Alternative investment funds
After the promulgation of the new constitution we see a new horizon of rapid economic development with the entrepreneurs and professionals eyeing the new investment opportunities to come. Experienced fund managers and bankers can play a valuable role to start the funds only by charging nominal fee and carried interest on the fund for the managements of the whole investment process
Required infrastructural, business and industrial establishments are the most integral part of the economic development of the nation. Likewise, technical, financial and entrepreneurial are the fundamental resources needed to structure the infrastructure projects and small and medium enterprises (SMEs). Financial recourse means equity capital and loan.
More than 150 banks and financial institutions have been supplying debt in the form of loans to the firms and companies extensively for the last two decades in Nepal. Where is the institutional establishment to supply the equity capital for the new and start-up companies in the area of software, e-commerce and other technology driven companies which turn some of them into tomorrow’s leading companies? Not only new, but from the existing hydro-electric projects completing the construction to the SME sectors for their growth stage investment get their products and services into both domestic and international markets and need extensive capital supply. Shortage of equity has been found in Nepal.
A business itself cannot be successful by just saying the sector is feasible, unless an entrepreneur makes it successful. Apart from the technology part of the business, adequate equity supply is required to empower the prospective, new and existing entrepreneurs at all stages from the start-ups to growth to execute their vision. The establishment of mass Alternative Investment Funds (AIF) under the security board of Nepal (SEBON) regulation along with the initiation of the government would open the institutional and private funds pooling to invest equity capital in the infrastructural including hydro-electric to roadways projects and SMEs, including export oriented to service sectors.
AIF as an investment vehicle includes Infrastructure Fund, Private Equity (PE) and Venture Capital (VC) Fund, SMEs Fund, Hedge Fund and so on. Some of them supply equity capital and quasi-equity for existing and the rest do it for early stages. The very interesting part of the fund is that the government need not inject any capital or fund. The funds will be raised by the private sector institutions and high-net-worth or wealthy individuals. The government of nation should not miss the opportunities to let the passive wealth turn into economic development.
India has started AIF with ICICI venture funds from 1988. Infosys is an example that has been initiated by the ICICI venture fund. 70 countries in the world have been extensively providing capital facility to the entrepreneurs through VCs and PEs. IF and LS Venture Corporation of India has developed express ways, toll roads, industrial water supply, flyovers, wind power and petroleum refinery projects. Security Exchange Board of India (SEBI) came with the venture capital fund regulation in 1996, and later they shifted the regulation into alternative investment fund regulation in 2000.
The initiation of supplying equity by starting a few funds has already been started in Nepal. Hydroelectric Investment and Development Company Limited (HIDCL), Dolma Impact Fund with the support of DFID, BO2 of IFC are some examples. But those funds are being started either under stand alone act or an foreign direct investment vehicle. Somehow, private investors have collectively been supplying equity to SMEs through the investment companies though. Those funds are small and not adequate to supply the start up and growth capital for the larger projects. Whatever funds have been started here so far is appreciative. The central bank of Nepal is focused on consolidation by merger and acquisition or capital raise to establish the optimum size of the banks and financial institutions in the South Asian context that can supply loans to the larger projects.
The Security Board of Nepal should focus on the same time to establish such equity supplying funds for the larger sized projects. Both equity and loan are relatively important to move on. The state must have the policy and regulation to facilitate such institutions for mass replication in the economy by pooling the funds from the private sector, NRNs and foreign investments. Insurance companies, investment banks, Citizen Investment Trust (CIT), Employee Provident Fund (EPF) can benefit by investing partly funds of savings into such alternative investment funds regulated by the SEBON.
After the promulgation of the new constitution we see a new horizon of rapid economic development with the entrepreneurs and professionals eyeing the new investment opportunities to come. The experienced fund managers and bankers can play a valuable role to start the funds only by charging nominal fee and carried interest on the fund for the managements of the whole investment process. In this context, the new regulation of AIF will definitely be able to register new and big sized ticket funds in the days to come along.
The writer is former CEO of Business Universal Development Bank