“Ideas are inexpensive; nonetheless, execution is critical. To win, you must work as a team.”
John Doer is a well-known author.
A business idea is not enough to make a firm successful. To commercialize a business idea, it is necessary to have a reliable source of funding as well as a team of specialists to operate the business.
The rising business world has a pool of entrepreneurs at one end who are looking for cash to materialize their ideas with prospective business chances, and at the other end who are trying to scale up their businesses but do not have access to funding choices for further investment. On the opposite end of the spectrum, there are possible investors who have the capability of supporting initiatives and ideas on a medium to big size that have the potential to generate significant profits.
The middle of the spectrum is filled by an unique investment vehicle, which serves as a mediator between entrepreneurs and potential investors, allowing them to market or scale up their business ideas. An alternative investment fund or a specialized investment fund is the name given to this type of unique investment instrument. Alternative investment funds include private equity funds, venture capital funds, and hedge funds, to name a few categories. Private Equity Venture Capital Fund (PE/VC Fund) will be the primary emphasis of this section of the article.
The practice of people pooling their money in order to purchase a controlling position in an existing private corporation has been around for a long time, according to historical records. During the last 100 years, the concepts of venture capital and private equity have experienced a dramatic increase in size, significance, and recognition. In the 1940s, the first companies to provide private equity finance for freshly formed and mature businesses were established in the United States and Europe, respectively. In fact, the Massachusetts Bay Company was a forerunner of the private equity model, having been founded in 1790. In doing so, it pooled funds to assist in the funding of the rapidly expanding British North American colonies. Because venture capital is a subtype of private equity investing, the history of venture capital is inextricably intertwined with the history of private equity investing.
For a long time, private equity was considered a niche investment vehicle, allowing wealthy individuals to purchase interests in or buy out enterprises that were not available on the open market. With the passage of time and the implementation of regulatory reforms, private equity funds (PE funds) were established to collect possible investors and prospective business concepts in order to proceed further along the path of investment. As a result, private equity funds are referred to as Special Collective Investment Vehicles. While the PE fund structure solves the finance gap, it also brings business knowledge to the table, allowing startups and small and medium-sized enterprises (SMEs) to make better decisions and grow their businesses.
It is necessary to understand the primary stakeholders participating in the private equity investment cycle in order to gain a better understanding of the private equity market or a PE fund.
The Bleyzer Foundation and the European Private Equity and Venture Capital Association (EVCA) are two sources of information.
Generally speaking, three primary parties are involved in the investment cycle on a regular basis:
Investors: Investors supply funding to private equity funds through a variety of means. It consists of institutional investors such as banks and financial institutions, insurance companies, pension funds, and high-net-worth individuals, amongst others.
Fund Manager: The fund manager is in charge of managing the capital invested by investors and acting on their behalf in accordance with the investment plan that was agreed upon by the investors and the fund manager during the fund’s formation and operation. Although the fund manager’s responsibilities include discovering, structuring, and managing investments, they are also responsible for devising successful exit strategies for their portfolios. The final and most important step in the PE investment cycle, the departure, has the potential to have a significant impact on the total return on the investment. Enabling the exit process with the finest available exit methods, such as an initial public offering (IPO), a trade sale, a secondary sale, and so on, will generate substantial value.
Target Companies/Portfolio Companies: A target company is a firm that has been recognized and selected as being attractive from an investment standpoint.
Nepal’s private equity and venture capital (PE/VC)
The notion of a private equity/venture capital fund has been around in Nepal for a long time and has taken on several shapes. Historically, capital sources were maintained by entities drawn from their circle of friends and family, with the funds being used to invest in projects that they themselves pushed. With the passage of time and the tides of globalization, a small number of companies began incorporating as private companies with the goal of operating similarly to a private equity fund.
It was the Soaltee Group that founded Nepal’s first local equity fund, the Surya Equity Fund, which served as a platform for prospective investors to make investments and get capital appreciation through capital appreciation. Donma Impact Vehicle I was the country’s first international private equity investment fund, and it was launched in 2008. PE/VC funds operating in Nepal are currently registered with the Company Registrar’s office under the company number 2063, according to the Companies Act.
However, the recent introduction of the “Specialised Investment Fund Regulation, 2075” by SEBON has marked a watershed moment in Nepal’s private equity and venture capital industries, as it has provided legal recognition and a framework for its operation, distinguishing between funds and fund managers. This is a significant step forward in the promotion of the PE/VC industry in Nepal.
In recent years, there has been a growth in the number of startup companies, which has resulted in an increase in private equity and venture capital fundraising operations in Nepal. According to a survey conducted by the World Bank Group on Nepal’s private equity and venture capital environments, there are three main elements driving the increase in investor interest in Nepal: the country’s economic growth, the availability of finance, and the availability of skilled labor.
• The stabilization of the economy following the earthquake on April 15 and the ensuing economic blockade by India.
• Nepal suffers from chronic underinvestment and poor foreign direct investment (FDI) inflows as a result of political instability, protectionism, and capital controls. As a result, capital is required in order to realize the country’s development potential. Development Finance Institutions (DFIs) and impact investors step in to fill the void left by the lack of private sector participation.
When it comes to lending on a cash basis, commercial banks in Nepal are reluctant to do so, which creates a challenge for expanding SMEs with a small asset base. On the other hand, bond issuance is restricted to the government and a few large enterprises. This has opened up new business prospects for private equity and venture capital firms.
Beyond the aforementioned considerations, the COVID 19 outbreak has accelerated the development of the work from home and social distance cultures, which has resulted in an expansion of the breadth of IT enterprises and technology-based/driven businesses in recent decades. Agriculture, logistics and services, tourism, and the energy and health sectors, in addition to information technology-based businesses, appear to be promising investment sectors for the private equity and venture capital (PE/VC) industry in Nepal.
With the availability of numerous prospective sectors and the financial constraints faced by SME and start-up businesses, the private equity and venture capital (PE/VC) industry in Nepal has a better outlook and will undoubtedly play an important role in the economic development of the country, particularly in terms of innovation fuelled by risk capital, job creation, and contribution to corporate governance.