US Seeding Venture Capital and Private Equity in Pakistan

US is providing $80 million to create multiple VC and PE funds in Pakistan. These funds will be run by professional fund managers who will be required to manage and raise additional money from other sources to start multiple funds. US Embassy in Islamabad told Express Tribune that they expect that "there will be substantial interest from local, regional and international investors”.

Polish Model:

The initiative is based on the Polish American Enterprise Fund model which was started with $140 million from US government and has now grown to several billion dollars of investable funds, according to Express Tribune.

US AID's Theodore Heisler said that co-investment was essential in bringing the size of each fund to a level where it can cover operating expenses. The funds will focus on investing in small and medium entrepreneurial companies which, the US Silicon Valley experience has demonstrated, are major drivers of innovation, economic growth and job creation. 

History of VC and PE Funds:

 In 2010, the Overseas Private Investment Corporation (OPIC) provided JSPE Private Equity Fund II $50 million with a target capitalization of $150 million.

Venture capital investing is not entirely new in Pakistan, according to Venture Beat. Silicon Valley insiders like Reid Hoffman, Mark Pincus and Joe Kraus, along with Draper Fisher Jurvetson (DFJ) and EPlanet Ventures have already started. In 2003, Hoffman, Pincus and Kraus invested in Monis Rahman, a Pakistani-American who left Intel for entrepreneurship. Rahman had successfully launched and sold a start-up in the Bay Area, eDaycare.com.

There are several investment firms in Pakistan, such as BMA Capital, Indus Basin Holdings and JS Private Equity, that offer examples of professionally managed funds. In addition, there are Social Entrepreneurial Funds like Acumen Fund, Dawood Foundation and Kashf Foundation which are very active in the SME sector in Pakistan.

Opportunity in Pakistan: 

Pakistan has the world’s sixth largest population, seventh largest diaspora and the ninth largest labor force. With rapidly declining fertility and aging populations in the industrialized world, Pakistan's growing talent pool is likely to play a much bigger role to satisfy global demand for workers in the 21st century and contribute to the well-being of Pakistan as well as other parts of the world.

 With half the population below 20 years and 60 per cent below 30 years, Pakistan is well-positioned to reap what is often described as "demographic dividend", with its workforce growing at a faster rate than total population. This trend is estimated to accelerate over several decades. Contrary to the oft-repeated talk of doom and gloom, average Pakistanis are now taking education more seriously than ever. Youth literacy is about 70% and growing, and young people are spending more time in schools and colleges to graduate at higher rates than their Indian counterparts in 15+ age group, according to a report on educational achievement by Harvard University researchers Robert Barro and Jong-Wha Lee. Vocational training is also getting increased focus since 2006 under National Vocational Training Commission (NAVTEC) with help from Germany, Japan, South Korea and the Netherlands.



A 2012 World Bank report titled "More and Better Jobs in South Asia" shows that 63% of Pakistan's workforce is self-employed, including 13% high-end self-employed. Salaried and daily wage earners make up only 37% of the workforce. Even if one chooses to consider just the 13% who are high-end self-employed as entrepreneurs, it's still a significant population willing to take risks who can do better with greater availability of venture and private equity money.
 
A recent Pew Survey of 21 countries reported that 81% of Pakistanis believe in hard work to achieve material success. Americans are the second most optimistic with 77% sharing this belief followed by Tunisians (73%), Brazilians (69%), Indians (67%) and Mexicans (65%).

Conclusion:

Promoting venture capital and private equity investments in Pakistan is a welcome initiative. It has the potential to unleash funding of new profitable ideas in small and medium size entrepreneurial businesses for significant returns to investors while also helping Pakistan achieve much needed economic stimulus with new jobs to lift more people out of poverty.  

