Changing the Investment Landscape

• In the second week of January, the logistics services provider Upaya received funding of Rs 60 million from Nepal Infrastructures Investment Fund Limited (NIIF). NIFF is a capital venture jointly promoted by Global Equity Fund (GEF), Prime Life Insurance, and Himalayan Everest Insurance.
• On December 20, 2022, Japan International Cooperation Agency (JICA) signed a USD 10 million investment agreement with Dolma Impact Fund II. The partnership aims to focus investments in renewable energy, technology, and healthcare in Nepal. The Dolma Impact Fund has USD 100 million under management and has invested in 12 companies across the energy, healthcare, and technology sectors.
• In the last week of June 2022, One to Watch announced the second investment of the Off-grid Renewable Energy (ORE) fund to solar energy solutions provider Gham Urja Sewa (GUS).
• On June 25, 2022, Aadhyanta along with TEAM Ventures, Tele Ventures, and Global Equity Fund committed Rs 85 million to Skill Sewa, a civil engineering startup company. 

the HRM
These four developments in the last one year show alternative and specialized investment activities are on the rise in Nepal. As the number of private equity (PE) funds and venture capital (VC) funds is gradually increasing in the country, the space for alternative investments has expanded, offering much relief to entrepreneurs seeking to scale up their businesses and those aspiring to become entrepreneurs.

The PE/VC phenomenon is relatively new in Nepal. It’s been only over a decade since PE/VC investing started in the country. In these years, alternative investing has gradually changed the investment landscape, particularly for small and medium enterprises (SMEs) and startups.

“Prior to PE/VC, funding from the banks was only possible if entrepreneurs had adequate collateral and that too if the entrepreneurs were willing to provide a personal guarantee for such credit,” said Suman Rayamajhi, Managing Director of Upaya, a logistics services company, which has recently received funding from Global Equity Fund. “This modality restricted any new idea and business plan to flourish,” he said.

There are several instances in the past where youths with new and innovative business ideas were forced to give up their plans due to lack of funding. Now, any entrepreneur in Nepal having a good project and seed money to create a business with promising growth prospects can pitch and induct a PE/VC investor to scale up their business. PE/VCs select an investee company by assessing the capabilities of the entrepreneur(s), their commitment, and most importantly, the viability of the business itself.

While the figure for alternative investments in Nepal is yet to be determined, industry insiders say PE/VC investment outlay has reached approximately USD 100 million to date.

The successful mid-level companies that have emerged in the last decade have PE/VC backing. The likes of Dalle Restaurant, Foodmandu, Sastodeal, Incessant Rain, Sajilo Sewa, Fusemachines, CloudFactory and Upaya would not have achieved success had they not been backed by PE/VC financing.

Currently, there are more than 12 institutional investment firms in Nepal operating in the PE/VC space. The PE/VC firms in Nepal can be categorized into three categories; Nepali local funds registered under the Companies Act, Nepali local funds registered at the Securities Board of Nepal (Sebon), and Development Finance Institution (DFI)-backed funds.

The likes of Kriti Venture Fund, Safal Ventures, Team Ventures, Seed Investments, Tele Venture Pvt Ltd, and True North Associates are operating under the Companies Act, whereas the newer entrants Aadhyanta, Avasar and Global Equity Fund started their operation after Sebon introduced Specialized Investment Fund (SIF) regulation. Similarly, Business Oxygen (BO2), Dolma Impact Fund and One to Watch are DFI-backed funds.

BO2 is the first private equity fund in Nepal. It is a part of the Global SME Ventures initiative of the International Finance Corporation (IFC) with investments from IFC, Climate Investment Funds (PPCR), and UK Aid’s Department for International Development (DFID), and is managed by WLC Ventures Pvt. Ltd.

Dolma Impact Fund has been a leader when it comes to institutionalizing and making greater space for the PE/VCs in Nepal. By investing in emerging companies such as Sastodeal, Fusemachines, CloudFactory and Upaya, Dolma not only helped the firms to scale up but also inspired others to follow these successful businesses.

