25-31 January 2013 #640

Equally invested

As an alternative source of funding, Private Equity has the potential to turn small businesses in Nepal more competitive and better managed firms
Puja Tandon
Is your business not able to tap into capital markets? Are you running out of financing options? Private Equity (PE) could be your best bet. An investment in shares (not traded on the stock exchange) of private, unlisted companies, PE provides an alternative source of funding for businesses who don’t have easy access to conventional financing through banks or capital markets. PE firms also provide management expertise which is often lacking in small businesses.

PE investments are ideal for developing countries like Nepal where capital markets are not very mature, and where companies have a hard time raising money because they lack collaterals such as land, property etc. PE can be used to expand Nepal’s transitioning economy by promoting entrepreneurship in the private sector. Businesses neither have to be big or hugely successful, instead PE funds make the most difference when used in companies that are ‘good enough’ but need an injection of capital.

Investments can also be used to boost agro-businesses. Through PE, farmers who would otherwise find it impossible to get funds from banks, can move from subsistence agriculture to more commercial production, increase their competitiveness through better branding and gain greater access to markets.

As PE investments come with a certain degree of handholding and technical assistance in maintaining accounts and adhering to governance guidelines, social and environmental issues, they benefit businesses in the long-term by improving the way they are managed.

For example, more than 90 per cent of businesses in the country are still family run with under developed and at times practically non-existent corporate governance procedures. PE partners can instil transparency and make these businesses tax compliant so that untaxed informal returns and outflows are gradually brought into the formal economy.

However, investments in privately held companies by their very nature are riskier than investments in publically traded companies. Investors can lose all their money and the risk is higher in companies with high leverage. Furthermore, political instability, rising inflation, and comparatively illiquid investments (most effective exit for PE funds being through Initial Public Offering, though offloading to existing promoters is a good enough option), add to the risks. 

However, local PE funds can address these issues to a great extent through their understanding of the local business practices and culture, market, and management expertise. For example the lack of liquidity can be resolved by encouraging mergers between enterprises. Close monitoring, strategic inputs, and managerial handholding can offset the other major risks.

With middle-class families on the rise who are increasingly spending their disposable incomes on consumer and luxury goods, Nepal’s consumer service industry in particular looks encouraging. Insurance companies, non-residential Nepalis (NRNs), and entrepreneurs willing to take a risk can expect plenty of opportunities. 

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