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PE/VC Investment Across Diverse Sectors in Nepal

PE/VC investment in Nepal has primarily focused on the clean energy sector, particularly solar energy and hydropower. – Tujala Jonchhe

Private Equity and Venture Capital (PE/VC) firms are alternative institutional investment firms designed to provide long-term funding to high-growth businesses by bridging the gap in capital markets. These firms focus on equity returns and support strategic and operational enhancements to boost the company’s value and growth. Venture capital, essentially a form of private equity, targets early-stage companies, while private equity typically targets more established companies.

The growth and development of PE/VC in recent times has shown immense promise with an increasing number of companies adopting this model, leading to more diversified investment portfolios. Notable success stories in Nepal include Dalle Restaurant, Foodmandu, Incessant Rain, Sajilo Sewa, Fusemachines, CloudFactory, and Upaya. These companies have scaled up with the support of PE/VC financing, which underscores the critical role of such funding in the growth of mid-size companies in Nepal. Here, we explore how PE/VC can contribute to growth in essential sectors such as energy, information technology, manufacturing, agriculture, tourism and hospitality, while driving Nepal’s economic development.

Energy Sector

PE/VC investment in Nepal has primarily focused on the clean energy sector, particularly solar energy and hydropower. This focus is evident through the number of energy projects within the portfolios of most PE/VC firms. As per a market study by the Nepal Private Equity Association (NPEA), renewable energy comprises a significant 46% share of the total investment of PE/VC firms.

The Dolma Impact Fund has financed approximately 70 MW of renewable energy projects, including the Setikhola, Swet-Ganga, and Suri Hydropower projects. Similarly, Team Ventures has invested, both directly and indirectly, in renewable energy projects with a combined capacity of 60 MW, such as the Dobhan Khola Hydropower project (24.5 MW) and the Pashupati Renewables solar projects (25 MW). The National Fund Management has also invested in energy projects, including Kabeli Hydropower and Hilton Hydropower, having a combined capacity of 50 MW. Likewise, Avasar Equity has also financed the Him Parbat Hydropower Project with a capacity of 25.5 MW. PE/VC firms are focused on the energy sector due to their flexible public listing requirements, which provide an exit way for investors. This flexibility is crucial as avenues for exiting investments other than through IPO are limited for domestic and foreign-backed PE/VCs.

IT Sector

The growth of the IT sector in Nepal has looked promising lately due to the increasing demand for IT services worldwide. Nepal’s IT sector is progressively becoming a focal point for investments. This presents a tremendous chance for PE/VCs to make profit by attracting more investment into this industry, while also contributing to foreign currency inflow into Nepal’s formal economy and working towards making Nepal an IT hub.

Large multinational companies like Apple, Microsoft, Uber and Amazon have grown with the help of PE/VC funding. IT companies in Nepal that have received PE/VC investments include Cloud Factory, Fuse Machines, Sastodeal and WorldLink, all of which have received financing from the Dolma Impact Fund. Team Ventures has invested in Wiseyak, a healthcare technology company that leverages AI to enhance the healthcare industry. Likewise, True North Associates has financed Sajilo Sewa and ACT360, while Smart Tech Solutions has received support from One to Watch. Notably, Foodmandu has received collaborative financing from all these three PE/VC firms.

Nepal has historically been an import-based economy with a huge trade deficit. Therefore, there is a massive need for PE/VC investments to be directed toward the manufacturing sector.

Manufacturing Sector

The manufacturing sector contributes approximately 13.5% to Nepal’s GDP and is primarily dominated by multinational giants such as Dabur, Unilever and Berger Paints. While their dominance often constrains the growth of local companies, these companies have, nonetheless, contributed to job creation and economic development in Nepal.

Nepal has historically been an import-based economy with a huge trade deficit. Therefore, there is a massive need for PE/VC investments to be directed toward the manufacturing sector. The investment inflow should continue to grow in this sector as PE/VCs offer more than just monetary investments. They also provide industrial expertise and support growth initiatives, facilitating their global reach.

Investments in manufacturing ventures can significantly contribute to Nepal’s economy.

Bajra Brick & Tiles Industries, Biovac, and Cotton Mill are prime examples of entrepreneurial success supported by One to Watch. Bajra Brick & Tiles Industries specialises in construction materials and Biovac focuses on vaccine research and manufacturing, while Cotton Mill is a women-led home textile business advocating for women’s empowerment and environmental sustainability.

In a different vein, Knit and Needle – a garment manufacturer, Meera Biotech – a pharmaceuticals manufacturer and Shanti Engineering – a metal fabrication company have received financing from Business Oxygen. Team Tara Yarn, which is engaged in the processing and manufacturing of woollen yarn, has received financial backing from Team Ventures. This investment aims to enhance efficiency and cost-effectiveness in carpet manufacturing in Nepal while focusing on export-oriented production. Additionally, the National Fund Management is funding and assisting Laxmi Steels. Together, these ventures showcase the diverse investments in Nepal’s manufacturing sector.

Agriculture Sector

Agricultural growth is vital for the development of least-developed economies like Nepal. Most Nepalis rely on agriculture as their primary source of income. Agriculture contributes 24.1% to the GDP. Despite being in the early stages of agro-tech, Nepal is undergoing a gradual agricultural transformation. Agricultural growth depends on various factors, including institutional loans, infrastructure, agricultural markets, technology, and socioeconomic factors such as poverty and literacy. Strengthening these factors is crucial in achieving the targeted double-digit economic growth.

