entrepreneurs to potential investors to commercialize or scale up their business ideas. This special investment vehicle is termed an alternative investment fund or specialized investment fund. Basically, private equity fund ventures capital fund hedge fund comes under alternative investment fund. In this section, we will be focusing on Private Equity Venture Capital Fund (PE/VC Fund).

Going back to history, the practice of people creating a pool of money to purchase a controlling stake in a private company is not a new concept. The concept of venture capital and private equity has undergone a sudden increase in growth, significance, and recognition during the last 100 years. The first companies providing private equity financing for newly created and mature businesses were established in US and Europe in the 1940s. In fact, the Massachusetts Bay Company was an early prototype of the private equity model. In that, it pooled money to help fund the mushrooming British North American colonies. The history of venture capital is fundamentally interlinked with the history of private equity, as venture capital exists as a subcategory within private equity investing.

Initially, Private equity emerged as a special investment vehicle enabling affluent investors to acquire stakes in or buy out businesses that were not accessible on the public markets. With the change in time and regulatory reforms, PE funds were formed that collect potential investors and prospective business ideas and move ahead in the journey of investment. Hence PE funds are termed as Special Collective Investment Vehicle. The structure of the PE fund not only fills the funding gap but also brings business expertise which helps the startups and SMEs to take better decisions and boost up their business.

To have a better overview of the private equity market or PE fund we must know the major players involved in the private equity investment cycle.

Source: European Private Equity and Venture Capital Association (EVCA), The Bleyzer Foundation

Generally, three major players participate actively in the investment cycle:

Investors: Investors provide capital to private equity funds. It includes institutional investors like banks and financial institutions, insurance companies, pension funds, and high net worth individuals.

Fund Manager: Fund Manager manages the capital injected by investors and acts on behalf of the investors aligning with the investment strategy agreed upon by the investors and the fund manager during the setup of the fund. The responsibility of the fund manager is not only limited to identifying, structuring, and managing the investment but also to developing successful exit strategies. The last critical step of the PE investment cycle, the exit, can greatly affect the final return of the investment. Enabling the exit process with the best available exit strategies like IPO, Trade Sale, Secondary sale, etc. will create significant value.

Target Companies/ Portfolio Companies: Target company refers to a company identified and chosen as attractive companies from an investment perspective.

PE/VC in Nepal

The concept of PE/VC fund has been prevailing in Nepal from the past in different forms. In the past, capital sources were managed by entities from their circle of friends and families to invest in projects that are promoted by themselves. With a change in time and the waves of globalization, few companies started incorporating as private companies with the objective of operating like a PE fund.

Surya Equity Fund managed by Soaltee Group was the first local equity fund established in Nepal as a vehicle for investment and capital appreciation for prospective investors. Dolma Impact Fund I was the first international private equity investment fund established in Nepal. Currently, the PE/VC funds operating in Nepal are registered in the office of the Company Registrar as per the companies as 2063.

But in recent times introduction of “Specialised Investment Fund Regulation, 2075” by SEBON has set a new milestone for PE/VC industry in Nepal which has given legal recognition and framework for its operation which recognizes fund and fund managers distinctly. This is an appreciative step to promote PE/VC industry in Nepal.

An increasing number of startup companies in recent years has led to an increase in private equity and venture fundraising activities in Nepal. According to the World Bank Group's survey of Nepal private equity and venture capital environment, there are three driving factors behind the increase in investors’ interest in Nepal:

• Stabilization of economy after April 15 earthquake and economic blockade by India.

• Due to political instability, protectionism, and capital controls, Nepal suffers from chronic underinvestment and weak FDI inflows. Hence capital is needed to fulfill the country’s development potential. This gap is fulfilled by the stepping of Development Finance Institutions (DFIs) and impact investors.

• In Nepal commercial banks don’t lend on a cash basis which is an obstacle for growing SMEs that are having a poor asset base and on the other hand bond issuance is limited to the sovereign and a few large corporations. This has created business opportunities for PE/VC.

Besides the aforementioned factors, COVID 19 outbreak in recent times has developed the work from home and social distance culture which has led to growth in the scope of IT companies and Technology based/ driven companies. Along with IT-based business, Agriculture, Logistic & Services, Tourism and Energy and Health sectors seems to be prospective investment sectors for PE/VC industry in Nepal.

With the availability of numerous prospective sectors and financial constraints to SME and start-up businesses, PE/VC industry has a better prospect in the context of Nepal and will definitely play a meaningful role in the economic development of a country, mainly in terms of innovation fuelled by risk capital, job creations, and contributor to corporate governance.

Article by Mr. Sachindra Dhungana
Assistant General Manager
NIBL Ace Capital Ltd