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Investment Assignment
Investment Assignment
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.
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
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.
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.