BY Team Ventures
Investment has long been ingrained in Nepali culture, from gold and real estate to the recent surge in secondary market stock participation. Traditionally, such investments were pursued individually. Not long ago, a trend of pooling resources collectively for investments was started, when a group of entrepreneurs and investors came together. Despite the familiarity with general investment concepts, the concept of private equity and venture capital (PE/VC) is relatively new even among the urban population of Nepal. PE/VC are forms of investment that involve providing capital to companies not publicly traded on the stock exchange. Private equity focuses on mature businesses, while venture capital supports early-stage startups. While these concepts are now finding their way to mainstream understanding, the groundwork for these investments was laid nearly a decade ago.
One to Watch with inception in 2010, Dolma Impact Fund in 2014, Business Oxygen in 2015, True North Associates and Team Ventures in 2016 are trailblazers in Nepal’s PE/VC sector. As the industry is emerging, a gradual awakening of governmental interest is observable. Despite a delayed initiation compared to some other developing economies, the Nepali government has recently recognised the promising potential of PE/VC as an alternative investment avenue. In 2017, the regulatory authority, Securities Board of Nepal (Sebon), took a decisive step in the right direction by introducing licences for Specialised Investment Fund (SIF), a licence vehicle which provides a regulatory framework for PE/VC and hedge funds in Nepal. This initiative has been perceived as a proactive step by the government to cultivate a favourable environment for PE/VC.
Contemporary Landscape
Sebon has granted SIF licences to 12 fund managers so far. Among them, Global Equity Fund stands out as one of the earliest recipients of the fund manager licence. Furthermore, Avasar Equity has obtained approval for its Avasar Equity Diversified Fund, with a fund size exceeding Rs 4.5 billion. Several additional firms are currently in the pipeline awaiting fund approvals, while others are actively engaged in roadshows. Funds such as National Fund Management’s fund of Rs 7 billion, NIBL Ace Capital’s Rs. 10 billion, Alpha Plus Ventures’ Rs 20 billion, Prabhu Capital’s Rs 500 million, Reliable Venture Capital’s Rs 2 billion and Laxmi Capital Market’s Rs 1 billion are among those raising funds.
In addition to the above-mentioned firms, numerous merchant banks in Nepal have taken the initiative to establish distinct entities dedicated to managing SIFs. This list includes esteemed institutions such as Nabil Investment Banking, Laxmi Capital Market, NIC Asia Capital, NMB Capital, and Prabhu Capital.
Before the introduction of SIFs, established firms strategically diversified their investments across a spectrum of sectors. The majority can be said to be renewable energy, specifically hydropower which holds a huge untapped potential. These funds are also channelling their investment in the dynamic sectors such as technology, tourism, agriculture and healthcare. Along with these sectors, real estate has been a sector of particular interest for firms like Team Ventures. The injected capital has been instrumental in fostering the growth of prominent local companies such as Foodmandu, Upaya, Gham Power, Dalle, and Incessant Rain. The growth in these portfolio companies shows that PE/VC firms are advancing and having measurable impact. After the maturation of a portfolio company, the success of PE/VC firms becomes evident through the strategic exits from investments. Notably, Business Oxygen has successfully exited from five of their previous investments, and Team Ventures has made four exits with strong returns.
With only a handful of fund managers, the PE/VC sector grapples with several challenges. The foremost hurdle lies in creating awareness among portfolio companies and investors which is impeding the expansion of fund sizes. This challenge is further compounded by the constrained range of funding instruments available in Nepal. While the local startup scene is experiencing growth, its concentration in Kathmandu restricts the market's size. As previously highlighted, while the success of portfolio companies signals promise, exits could serve as an even more robust indicator of sectoral strength. Unfortunately, the lack of a considerable number of successful exit stories limits the potential for inspiration needed for this emerging sector. Considering the evolving stage of the PE/VC sector, a vast array of opportunities awaits for both existing firms and new entrants to seize the untapped potential and contribute to its growth.
In any circular economy, the strength of the industry alone is insufficient for its growth. The dynamics are shaped by the multiple actors, both contributing to and constraining its development. Here, we examine the PE/VC ecosystem, outlining the diverse players involved.