Related Links:

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New Private Equity Fund Targets Pakistan

A private-equity fund solely dedicated to investing in Pakistan was closed December,2007, capping a year in which the country was one of the hottest emerging markets despite its political turmoil.
JS Group, a Pakistani financial services group, is the sponsor and a large investor in the new JS Private Equity Fund, which was closed on Dec. 31 at $158 million.
The fund, launched in 2006, is likely the third or fourth private-equity fund to invest solely in Pakistan. There are also several regional funds with a mandate to invest in Pakistan. Compared with neighboring India, however, Pakistan has a virtually virgin private-equity market.
In Karachi, the benchmark KSE-100 stock index rallied 47% in 2007 through Dec. 27, making it one of the best-performing emerging markets and nearly matching the gains of India's Sensex index. In comparison, Indonesian shares gained 52% and Brazil 40% in 2007.
"I could understand why a lot of foreign investors are a little spooked by what is happening in Pakistan," said Stephen Smith, partner at JS Private Equity. "Those less experienced in emerging markets will become very nervous."
After Bhutto's killing, the stock exchange was closed for several days and when it reopened on Dec. 31, the market tumbled 4.5%. Subsequently, however, the market has slowly pared its losses. The KSE-100 index is virtually unchanged on the year as of late Thursday.
Smith, however, believes that the political premium is likely overstated and that Pakistan's economic growth and unpenetrated private-equity market offer big opportunities for investors willing to take the risk.
Pakistan has a population of $160 million and its GDP growth has averaged 7% over the past five years. According to a recent United Nations report, Pakistan's GDP is expected to grow 6.2% or more in 2008.
Pakistan is one of the so-called "Next 11" countries singled out by Goldman Sachs as having the potential to offer tremendous investment opportunities, akin to those of leading emerging markets.
"The real thrust of the fund is to provide expansion capital to businesses that are domestic-demand driven," Smith said. "Things have really changed in Pakistan over the last five years. You have the emergence of a fledgling middle class."
The fund sees opportunities in both export-related industries, such as textiles, leather and medical supplies, as well as domestic-demand related industries, such as consumer goods, media and advertising. Smith also sees opportunities in inefficiencies in infrastructure, transportation and logistics, as well as agriculture and horticulture.
"[About] 25% of its economy is agricultural and horticultural and yet the amount of wastage of those products is extraordinarily high, because the infrastructure points are not very efficient," Smith said.
The JS Private Equity Fund has already made two investments. The first is a control investment in Optimus, the Hertz franchise in Pakistan, which specializes in long-term vehicle contract-leasing to businesses. The second is a minority investment in Engro Asahi Polymer & Chemicals, the only Pakistani producer of PVC resin.
Focus on institutional investors
JS Group has been doing private-equity style deals in Pakistan for a long time, but it was only in 2006 that it decided to create a formal fund, targeting professional institutional investors.
With a $40-million investment, CDC Group, a British government-owned fund of funds that invests in emerging markets, is the largest investor in the JS fund. Other investors include the International Finance Corporation; Samba, one of Saudi Arabia's leading financial groups; the Asian Development Bank; the Swiss Investment Fund for Emerging Markets; and PROPARCO, a subsidiary of the French Development Agency dedicated to financing the private sector.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win," said Brian Lim, portfolio director at CDC Group.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win."
— Brian Lim, CDC Group
"What we did look at was the history of the economy over successive generations of rulers," Lim said. "There did seem to be an economic will for liberalization, for FDI [foreign direct investment]. The one certainty is the economy has worked very well over the recent past. We're hopeful that things will resolve themselves on the political front."
Another reason to enter the Pakistani market is that there is very little competition among private-equity players, Lim said.
"In many sectors there were companies that could grow even faster, but the capital wasn't there," he said.
While neighboring India is experiencing a private-equity boom, Pakistan remains largely overlooked by the industry. There are only a handful of other private-equity funds solely dedicated to Pakistan. Among them are the $100-million TMT-SEAF Pakistan Growth Fund and the $300-million Abraaj BMA Pakistan Buyout Fund L.P. Several regional funds also have a mandate to invest in Pakistan.
In comparison, there are approximately 110 to 120 funds focused primarily on India, according to estimates from the Emerging Markets Private Equity Association.
That estimate looks conservative compared with that of Evalueserve, a global research and analytics firm, which estimates that approximately 200 funds are actively investing or fundraising in India.
"It's a very, very different market from India and China," Smith said. "We like to think we're helping to develop the market. We're a long away from what I'd call a competitive market for private equity. It means that we have to do a lot of patient education."

Source: MarketWatch, January, 2008