PRIVATE EQUITY FIRM

ASSESTMENT

Mega Bhattarai
Ace-IBS 5th semester
What is Private Equity?
“Private equity is money invested in companies that are not publicly traded on a stock
exchange or invested as part of buyouts of publicly traded companies in order to make
them private companies.” (Investopedia)
In general there are two different options to invest in a company. If the company has
gone public you can buy shares of that firm at the public capital market (stock exchange
market). This kind of investment is called “Public Equity”.
An investment in a company that is not listed at the public capital market is a “Private
Equity” investment. So the term “private” is related to the kind of the existing ownership
of the company’s equity. It doesn’t mean that the financing of the investment itself is
done by “private” money or cash.
There are some significant differences between the main characteristics of a “Public
Equity” and a “Private Equity” business
In the form of Public Equity the investor has usually no limitation of the time frame of
his investment. He can handle his investments very flexible, which means adjusting his
business quite easy in a short term e.g. by buying and selling shares on a day to day
basis. Also it is a standard to put investments into different companies or industries. But
with this way of investment the investor does not have a big influence and power on the
company’s daily business and further strategic planning. A public company works like a
representative democracy. The designated board of directors monitors and discusses
with the Management the company’s future and development. The annual meeting is
more or less the only way to address an investor’s opinion to the board of directors. In
comparison the Private Equity investment is directly linked to a more entrepreneurial
attitude. With such an investment you can be part of the company’s management, if you
are have operational control, and you can play a part in decisions concerning the future
of the company’s business. On the other hand this kind of investment is less flexible to
rearrange or sell within a short time period. Only if the complete company value has
increased it makes sense for the investor to sell his investment.
What is Private Equity Firms?
Especially start-up companies need to raise money for finance growth. Very often the
business plans and strategies do not give opportunities to make profit in the short terms
which stops banks from giving out necessary loans. Also Private equity firms very often
invest in troubled companies. Of course they have to analyze the financial structure and
potential of profits carefully upfront to determine if the profit risk ratio makes the
investment reasonable. Therefore Private Equity companies are an important tool for
driving growth and improving performance for companies that struggle to survive. That
can work out, because Private equity owners and the managers of their acquired
companies can focus in an accurate way on what is required to improve long-term
performance.
This structure also makes it far easier to align the interests of owners with those of
managers who also have a direct stake in the success of the company. “Private equity
firms typically hold companies for about five years, and then sell them, hoping to realize
a gain on the sale as a result of the increased value they have created during their period
of ownership.
The general partners cannot recover any of their 3 Financial Management Private
Equity money until and unless they return to investors their principal plus the first eight
to 10 percent of partnership profits. If there are no profits, PE partners not only make
no money, they lose their own equity investment.”
Some of the notable Private equity firms /Venture Capitals in Nepal are:
 Dolma Impact Fund
 Business Oxygen
 One to Watch
 iCapital
The private equity market scenario in Nepal:
Private Equity (PE) and Venture Capital (VC) are the sources of equity fund which
finance new and rapidly growing companies through equity participation. These are
high-risk, potentially high return investment to support business creation and growth.
Venture capital is not just a capital investment, but also assumes that investor has an
active owner involvement through representation in board of directors of the investee
company.
Private equity and venture capital investment in Nepal is still in an infant stage. They
have not yet been categorized as a separate asset class, but works are going on to
recognize these funds as an alternative investment fund. Nonetheless, there are few
private equity funds that are engaged in providing risky capital to the companies that
are in a growth stage in exchange for certain stake.
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 themselves.
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.

Some of most important factors to evaluate an investee company in Nepal are as follows:
1. Management Quality: The most important criteria that VCs use to evaluate an
investee company is its management quality. PE/VCs in Nepal primarily seek to
invest in those companies whose management has a good knowledge of the
sector, has honesty and integrity, good leadership qualities and possess skills
needed to run the business. The references of the management team are of the
least concern to PE/VCs. This means that even though the businesses are referred
in by reputed people, the business has to go through the same process as those
without a reference by reputed people.

2. Market Feasibility: The next factor PE/VCs look at is the overall

characteristics of the market for the product or service. PE/VCs in Nepal consider
potential for market growth, big market size and high demand for the product,
and ease of access to market as some of the most important criteria to evaluate
 business. This comes of no surprise as PE/VCs want to see their investment grow,
and this can be attained only if there is demand for the product, high potential for
future growth and market is easily accessible.

