With the growing number of innovative business projects in the country, there is a steady rise in the demand for non-conventional financing sources such as alternative investment funds (AIFs).
--BY DIVAS BASHYAL AND YAGYADI ACHARYA
The promulgation of the new constitution which heralded political and economical stability has undoubtedly provided a firm platform for diverse investment opportunities in Nepal. The government also seems to be aware of the opportunities and challenges foreign investments offer to developing economies like ours. In such a scenario, introducing new forms of financing with different objectives and diverse involvement of investors in the form of alternative investment funds (AIFs) can prove to be a boon for our economy. AIFs that have taken the global market by storm since their inception, are regarded as lucrative investment avenues. In many developed nations, AIFs such as hedge funds, private equity (PE) funds, venture capitals, real estate investment trusts, infrastructure funds and SME funds have played a major role in the growth of capital in various sectors of the economy. Unlike traditional investors, alternative investors differ widely in motive, experience, and investment time horizons investing precisely in a variety of environments and transferring standard investment approaches from one country to another. Also, they differ from traditional investments in terms of low correlation with traditional asset classes, dynamic trading strategies, and the use of a wide range of techniques and instruments.
With rapid modernisation and ever expanding technology-based evolution of the current world economy, the need for capital seems to be ever increasing. Initially, efforts were focused on meeting such needs through traditional financial institutions in most countries. However, such efforts were considered futile later in the face of the preoccupied demand for finance in the traditional financial industry. This stimulated the need for fulfilling the demand for capital by adopting diverse measures such as creation of alternative investment funds (AIFs). These funds acted as a stimulant against the quickly crunching level of liquidity by adding a plethora of funds injected by private investors. This was a much-needed push in the development and evolution of economic modernisation in many developed economies resulting in a technological revolution and creation of globally renowned firms like Apple, HP, Google, and many more.
In a country like Nepal where the largest population is of the age bracket of 18-40, there is drive towards business innovation which is exemplified by the rapid growth of startups in the recent years. However, most startups face the same problem of financial support. Due to the prominence of collateralised lending in the banking industry along with lack of good project financing, many business innovations are faced to meet a premature end or are abandoned in the early stages. This problem of capital is even more severe due to the requirement of BFIs to mandatorily separate funds for priority sector lending which doesn’t include many modern areas of the economy. This is where the role of PE funds and other AIFs could come into play. By providing capital and also nurturing the growth of early-stage business projects, AIFs are able to create successful entrepreneurs.
In the recent years, the government has identified various investment opportunities that are essential for the nation’s development as well as ensuring long term profitability for investors. But the truth with the large projects is that the investments could be highly illiquid and would require a long time for profit to be generated. In such a scenario a positive step the government could take would be to encourage AIFs to inject funds in innovative business projects. By doing so, the private investors would also be encouraged as their funds would be managed by a competent team ensuring better due diligence.
The introcuction of the Specialised Investment Fund Regulation, 2075 by the Securities Board of Nepal (Nepal), the securities market regulator, has been regarded as an achievement for the growth of the AIF ecosystem in Nepal. As per the regulation, a specialised fund requires Rs 20 million in paid-up capital to receive approval from the board to operate. Meanwhile, PE funds, venture capital funds and hedge funds will require at least Rs 150 million to start their operation. The fund managers are mandated to sign an agreement with other investors in all sectors except for those restricted by the government. Such investments would be useful in small & medium companies in a state of the financial troubles, firms that carry out R&D processes and in various infrastructure projects.
AIFs have the main role in shaping the capital markets in a nation. It is high time for Nepal to recognise the importance of such funds and advantages it brings in a developing economy like ours.
In India, as of 2019, AIFs have more than USD 24 billion in assets under their management. AIFs have gone under a sea of change in their operation and investment strategies since they came into existence in India. This has also allowed foreign investors to invest in India with a greater sense of security. Analysing current trends, we can see this has brought an injection of large funds to support the rapidly growing economy of the South Asian giant.
To encourage AIFs, the government should adopt a “regulate but not restrain” policy. As AIFs are privately managed funds, they should be subjected to some level of flexibility in part of regulations to foster and can be better regulated by categorising them into different brackets according to their field of investment and capital. AIFs should be encouraged to become a full serviced value chain to allow it to become mainstream from an investor's perspective. Also, AIFs can be made as “socially responsible investment” by ensuring that their investment would be beneficial to the society’s well being along with the well being of the investors. The adoption of such strategies will lead to the creation of a sustainable base on which AIFs can grow in Nepal. It will provide more access to multiple schemes and options for investors to invest per their risk-return perspective allowing diverse investment opportunities and strengthening a developing tarnished economy like ours. Besides, the government also has a role in providing various incentives and concessions through suitable approaches. This can be an important economic tool for the post-Covid economic recovery of Nepal.
Bashyal and Acharya are undergraduate students currently pursuing BBM.LLB at Kathmandu University School of Law.