PE/VC Firms
In the ecosystem of PE/VC, the primary players are PE and VC firms. Private Equity (PE) firms provide capital as equity to facilitate the growth of established businesses, while Venture Capital (VC), a subset of PE, focuses on funding startups. With over a dozen investment firms in the landscape, it is crucial to understand the differences.
The first category comprises local funds registered under the Company Act such as Team Ventures, Kriti Venture Fund, and Safal Ventures. These funds accumulate investments locally, collaborating with local investors and financial institutions.
The second category includes firms licensed under the SIF framework under Sebon regulation. This includes both PE/VC firms and a few merchant banks like Avasar Equity, Adhyanta Fund, NIBL Ace Capital, and Global Equity Fund. This SIF policy aims to facilitate flexible and efficient fund allocation, enhancing transparency and governance. The positive impacts of this step instil confidence in investors.
These PE/VC firms inject capital into diverse sectors, spanning renewable energy, real estate, information technology, and agri-business. In our developing economy, where entrepreneurship and innovation often take a back seat, local funds play a pivotal role by offering capital, expertise and guidance, empowering businesses to expand their horizon. The existence of robust local funds becomes an appealing factor for foreign investors potentially catalysing increased foreign direct investment and contributing to the overall economic progress.
The third and final category of funds encompasses foreign-backed funds, such as Business Oxygen and Dolma Impact Fund, which manage more than $100 million in assets with its Fund I and II. These funds source investment from different Development Finance Institutions (DFIs) including the International Finance Corporation (IFC), and British International Investment (BII). Supporting SMEs and industries like technology, healthcare, and renewable energy, these foreign-backed funds not only provide capital but also bring global expertise, fostering access to international markets for local businesses.
To propel the sector forward, existing firms must prioritise fostering collaboration among local and regional PE/VC entities. Concurrently, a strategic shift towards incorporating ESG standards in investments should be embraced. ESG (Environmental, Social and Governance) refers to a set of criteria used to assess the ethical and sustainability practices of a company or investment. This move not only ensures the sustainable development of individual companies but also contributes to the nation's development. As the industry experiences growth, the demand for a more extensive talent pool becomes important. Firms should proactively invest in nurturing local talents, establishing a sustainable pipeline for industry development.
Investors
Investors are the essential supply side of the PE/VC market. It includes High Net Individuals, Institutional Investors, and Bank and Financial Institutions (BFIs). Notably, existing PE/VC firms often secure backing from merchant banks and insurance companies. For instance, Global Equity Fund is backed up by Prime Life Insurance, Everest Insurance, Khetan Group, BLC and professionals from various sectors. Similarly, Avasar Equity is promoted by Siddhartha Bank, Sanima Bank, Kumari Bank, Nepal Bank, professionals, and personalities from various business sectors. Investing in PE/VC funds has emerged as an appealing alternative for those investors positioned to navigate higher risk thresholds and commit to a longer period for the amplified returns. Beyond the allure of capital gains, investors are increasingly drawn to the positive impact of their investments in private enterprises. As the supply side strengthens, mobilised by diverse and committed investors, the PE/VC market is equipped to reach new heights.
Angel/Seed Investors
The article has already introduced private equity and venture capital investors as key players, but it is crucial to distinguish the unique contribution of angel and seed investors who invest at an even earlier stage of startup. Angel Investing is a form of private equity that cultivates startup ecosystems, foster innovation and empowers aspiring entrepreneurs. The angel investors provide mentorship and guidance along with the financial support. In Nepal, numerous angel investors have provided seed financing to startups that have now evolved into successful operations. Firms such as Safal Partners have introduced seed financing programs which funded promising entrepreneurs.
Dr Bishal Dhakal, co-founder of Nepal Angels Network stated, "The entrepreneurial ecosystem in Nepal is currently below the ideal level, suffering from a drought of ideas. To enhance the overall investing environment, we need three players. First, entrepreneurs who have a multitude of ideas and innovations. Secondly, a government with both the appetite for economic growth and a desire to help society prosper. Thirdly, we need a capital market which is friendly with startups and ideas of new innovation. The entrepreneurial ecosystem has to start building up conversation on celebrating risk and growth and have a relentless dreamer attitude."