Despite the potential in the agriculture sector, capital availability is limited. So far, most PE/VC firms have invested in agricultural industries like warehousing, coffee, sugar, tea, livestock and floriculture. However, significant hurdles exist in drawing more investment into the agricultural sector. Nepal Warehousing Company Ltd (NWCL), supported by Team Ventures, is a pioneering change. NWCL offers modern storage, grain services and transportation. It aims to transform Nepal’s agricultural markets by providing comprehensive solutions like auction management, commodity trading and financial services. Tattva Farms, Organic Mountain Flavor, Ficus Biotech, Nepal Thopa Sinchai (NTS) and Godawari International Private Limited are some of the agri ventures that have attracted PE/VC financing. Financed by Global Equity Fund, One to Watch, Business Oxygen and True North Associates, these ventures showcase innovation and sustainability in agriculture.

Tourism & Hospitality Sector

In recent years, Nepal’s tourism and hospitality sector has experienced remarkable expansion and increased investment evidenced by the surge in new hotels, restaurants and other tourism-related enterprises. This sector contributes 6.7% to the GDP, driven by the rising number of tourists visiting Nepal. The establishment of regional international airports in Pokhara and Bhairahawa has further intensified investor interest, leading to increased investments in infrastructure improvements aimed at accommodating the growing demand in Nepal’s flourishing tourism industry.

In anticipation of a surge in domestic and foreign tourist arrivals, the private sector has increased its investments in the hotel industry. Traditional bank loans may not always suit this sector due to their risky nature, seasonal variations and extended project durations. PE/VC firms offer alternative financing methods like equity or convertible debt which are crucial for fostering growth and sustainability. The sector’s emergence as a critical economic contributor has attracted domestic and foreign investors. PE/VC firm’s investment and strategic support are instrumental in growing the tourism sector through the expansion of hotels and tourism activities.

The Lakeside Retreat, situated on the banks of Fewa Lake in Pokhara, has received financing from Business Oxygen to expand its capacity to accommodate more than 19,000 tourists annually. Other ventures, such as Le Sherpa and Dalle Restaurant, have also received support from Business Oxygen. Classic View Resort, which emphasises luxury and sustainability in the hospitality sector, is funded by the Global Equity Fund. Similarly, Reliable Venture has invested in Akama Hotel, while Aloft Kathmandu Hotel has received support from National Fund Management. Likewise, Hathway Investment has backed Chandragiri Hills Ltd. These venture investments by PE/VC firms have supported entrepreneurial activity and driven growth in Nepal’s tourism and hospitality sector.

Sectoral Trends in Indian PE/VC Investments

India’s PE/VCs significantly support the country’s growing startup ecosystem. Over the last decades, the Indian PE/VC market has experienced remarkable growth, increasing from $8.4 billion in 2010 to an impressive $77 billion in 2021. In 2023, India’s PE/VC investment activity saw prominent trends across sectors – dominated by infrastructure, real estate, financial services and technology, collectively constituting approximately 72% of total investments by value.

PE/VC firm’s investment and strategic support are instrumental in growing the tourism sector through the expansion of hotels and tourism activities.

The infrastructure sector witnessed a notable surge in PE/VC investments, totaling $11.6 billion across 57 deals in 2023. PE investors in India express optimism about the country’s infrastructure growth story, particularly in the social sector and renewable projects. Renewables took the centre stage, attracting 63% of all PE/VC investments in the infrastructure sector in 2023, fuelled by increasing global awareness of climate change and the growing demand for sustainable energy solutions. Core infrastructure sectors, including roads, transmission, renewables, ports and airports, are experiencing substantial deal flow. The largest private equity investment was the $1.1 billion infusion by Global Quality Growth, an investment boutique, into Adani Power Ltd.

The real estate sector emerged as the second most attractive industry for PE/VC investors, achieving a historic high with investments totaling $8 billion across 55 deals in 2023. Similarly, the financial services sector attracted PE/VC investments totaling $6.4 billion. Over the past five years, the life sciences sector in India has recorded a remarkable Compound Annual Growth Rate (CAGR) of 24% in PE/VC investments. However, the technology sector has faced challenges, witnessing a sharp 62% decline in 2022 and further contracting by 39% in 2023, recording investments of only $3.7 billion after reaching a peak with record investments of $16.2 billion in 2021.

Overall, India’s PE/VC landscape has evolved from an emerging market to a formidable global contender, providing abundant growth prospects for investors worldwide. While Nepal may not possess the same market size and economic scale as India, entrepreneurship, innovation and adaptability principles are universal. Despite this difference in scale, Nepal can learn from its larger neighbour and position itself for sustainable growth and development.

Conclusion

Currently, Nepal lacks provisions for blanket approval routes to PE/VC funds for foreign investors. Restrictive regulations and lengthy approval processes hinder the foreign investment inflow which is crucial to the country’s growth. Despite challenges such as restrictive regulations and limited access to financing, PE/VC investments have proved instrumental in driving innovation and sustainability in sectors like clean energy, IT and agriculture. Additionally, efforts to prioritise investment in the manufacturing sector are essential for achieving sustainable economic growth and reducing import dependency. In conclusion, PE/VC financing is fundamental for Nepal’s economic transformation and should be further encouraged through supportive policies. Through long-term funding and strategic support, PE/VC firms can stimulate entrepreneurial activity and contribute to economic development.

(Jonchhe is an ESG Associate at Team Ventures. 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.)

Source: https://www.newbusinessage.com/MagazineArticles/view/4386

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