3. Product/service Feasibility: With respect to criteria related to

product/service, PE/VCs consider competitive advantage, good market
acceptance and life cycle of the product as important. This means that PE/VCs in
Nepal invest in only those businesses with a certain history rather than investing
in businesses at an idea level. Likewise, PE/VCs majorly invest in products that
are in the growth stage of product life cycle. This result is quite predictable as
equity investors in Nepal are more inclined towards private equity rather than
venture capital.

4. Financial Viability: PE/VCs in Nepal prefer to invest in those companies that

have a high upside potential and provide high investment liquidity. They rate
potential for earning growth, high IRR, high profit margin projections and an
early exit opportunity as being some of the most important financial criteria.
PE/VCs generally disregard the need for follow up investment as they usually
provide their investment in tranches depending on the milestones of the
business.
Regulations governing the private equity investment in Nepal and the gaps
identified:
Nepal’s first onshore PE fund with FDI, Business Oxygen Pvt. Limited, was established
in 2012. At present there are several offshore and onshore (with and without FDI) PEVC
funds for Nepal. The fiscal year 2018-19 budget mentioned about the promotion of
alternative investment such as private equity, venture capital and hedge funds. Until
now, PE funds are set up in traditional company form as Investment Company and are
governed by Companies Act like any other company. However soon after the
announcement in the last budget speech, Securities Board of Nepal (SEBON) took
initiative to enact regulatory instruments to govern PEVC in Nepal.
PE/VC Regulations
SEBON issued “Specialised Investment Fund Regulation, 2075” (SIF Regulation) to
promote PEVC industry with effect from 6 March 2019 (22 Falgun 2075). This is a
milestone in Nepal’s PEVC industry. The regulation has been welcomed by related
stakeholders given the sector was waiting for a legal recognition and a framework for its
operation. The regulation recognises ‘fund’ and ‘fund manager’ separately. Fund
manager should be a company which can manage multiple funds and fund should be
registered as fund with SEBON. Since the industry is in a very nascent stage, there is a
need of facilitator than a regulator. The regulation encompasses this concept and has
allowed hurdle rate, management fees, fund tenure and size (within the limits provided
by the regulation) and carry to be as per the investment agreement. Qualification of
fund manager, CEO & director of fund manager, provision of independent director, roles
and responsibilities of fund manager, minimum requirement of a fund, content of an
investment agreement and statute of fund have been outlined in the regulations.