Dolma has the largest investment portfolio among the PE/VCs operating in Nepal. It has also been successful in getting investments from DFIs including IFC, FMO, and Finnfund, among others. The latest funding Dolma has received is USD 10 million from Japan International Cooperation Agency (JICA) for Dolma Impact Fund II. Dolma has already invested in 12 companies across the energy, healthcare, and technology sectors.

As DFIs look for impact investment, PE/VCs backed by such institutions have given priority to investing in such sectors where businesses can not only earn profit but also can have a positive impact on society.

Backed by high net-worth individuals (HNIs), True North Associates (TNA) is one of the early movers in the PE/VC space that supported startups such as Foodmandu, Ebeema, Karja Bazar, Alpine Coffee, and Sajilo Sewa, among others.

While some of these funds were operating in Nepal since 2012, the much-needed regulatory support for PE/VC ecosystem came in 2019 when the Sebon introduced the Specialized Investment Fund (SIF) Regulation, allowing investment companies to mobilize alternative investments like private equity funds, venture capital funds, and hedge funds. Under the provision, firms working as fund managers and having a paid-up capital of Rs 20 million are eligible to mobilize these newly introduced funds in the domestic market.

Under the new rules, firms having a fund size of a minimum of Rs 150 million can get permission to mobilize alternative investments. The fund manager needs to maintain a minimum 2 percent stake in the fund.

The Sebon has so far issued licenses for eight firms, namely Global Equity Fund, Nabil Investment Banking, NIC Asia Capital, Prabhu Capital, Lakshmi Capital, NIBA Ace Capital, NMB Capital, and Avasar Equity Limited, to work as specialized fund managers.

After the introduction of SIF, two locally funded PE/VCs have come into operation, Avasar Equity and Aadhyanta. Avasar Equity Limited was the first private equity fund to be licensed by the Sebon on August 23, 2022. It is backed by four prominent banks, namely Siddhartha, Sanima, Kumari, and Nepal Bank.

According to Dhruba Timilsina, CEO of Avasar Equity, they are in a fundraising process and are studying the market for investment. “We have already raised Rs 5 billion from the market and are planning to invest in sectors including manufacturing, health, and e-commerce,” he said.

Aadhyanta is supported by five prominent banks, both government and private, and prominent professionals, HNIs, and other financial institutions. “We are currently in the fundraising process to raise Rs 3-5 billion,” informed Nischal Singh Bhandari, Partnerships and Communications Manager at Aadhyanta. Before investing, Aadhyanta provides an accelerator program to make businesses capable of getting investments. Currently, it has launched an accelerator program in the Koshi Province.

The promoters of PE/VCs say private equity and venture capital will play a critical role to strengthen SMEs, a key engine of growth, and rejuvenating the economy by creating jobs and attracting greater private investment. So far, Nepal PE/VCs have invested in SMEs and e-commerce, fintech, health, and energy companies.
The ‘CNIYEF Nepal StartUp Fest 2022’ organized in June 2022 saw Nepali PE/VCs supporting Nepali startups to scale up their business operations. Out of the total investment pool of Rs 500 million, Team Ventures, Global Equity Fund, Aadhyanta Fund Management, Himalayan Capital and Televenture Partner Pvt Ltd pledged a capital investment of Rs 250 million to seven out of the 10 finalists.

Easing Hurdles in Increasing Access to Investments
Easy financing has always been an issue in Nepal. With Nepali banks still reluctant to project financing, the role of PE/VCs has become critical to promote entrepreneurship and investment in new areas. With the proliferation of startups in the country, PE/VCs are becoming pivotal as they are the first ones approached by new firms for funding. Unlike banks, PE/VCs not only come as investors but also as mentors with managerial and other expertise or business development support.

It is estimated that around 100 companies have received PR/VC funding to date in the country. To name a few, firms such as Foodmandu, Red Mud Coffee, Smart Pani, Upaya, Sastodeal, Dalle Restaurant, Sajilo Sewa, Fusemachines, Alpine Café, Cloud Factory and Sahas Urja have received funding and climbing ladders of success. Some of these investments were made even before Sebon’s regulation on SIF.