Dr Dhakal is actively engaged in supporting innovators, particularly in the health tech sector, across the globe, from Nicaragua to Nigeria. He offers mentorship and guidance in fundraising for pre-seed and seed-round startups.
Associations & Ecosystem Facilitators
Associations and ecosystem facilitators play a crucial role in fostering collaboration, capacity building and representation at both national and international level. Invest for Impact Nepal (IIN) is one such ecosystem facilitator promoted by Development Finance Institutions (DFIs) and Development Partners (DPs) like British International Investment (BII), the Dutch Entrepreneurial Development Bank (FMO), and the Swiss Agency for Development Cooperation (SDC). Their primary goal is to deepen DFIs partnerships and facilitate transformative investments and create jobs through economic growth.
Before IIN's inception in 2021, a group of PE/VC firms had come together to establish the Nepal Private Equity Association (NPEA). Their mission is to promote alternative investment activities and connect stakeholders. IIN and NPEA collaborate to create valuable market intelligence, conduct community capacity development, and cultivate a conducive environment for the sector’s growth. At the fund level, IIN provides technical assistance to fund managers helping them launch their new funds.
Bibek Shrestha, CEO of IIN, emphasises, "It is time for Nepal to overcome its nascency perception and prove to foreign investors that the market has steadily developed over the last decade. Yes, there are some regulatory constraints that need to be addressed, but the market offers ample investment opportunities and multiple exit paths for investors. Last year alone, 75 firms in the real sector registered for IPO, this route of exit was unimaginable a decade ago. Likewise, there are tech deals that have passed three series of investments and repatriation is no longer an issue."
Government Agencies and Regulatory Bodies
The government plays an important role in creating an environment that fosters industry growth while ensuring fairness, sustainability, and economic development. Various government agencies impact the PEVC ecosystem, with key players being Sebon, Nepal Rastra Bank (NRB), and the Investment Board of Nepal (IBN). Sebon, as the regulatory body, took a crucial step by introducing SIF Regulation in 2019, opening avenues for a new set of funds.
However, challenges persist in subsequent stages of the process. Administrative hurdles and delays, especially the prolonged approval process often taking many months for foreign-backed funds, impede operational efficiency and growth. In addition to this, policy disputes contribute to confusion and fail to provide support or reassurance to DFIs.
While the introduction of SIF policy was proactive, its non-alignment with Foreign Investment and Transfer of Technology Act (FITTA) creates hindrances for PEVC firms. This evolving industry needs more nurturing in order to realise its full potential and become a key facilitator of foreign investment in Nepal. In this regard, the government bodies need to double their collaboration efforts to create a cohesive framework that nurtures the alternative investment industry’s growth. Ultimately, for a growing sector, the government should adopt the role of facilitator over regulator.
Academic Institutions
In Nepal, academic institutions have yet to recognise the significance of the burgeoning PE/VC sector. A noticeable gap exists in current business education, particularly within traditional MBA specialisations that lack emphasis on the growing PE/VC sector. As Nepal's PE/VC industry expands, it becomes imperative for academic institutions to adapt. This adaptation should involve the introduction of specialised courses tailored to meet the evolving demands of the industry. Beyond coursework, the integration of practical elements such as workshops and mentorship are crucial. These hands-on experiences are vital for cultivating the next generation of PE/VC professionals, and their proactive inclusion is essential for bridging the existing gap and aligning education with the dynamic needs of the sector.
Law Firms
Another integral contributor to the development of a robust and legally secure PE/VC ecosystem in Nepal are Law firms. These firms play a pivotal role in helping entities navigate the intricate regulatory landscape, providing invaluable assistance in deal structuring and due diligence processes. Their expertise extends to ensuring compliance and governance, upholding regulatory standards within the PE/VC framework. Law firms are instrumental in exit planning, contributing to strategic decision-making, and addressing challenges that may arise during cross-border transactions. As the PE/VC landscape takes root in Nepal, law firms have proactively expanded their focus to incorporate specialised PE/VC practices. Few law firms in Nepal, such as Pioneer Law Associates, Neupane Law Associates, and Vidhi Legal Concern, are among the leading law firms in the PE/VC sector, that have taken proactive measures to enhance the ecosystem by joining the NPEA and engaging in various activities to support and build the PE/VC ecosystem.