 Equity Investment Made Easy

Companies Act restricts a company to invest in excess of 60 percent of its paid-up
capital and free reserves or 100 percent of free reserves whichever is higher in any other
company. First amendment to Companies Act included “Investment Companies” in the
exclusion list from this restriction. Company Directive 2015 (Clause 90) again put
investment limit of 90 percent of paid up capital and 100 percent of free reserves on
those companies in the exclusion list. This means investment company wouldn’t be able
to invest 10 percent of their paid-up capital. What if an investment company uses debt
to make the investment? It was an ambiguous topic. Now a PE fund can be set up as a
fund and provisions of Companies act will no longer be applicable to a fund. The
regulation has solved the problem allowing a fund to take loan from international
investors for investment, however domestic loan has not been allowed yet.
  Decision Making for PEVC Fund
In a typical PE fund, all investment decisions are made by an independent Investment
Committee and is supervised by an Advisory Committee. In a company structure,
decisions made by investment committee had to be reapproved by board of directors as
Office of Company Registrar only accepts board minute for investment decision. This
made the process redundant and Investment Committee could not make independent
investment decision. Now, the regulation recognizes both Investment Committee and
Advisory Committee allowing a PE fund to operate as per international practice.
 Streamlining of Approval Process
PE/VC fund is one of the most effective means to provide businesses an access to
international fund. Large size projects and businesses may, on their own, pitch for FDI
but SMEs may not be able to access FDI which can be bridged by a PE fund. FDI in PE
fund, only from bilateral and multilateral organizations to begin with, is allowed by the
regulation which is a very welcome step. At the same time, FDI is not allowed in
investment business as Industrial Enterprise Act doesn’t classify investment business as
an industry. This issue needs to be addressed to avail funds with FDI. Each FDI must
pass through Department of Industries (DOI)/ Investment Board and Nepal Rastra
Bank for approval and Office of company registrar (OCR) for recording of investment in
share registry. Offshore funds have to go through all three bodies for each investment
whereas in case of onshore fund, it has to go through all three bodies once and
thereafter go through DOI and OCR for each investment to be made. How will the
regulation help to simplify this process? If the regulation is going to add SEBON as
another layer in the process, it will lose its essence.
 Blacklisting Exclusion & FDI restrictions for PE/VC
NRB’s provision on blacklisting of defaulter blacklists shareholder holding more than 15
percent equity and director of Defaulter Company which is a draconian provision for
PEVC funds. FDI investors are waived of the blacklisting provision but onshore funds
with FDI are not considered FDI investor for this purpose. Whereas Investment by
onshore fund with FDI is considered as FDI by DOI and needs to go through FDI
process at DOI for each investment. Current provisions seem to be biased against
onshore fund. Banks and Financial institutions are immune of blacklisting provision,
similar immunity should be provided to PEVC funds for level playing field. FDI is
restricted in certain sectors as outlined in negative list and minimum amount of FDI has
been revised to NPR 5 crore. In case of onshore fund with FDI, there arises two
questions – 1. Will the negative list be applicable when onshore fund with FDI makes its
investment in portfolio companies? (Probably yes), and 2. Does FDI limit apply only
when a foreign investor makes investment into the onshore fund or also when the fund
makes investment in portfolio companies? It would be logical to apply the limit when
FDI is brought into the fund. If FDI limit applies to onward investment by fund, it will
restrict SMEs, larger segment of the economy, from access to funds with FDI.
  Avoiding double taxation of PE/VC Funds
Another important aspect to be discussed here is tax treatment on PE/VC fund. The
regulation has allowed PE/VC fund to register as fund but tax treatment is still not
spelled of which means there will be double taxation. Mutual funds have been exempted
of income tax as per Finance Ordinance 2070-71 and only 5 percent withholding needs
to be deducted while distributing income to unit holders. This is basically a pass-
through treatment of tax with a logic that mutual funds are just a SPV for investment
and don’t create income on their own, but pass return generated through investment to
unit holders. PE/VC fund is special purpose vehicle which pools investment from
different investors and invests in portfolio companies. It is very much like a mutual fund
from taxation point of view, so same logic should apply to PE/VC fund as well. Once
pass-through treatment of tax is available, more onshore fund will be attracted against
current trend of offshore fund.
 Lucrative Investment Sector
Investors assess return, liquidity and risk aspects before investment. Regulation has
reduced post IPO lock-in period to 1 year for promoter shares held by funds. Investors
(both domestic and foreign) would be more comfortable investing in PE/VC funds
managed by professionals than invest in individual projects. In frontier markets like
Nepal, government’s approach towards a sector matters a lot for international investors.
Since PE/VC sector is now formally recognized and regulated, this can be a lucrative
investment sector for domestic as well as international investors. We have been talking
about investment requirement for Nepal, Nepal is investment ready and others, at the
same time we also need to discuss of creative ways of channeling investment into Nepal.
PE/VC is one of those channels.
One example of prevalent private equity firm in Nepal is:

Business Oxygen Pvt.Ltd

Business Oxygen Private Limited (BO2) is Nepal’s first private-equity fund that has a
climate focus. It is a part of the IFC’s Global SME Ventures initiative with investments
from the IFC of the World Bank Group, Climate Investment Fund’s (PPCR) and UK
Aid’s DFID and is managed by WLC Ventures Pvt. Ltd, a subsidiary of White Lotus
Centre Pvt. Ltd. This sector-agnostic fund combines risk capital financing with advisory
support to help investee small and medium enterprises develop fundamental financial
systems, quality-assurance standards, and corporate governance frameworks.
BO2 is a sector agnostic fund and they invest in all areas that are not in the Government
of Nepal’s negative list including:
 Education up to higher secondary
 Primary Agriculture and horticulture
 Dairy, dairy products and cattle.
Investment will be made in all sectors and in all geographically located places in Nepal
with a minimum of investment of US $ 500,000 to a max of US $ 1,000,000.
BO2 investment process will incorporate rigorous Environmental, Social and
Governance (ESG) that will evaluate all investment analysis and decision-making. The
investments will follow strictly the 8 guidelines of IFC on Social and Environment
Management Systems
BO2 helps entrepreneurs running Small and Medium Enterprises (SMEs) to scale up
their operations by injecting equity and providing technical assistance. The SMEs need
to have enterprise value and a track record before we can commence doing business
with them.
Following are the overview of the works BO2 does as a Private equity firm:
 A Private Equity (SME Venture) Impact Fund
 Investments from IFC of the World Bank, UK Aid’s DFID, and Climate
Investment Funds (international partners) and WLC Ventures (the local partner)
 Can invest up to 49% of total equity.
 Invests from US $500,000 to US $ 1,000,000
 No collateral required.
 No interest to be paid.
 4-5 years funding with ‘harvest period’ of 6 months.
  IRR – minimum 20%
Some Basic Qualification required by the firm to invest in business:
 The business should not be in the IFC’s exclusion list of industries.
 FDI industry Compliant (Not in the government negative list of industries)
 Business should not have a negative history with any government authority.
SME Basic Criteria:
Company must respect any 2 of the followings:
 Company should have < 50 staff.
 Annual turnover must be < US$ 3M.
 Company should have < US$ 3M assets.
Other Basic Criterias:
Operations
 The company must be registered with the CRO as public or private limited
company.
 Preferably it should be in operation for at least two years; or
 It can be a new venture which is a part of an old business in operation for over
two years.
Accounts
 Preferably, the company should not have double books of accounts.
 If they do then you should be able to convert to a single book; and
 There should be a set of books showing actual data of previous years.
Loans
 Preferably, the company shouldn’t have bank loans; or
 Loans should be repaid by the time of investment.
 In some cases, BO2 investment maybe used for loan repayment as long as other
basic criteria are not contravened.
IMPACTS:
Development Impact
Investment should be utilized for growth
Social impact
 New jobs are created.
 Total absence of child labour.
 Adhere to government standards and governance.
Environmental impact
 Investments must be climate friendly.
 Recycling and reusing.

Bo2’s mission is to support the building of small and medium sized enterprises
throughout Nepal, to create jobs and support local economies. In Nepal, 28% people live
below the poverty line. Eleven thousand SMEs employ 1.75 million people and
contribute 22% to GDP. However, this is one of the neglected sectors due to lack of
funding available to the SMEs. BO2 has been investing in SMEs for the past two years to
boost the country’s economy by creating jobs, promoting environmental protection,
raising livelihoods of people affected by SMEs. Only 39% of SMEs in Nepal have access
to finance, we strive to be the alternative access to finance to narrow that gap slowly.
Some Impacts BO2 thrives to create are as follows:
 Advancing Women’s economic empowerment
 Addressing cause and effects of climate change
  Powering communities in Nepal
 Promoting organic products

The Investment Process

Eight-step Mode
 Project Concept Note
 Full Application
 Preliminary Review
 Client Visit
 Preliminary Evaluation
 Due Diligence Review
 Investment Report
 Evaluation by the Investment Committee of BO2.
Some Exclusive Benefits that BO2 offers:
 Access to world-class expert advice of our national and international team
members.
 Availability of interest free technical assistance fund to improve gaps in your
business.
 Gateway to the rich network of the WBG and WLC to grow the business in Nepal
and internationally.
About White Lotus Centre
White Lotus Centre Pvt. Ltd (WLC) offers world-class SMART management, advisory
and consulting services on Private Sector Development and Public Communications.
The team comprises of bankers and development experts with experience in
entrepreneurship development and SME financing internationally.
WLC contributes towards knowledge building and is a practice hub for private sector
development in Nepal.
Business Oxygen Private Limited PORTFOLIO
 Godawari International Private limited (GIPL): The vision of Godawari
International’s founder is to increase export of the ‘Churpi – hardened form of
cheese’ in the international market. Godawari International Pvt. Ltd. is USFDA
registered and with Bo2 investment has better working capacity, built one of the
exemplary processing plants for ‘Churpi’ in the nation and the company is a step
ahead towards its mission to  deliver best quality Nepal- made Churpi to its
customers globally. BO2 is helped GIPL to attain the goal and now has
successfully exited.