PE/VCs in Nepal have not only made new investments but have also successfully exited from the companies where they invested. According to Siddhant Raj Pandey, Chairman and CEO of BO2, his company successfully exited from Godawari International Pvt. Ltd., Le Sherpa, Shanti Engineering, Dalle Restaurant, and The Lakeside Retreat.

Fund managers say that given that domestic resources are insufficient to fulfill the demands for capital, specialized funds can play an important role to bridge the gap by mobilizing funds from abroad, be it from DFIs or other international financial institutions.

But for this, the government needs to make amendments to the number of Acts, according to investment firms.

“For PE/VCs to grow, we need international best practices. If there are roadblocks to adopting international practices, the government should step in to remove them. While international development banks are investing in Nepali PE/VCs, we are not been able to attract international pension funds and financial institutions,” said Ashutosh Tiwari, Founder of Safal Partners.

While the introduction of SIF has been seen as a good start to moving forward, much needs to be done to develop the PE/VC industry in Nepal. According to a 2022 joint report of British International Investment, FMO and Swiss Agency for Development and Cooperation, there should a policy to provide blanket FDI approval to onshore FDI funds during their initial application for FDI approval setup so that it is not subjected to additional FDI approval requirements during portfolio investments. “The high capital threshold required for setting up onshore FDI funds and onshore local funds could also discourage investment firms,” reads the report, adding, “There should be a focus on the significance and impact of smaller funds which can be a useful tool to bring capital to the SME sector which lacks access to finance.”

The report says that the regulatory fees set by the Sebon for fund manager is high and should be lowered. Similarly, it has suggested making changes to the SIF Regulations. “The SIFR does not provide any clarity on the legal structure of the SIFR fund. Clause 4(n) of the Investment Company Guidelines prohibits investment companies to raise loans from local banks and financial institutes. And, rule 14 (9) of SIFR provides that funds can raise loan capital only from international or multilateral organization investors,” says the report. According to the report, this prohibits SIFR funds to raise loan capital from other individual and corporate investors, banks, and financial intuitions.

“Those who’re already in the PE business are doing well and have a good track record”

Siddhant Raj Pandey, Chairman & CEO, Business Oxygen (BO2)

PE/VCs in Nepal can be categorized into three categories – Nepali local funds registered under the Companies Act, Nepali local funds registered under the Securities Board of Nepal (Sebon), and Development Finance Institution (DFI)-backed funds. Those who’re already in the PE business are doing well and have a good track record.

B02 has so far made investments in 16 companies, of which we have exited five companies.

Sebon is a regulatory body attempting to regulate private equity but it does not address the FDI issue as B02 is one of the PEs receiving DFI-backed funds. The good thing is that DFI-backed funds recently received a waiver for the blacklisting clause but the local companies do not have that waiver. For a PE or investment company, waiving from blacklisting is very important. Fund managers should not be taxed on capital gains. It should go to the ultimate recipient. The other problem is section 57 of the Income Tax Act which says if there is a change in more than 50 percent in equity, you will not be able to have your losses carried forward. These issues need to be addressed.

“We need international best practices for PE/VCs to grow”

Ashutosh Tiwari, Founder, Safal Partners

When a traditional source of financing is not sufficient, the trend in Nepal is to approach banks and financial institutions. But Nepali banks do not invest in ideas, they need collateral to invest. Alternative financing is about giving funding based on ideas, market potential, and business. There is a risk associated with this as it is a high-risk and high-reward game. The majority of investments made by PE/VCs do not give desired results.

Tim Gocher of Dolma Impact Fund should be credited for developing PE/VC ecosystem in Nepal. Then, other PE/VCs also came into the scene.