Anup Raj Upreti, Managing Partner of Pioneer Law Associates, said: "We have a dedicated team of lawyers working in the PE practice group in our firm. To ensure that we are always ready for the next big thing, our team receives adequate training on PE and transactions matter often from trainers and lawyers from jurisdictions with a more mature PE market."
Pioneer now provides legal services as well as training sessions to over half of the PE funds operating in Nepal. In their commitment to promote the startup ecosystem, Pioneer hosts a start-up clinic, offering five-hour pro-bono advisory services. Following the introduction of Sebon's SIF, Pioneer has been engaged in knowledge sharing with leading law firms in India. This shared knowledge is then transferred to fund managers in Nepal through the NPEA. Pioneer Law Associates is further dedicated to advocating reform agendas before relevant government authorities, aiming to eliminate obstacles hindering the growth of the PE/VC sector in Nepal.
Incubators/Accelerators
Incubators and Accelerators are vital catalysts for transforming innovative ideas into businesses. While incubators help people to turn their ideas into business, accelerators propel existing business forward. Idea Studio Nepal is one noteworthy example incubator that provides resources and opportunities to business ideas with social consciousness. Growth X Everest, an accelerator program, has been launched in collaboration by Team Ventures, Confederation of Nepalese Industries (CNI), Confederation of Nepalese Young Entrepreneurs Forum (CNIYEF), and Startup Reseau India. This accelerator program is focused on providing acceleration to Tech startups and SMEs in Nepal.
In addition, CNI has been organising Nepal's Startup Fest since last year, championing innovative ideas and the 'Make in Nepal' campaign. The fest was successful in garnering Rs 240.5 million in investment commitment last year and continues its momentum this year with commitments from prominent firms, including Team Ventures, Tele Ventures, NIMB Ace Capital, Reliable Ventures, Lotus Holdings, Alfa Plus Ventures, Himalayan Capital, Global Equity Fund, Adhyanta Fund Management, and Neoteric Nepal. Incubators and accelerators should focus on expanding their network and collaborate with PE/VC firms to bridge the gap between startups and potential investors.
Portfolio Companies
Portfolio Companies constitute the demand side of the PE/VC market and serve as the focal point of the PE/VC ecosystem. PE/VC firms infuse capital into these businesses and, in return of financial resources, acquire an equity stake in them. Depending on pre-agreed terms signed, usually through a shareholders’ agreement, PE/VC firms adopt either a hands-on or hands-off approach, dictating their level of involvement in management. This distinctive characteristic sets PE/VC investments apart, as they not only offer financial support but also provide strategic guidance for expanding market presence and reach. Through PE/VC partnerships, portfolio companies gain access to investor's network cultivating valuable connections.
A notable success story within Nepal's PE/VC landscape is Foodmandu, a pioneer in food-tech and e-commerce in Nepal. It secured multiple rounds of funding from True North Associates, Team Ventures, Dolma Impact Fund, and Himalayan Capital. With series B funding from Team Ventures, Foodmandu significantly expanded its footprint into emerging cities and successfully launched and grew its grocery vertical. As a result, Team Ventures successfully concluded a partial exit through the sale of shares to Himalayan Capital. This exemplifies the transformative impact of PE/VC investments on pioneering businesses, fostering growth and innovation. Other successful ventures backed by PE/VC investments include Dalle Restaurant, Sastodeal, Incessant Rain, Fusemachines, CloudFactory and Upaya.
Conclusion
Ecosystem strength is derived from the collaborative efforts of these various stakeholders. A collaborative effort between these players will form a backbone for creating a resilient ecosystem. A strengthened PE/VC ecosystem has the transformative power to attract substantial foreign investments, a critical necessity for a developing economy like Nepal. Beyond serving as a catalyst for entrepreneurial success, these investments carry the potential for a positive ripple effect throughout the nation's economy.
In essence, the collaborative efforts of PE/VC firms, government bodies, associations and other stakeholders are not only constructing a prosperous venture landscape but are forging a pathway towards comprehensive economic empowerment and sustainable growth.
(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.)
