||||||energy, IT, building<br>materials|
|---|---|---|---|---|---|
|True North<br>Associates|T.N.A. Invest Pvt.<br>Ltd.|2016|5.0<sup>3</sup>|SMEs, growth<br>capital|Generalist with focus on e-<br>commerce, education,<br>marketing, IT services,<br>energy|

# **B. Main features of PE/VC firms in Nepal**

Based on investor surveys and extensive interviews, the team has analyzed the key features of the funds investing in Nepal. The detailed discussion is followed by Table 2, which provides a summary of these features.

# <u>Investment strategy</u>

The prevailing investment strategy is minority, growth-equity investments in SMEs and midcaps. This is instrumental to servicing the capital needs of a growing economy, in infrastructure as well as the corporate sector. Average ticket size across funds ranges from less than $300k to $2m – although bigger investments were made in the hydropower sector (by Dolma in particular). Funds usually acquire a stake ranging from 20% to 49% and, despite not having equity control, try to have a proactive role in company management. Majority deals are extremely unlikely, due to a culture of long-term ownership and control that is typical of Nepalese entrepreneurs, and indeed most SMEs across developing countries.

While all funds expressly claim to focus on SMEs, only one provides clear parameters in terms of portfolio company size. BO2 defines as SME any company that meets at least two of the following three criteria: fewer than 50 employees, less than $3 million turnover, less than $3 million assets. This definition seems consistent with the typical profile of a portfolio company for the other funds interviewed. Hydropower investments, as indicated by Dolma, can be substantially bigger.

Funds invest exclusively in equity and equity-like instruments, as is most common in the PE/VC industry and also reflecting Nepalese-specific constraints. First, due to draconian blacklisting rules applied to shareholders and directors of companies in default (see detailed discussion in Section II), funds err on the side of caution and prefer to minimize or avoid leverage at the portfolio company level. Second, leveraged finance is not yet offered by Nepalese banks, which prefer to lend on an asset rather than cash flow basis.<sup>4</sup> Last, the NRB restricts PE/VC funds established in Nepal (like BO2) from providing capital in the form of debt, given these funds are not licensed under the Banks and Financial Institutions Act (BAFIA); in addition, the Central Bank has set strict limits to lending by foreign institutions, which is allowed only where domestic debt is unavailable, and is subject to an interest rate cap of LIBOR+5.5% (see detailed discussion in Section III).

While the exit track record is still very limited, funds lean towards buy-back by controlling shareholder and strategic sale as the main exit strategies. Due to the young age of the industry,

> 3 US$-equivalent (fund is denominated in Nepalese rupees).

> 4 Leveraged finance loans or HY bonds are usually unsecured, especially when portfolio companies are in sectors that are not capital intensive. In that case, loan/bond repayment is made from the cash flows generated by the portfolio company. Sometimes loans are also secured on a company’s collateral (e.g. real estate), but not always.

4