 Dalle:  Bo2 has partnered with the founders to build ‘Dalle’ chain of outlets
across Kathmandu. With Bo2 investment, Dalle is not just one of the leading fast
casual national chain restaurant but an institution that has been offering much
needed jobs to over 100 youths of Nepal. Women represent over 25 % of DRPL
workforce.

 Karkhana: This Company led by young dynamic group of entrepreneurs is

geared to take up an instrumental role in bringing the much-needed facelift to the
Nepal’s traditional ‘chalk and talk’ educational methodology in classrooms by
assimilating more scientific, logic-based learning approach. The company targets
to grow its financials by capitalizing on filling this huge unmet demand by
improving the education-practices in Nepal. The company has over in the last 5
years worked with 10,000 students in over 100 schools in the Kathmandu Valley.
Karkhana’s entry strategy had primarily, in the beginning, been as an educational
service provider to enter the market. Now they are in a position to transition and
scale up their position as an educational product cum service provider. Bo2
capital investments in this company will help Karkhana achieve its true potential.

 Bakas renewable energy (BREL): This is a private limited company

registered in 2016 under the Company Act of Nepal. The company produces
alternative energy sources for industrial and household uses. The maiden venture
of the company is manufacturing biomass pellets using forest floor undergrowth,
which is highly inflammable and a key trigger for the outbreak of forest fires. The
raw material also comes from farm field biomass, sawdust and agriculture
wastes. The biomass pellet production process creates employment opportunities
to the local communities, largely women and disadvantaged groups of people,
engaging them in collection and processing of the raw materials from the forest
floor as well as farmers’ fields. The pellets are used by industries like brick,
cement and many more Industries that require energy for heating or cooling of
their products. The company is developed by a group of professionals working in
 different sectors of renewable energy including hydropower, solar, forest and
environmental management. Bo2 investment is assisting in setting up the factory.
Commercial transaction will commence in 2021.

 Knit and needle: Established in 2013, KNPL is the vision of Ms. Dahal, an
MBA graduate who wanted to follow her passion to pursue her career in fashion
industry. There are very few local ready-made garment-manufacturing outlets in
Nepal that provide a brand name and haute couture. KNPL with its outlets
around Nepal provides affordable fashionable clothing for women through their
brand ‘July.’  Through Bo2 investment, KNPL will be able to scale up their outlets
and provide a greater range of clothing to service the young women who would
otherwise buy imported fashion ware.

Other notable PORTFOLIOS:

 Le Sherpa: A fine dining restaurant which has successfully exited aswell.
 Shanti Engineering: A metal fabrication industry which has diversified its
business from traditional fabrication works to solar panel, automation works,
remote controlled equipment, penstock pipes, metallic improved cooking stoves
etc.
 Saral Urja Nepal: This is a distributed energy service company which offers
innovative solutions that address the energy needs while also contributing
towards addressing Nepal’s larger energy challenges. They were the first to
commercially transact in solar energy under the RESCO model.
 MedPro: Medpro is a healthcare company established on the platform of
technology. Health at Home is the managing company of Medpro International. 
Health care technology is used to provide patients faster, cheaper and more
accessible care; generally, outside of a clinical setting. 
 The lakeside retreat: The Lakeside Retreat Pvt. Ltd. is a hotel at Fewa
lakeside, Pokhara. Established in the year 2012, the hotel has been built in the
theme of a resort with a large spacious garden and swimming pool and is
conveniently located near restaurants and bars at the lakeside.
References
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Bansal, A. (2006, August). An Overview of Private Equity Investments. Retrieved May
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http://www.indianmba.com/Occasional_Papers/OP154/op154.html
BO2. (n.d.). Http://Bo2.Com.Np/. Retrieved January 12, 2021, from
https://bo2.com.np/investment-made/

REGULATIONS. (n.d.). Www.Empea.Org.

https://www.empea.org/app/uploads/2019/08/Survey-of-the-Nepal-Private-
Equity.pdf
BO2. (n.d.). Http://Bo2.Com.Np/. Retrieved January 12, 2021, from
https://bo2.com.np/investment-made/