Safal Partners started as a seed funder with small funding. Our funding ranges from Rs 1-5 million. We have invested in IT, pesticide, and safety gear companies so far. It will take 5-7 years to exit the companies we’ve invested in. Safal is kind of a feeder fund that feeds large firms such as Dolma and TNA. Our approach is to increase the valuation of the companies we invested in and make them eligible for getting funds from larger funds.

We need international best practices for PE/VCs to grow. If there are roadblocks to adopting international practices, the government should step in to remove them. While international development banks are investing in Nepali PE/VCs, we are not been able to attract international pension funds and financial institutions.

“Friendly-policies needed for the growth of PE/VC”

Dhruba Timilsina, CEO, Avasar Equity

The concept of private equity investment was introduced in Nepal in 2010-2012. After the introduction of the “Specialized Investment Fund Rules, 2075, Avasar Equity was registered as a private equity (PE) and venture capital (VC) fund manager.

Currently, we are in a fundraising process and are studying the market for investment. The role of PE/VC is not only limited to investment funds but also providing expertise and feedback to startups and companies. Venture capitalists invest in any company only after proper study.

If the business or startup show bright prospects, we first make such firms investment-ready before investing capital. We are planning to invest in a closely-held sector so that they grow and are able to issue IPOs of the company.

We have already raised Rs 5 billion from the market and are planning to invest sectors including manufacturing, health, and e-commerce.

PE/VC is still in a nascent stage in Nepal, and the government needs to bring in friendly policies to help foster this investment concept. As per the SIF Rules, foreign investors are able to come to Nepal as PE investors. However, the SIF, Foreign Investment and Technology Transfer Act (FITTA), and Income Tax Act are incompatible to each other which creates a lot of confusion among foreign investors.

Besides, if the government brings in friendly policies, we can attract billions of dollars from abroad. Currently, the size of unutilized global equity capital stands at USD 4 trillion. If we are able to attract even a small portion of that amount, it can help boost Nepal’s economic development.

“PE is one of the best models for Nepal to bring investments”

Nischal Singh Bhandari, Partnerships and Communications Manager, Aadhyanta Fund Management

With the Securities Board Nepal (Sebon) introducing the SIF Rules, it seems the government has realized the importance of PE investments. There is a misconception that every startup gets investment from PE funds. We are also approached by a lot of firms for investment. But we look after the business concept and return of investment before investing money in any business. We are currently in the fundraising process to raise Rs 3-5 billion. Before investing, we provide an accelerator program so as to make businesses capable of getting investments. Currently, we have launched an accelerator program in the Koshi Province.

Now that fund managers are ready for investment, the progress will be seen in a few years when the return starts to comes. Then we can invest more money. As PE is regulated, domestic and foreign investors will come. Nepal needs massive investment and the PE is one of the best models for Nepal to bring investments.

“The growth of PE/VC is encouraging for entrepreneurs”

Suman Rayamajhi, Managing Director, Upaya

It is very encouraging and exciting to see the growth of PE/VC in Nepal. This provides the much-needed access to finance for startups and growth companies. Business Oxygen (BO2) and Dolma Impact Fund I paved the way for local PE/VC companies together with investment companies with venture capital or risk capital approach. Currently, there are many Nepali PE/VC companies and this investment business is being regulated by Sebon. This is encouraging for new entrepreneurs to gain access to finance based on their ideas, project concept, and their diligence to grow and scale the business.

Prior to PE/VC, funding from the banks was only possible if entrepreneurs had adequate collateral and that too if the entrepreneurs were willing to provide a personal guarantee for such credit. This modality restricted any new idea and business plan to flourish. Now, any entrepreneur in Nepal having a good project and has put in initial seed money through his/her friends and family to create a business that has the viability to grow, they can pitch and induct a PE/VC to grow the business. PE/VC select their investee company by assessing the capabilities of the particular entrepreneur, his/her commitment, and most importantly the viability of the business itself.

I am hopeful that in another 10 years, Nepal will have a new set of entrepreneurs managing a successful, innovative, and technology-driven business that is not only solving current bottlenecks and problems but are also responsible towards society and the environment.