BY Team Ventures
Nepal, a nation known for its breathtaking landscapes and cultural richness, is experiencing a transformative wave in its business arena. This transformation is largely attributed to the growing presence of Private Equity (PE) and Venture Capital (VC) firms, which have significantly impacted various sectors, thereby setting the stage for a promising future. In this article, we delve into the impacts these firms have had on investee companies and the economy of Nepal, while also discussing the challenges they face and offering recommendations for their future growth.
Impacts on Investee Companies and the Economy
IT Sector: Unlocking the Potential of Tech Startups
One of the most notable success stories in Nepal's IT sector involves companies like Foodmandu and Sasto Deal. Private equity investments in these companies have catalysed their growth and expansion. Foodmandu, for instance, received strategic investments from TEAM Ventures and later Dolma Impact Fund, resulting in remarkable growth and returns for the investors. This infusion of capital empowered Foodmandu to broaden its customer and restaurant base, diversify into new verticals such as grocery and beverage delivery, and elevate its services to international standards. Moreover, it contributed to job creation and the development of Nepal's e-commerce sector.
Sasto Deal, in partnership with Dolma Impact Fund, witnessed substantial business growth, expanding its product offerings and improving core operations. These investments are instrumental in fostering sustainable economic development, helping SMEs grow through their platform, educating the market about e-commerce, supporting skill development, and enhancing the overall online shopping experience in Nepal.
Hydropower Sector: Energising Nepal's Future
Private equity and venture capital investments in Nepal's hydropower sector hold immense potential for transforming the nation's energy landscape. Projects like Upper Sangye Hydropower, Hidi Khola Hydropower, Dhoban Khola Hydropower, Setikhola Hydropower and Him Parbat Hydropower backed by PE/VC fund aim to increase electricity production. This not only reduces Nepal's dependence on traditional energy sources like biomass and coal-based electricity from India but also aligns with cleaner and more sustainable energy solutions, addressing climate change concerns.
These investments are crucial to meet the growing demand for electricity in Nepal, enhance the reliability of the energy system, encourage innovation in the energy sector, and reduce the cost of capital, thus spurring economic growth and diversification.
Agro Sector: Modernising Agriculture Value Chains
In a country like Nepal where the agro sector requires a major push, Nepal Warehousing Company Ltd (NWCL) is a pioneering change. NWCL offers modern storage facilities, grain cleaning, drying, and transportation services. Beyond storage, NWCL envisions comprehensive solutions, including auction management, commodity trading services, and financial services like insurance and inventory credit. This initiative aims to revamp Nepal's agriculture markets, promoting inclusive recovery and growth.
Renewable Energy in Rural Areas: Empowering Communities
PE/VC investments in renewable energy technology are transforming rural areas with limited access to electricity. Companies like Saral Urja Pvt Ltd, supported by PE impact fund Business Oxygen Pvt Ltd (BO2) have installed solar power systems and Dharamnagar Solar Farm- I (10MW) project, an initiative of Pashupati Renewables Pvt. Ltd backed by Team Ventures, helped spurred entrepreneurship, new businesses, and economic growth. Access to energy has unleashed the potential of local communities, resulting in an array of economic activities and prosperity.
Impact Investing and Sustainable Development
Blended finance with impact investing is gaining traction in Nepal, aligning with the UN's sustainable development goals. Multilateral and bilateral organisations are championing impact investing, influencing Nepali businesses to prioritise sustainability. These initiatives are expected to contribute to achieving the SDGs by 2030.
Challenges for PE/VC ecosystem in Nepal
While the impact of PE/VC investments in Nepal is notable, several challenges need to be addressed for a sustainable and inclusive future. The following are some key issues:
● Novelty and Acceptance: PE/VC is a relatively new concept in Nepal, and local business owners often lack understanding of it. Entrepreneurs may be hesitant to relinquish control of their businesses, making it crucial for investors to provide value beyond capital.
● Technical Assistance: Entrepreneurs see technical assistance from PE/VC investors as a valuable contribution. Assistance in areas like governance, budgeting, accounting, and strategy helps establish PE/VC firms as valuable partners in business development.
● Limited Data: There is a lack of comprehensive data on the number of companies receiving PE/VC funding and their portfolio sizes, making it challenging to gauge the full impact of these investments.
● Regulatory Constraints: Regulatory constraints to blanket the foreign funds as well as local funds from limited partners hinder the fund raising. Further, limited exit options for investors make it difficult for PE/VCs and limited partners to invest in these kinds of funds. Addressing these issues is essential for a vibrant PE/VC ecosystem.
● Quality of Human Resources: While the quality of human resources for PE/VC in Nepal is a mixed bag, there is a need for skilled professionals to support the industry's growth. Migration of skilled workers is a concern that needs to be addressed through suitable employment laws.
Current State and Impact
● Prior to 2019, the absence of a dedicated regulatory framework for PE/VC in Nepal hindered investment opportunities, and many innovative business ideas went unfunded.
● The introduction of the SIF regulations allowed investment companies to mobilise alternative investments like private equity and venture capital, boosting the confidence of investors and entrepreneurs.
● Specialised Investment Funds (SIF) have started injecting equity into startups and businesses, offering not only capital but also valuable managerial and operational expertise.
● The government has recognised the importance of PE/VC in addressing funding challenges, and it has expressed its commitment to promote these investment types in budget speeches.
● The regulatory environment for PE/VC in Nepal is still evolving, which can create uncertainty for investors and firms. More clarity and streamlining of regulations are essential to create a stable and conducive environment for PE/VC operations.
Future Prospect and Impact Enhancement: A need of Change
● Standardisation of Valuation Metrics: PE/VC leaders suggest the need for standardised metrics to evaluate the value of businesses, especially in the tech sector. This would prevent unrealistic valuations and promote responsible investing. Establishing valuation standards ensures that investments are made based on reasonable and fair assessments, reducing the risk of overvaluation. This, in turn, enhances the effectiveness of investments by preventing misallocation of resources.
● Lending Environment Improvement: The lending environment in Nepal has been volatile, making it challenging for businesses. Ensuring a more stable lending environment would facilitate PE/VC investments. A stable lending environment means more accessible capital for businesses, which complements PE/VC investments. When companies have better access to loans, it fosters an environment where businesses can thrive and use PE/VC funds for expansion and development.
Considerations for wider PE/VC Impact
To further enhance the impact and effectiveness of PE/VC investments in Nepal, additional steps can be taken:
Encourage Impact Investing: The government and stakeholders can encourage PE/VC firms to adopt impact investing principles. This approach ensures that investments generate not only financial returns but also positive social and environmental impact. Providing support, such as training and access to impact measurement tools, can help PE/VC firms manage impact investments effectively. This ensures that investments align with social and environmental goals.
Facilitate Collaboration: Promote collaboration between PE/VC firms, government agencies, Development Organisations, and other businesses. Collaborative efforts can identify and develop impact investment opportunities and scale up existing investments, leading to a broader and more profound positive impact.
Education and Awareness: Conduct workshops, seminars, and educational programs to raise awareness about PE/VC among entrepreneurs and investors.
Regulatory Reforms: Address regulatory constraints, simplify investment processes, and promote IPO effectiveness to make the exit options more attractive for investors. Continue to incentivise and support the growth of the PE/VC industry through tax breaks and other initiatives.
Talent Development and Impact Measurement: Invest in building a pool of skilled professionals to support the PE/VC industry's growth and meet the demands of the sector. Encourage PE/VC firms to adopt and report on Environmental, Social, and Governance (ESG) standards to ensure a positive societal and environmental impact.
The rise of PE/VC investments in Nepal is a testament to the country's potential for economic growth and innovation. These investments have already transformed sectors like IT, hydropower, agro, and renewable energy, with the potential to shape the nation's future. Overcoming challenges and implementing recommendations can further boost the positive impact of PE/VC investments, creating a thriving ecosystem that supports sustainable development, job creation, and economic growth for Nepal. The journey has begun, and the future looks promising.
(TEAM Ventures, is an industry-agnostic alternative investment firm with a diverse portfolio spanning the energy, technology, real-estate, manufacturing, financial institutions, agro-infrastructure, and electric-vehicles sectors.)