Equity funds for SMEs

Published Jul 01, 2013 08:33am

THE launch of the Pakistan Private Investment Initiative will expand the new private equity market and help the promising small and medium-sized businesses access capital to grow.

The initiative launched by the United States hopes to mobilise at least $150 million in private equity investment to help the country’s dynamic and fast growing small to medium-sized businesses.

Under the initiative, the US Agency for International Development (USAID) announced to partner with the Abraaj Group and the JS Private Equity Management at the second US-Pakistan Business Opportunity Conference in Dubai last week to roll out two private equity funds.

The USAID said it will provide seed investment of $24 million each to capitalise the funds.

Both the Abraaj Group and JS Private Equity Management have committed to match or exceed the seed funds with investments of their own, as well as private funds raised from other limited investors.

“Pooled funds will initially be $100 million which we expect will grow manyfold into hundreds of millions of dollars in investment for small and medium businesses,” an official statement issued by the USAID said.

“In addition, the Pakistan Private Investment Initiative is expected to demonstrate that investing in growth-focused enterprises can generate real profits for investors. This demonstration effect is expected to attract more investment into the enterprise sector through establishment of additional private equity funds,” the USAID statement said.

The Americans had announced to launch the initiative at the first US-Pakistan Business Opportunities Conference organised in London last year, committing to provide up to $80 million as seed investment to local companies.

The entry of the two new players in the market will boost the nascent private equity industry in the country and take the number of these funds to three. At least one such fund, Cyan, backed by the Dawood Hercules Group as an anchor investor is already in the field. The anchor investor has committed $50 million and plans to raise $150 million from other investors.

The private equity funds function by identifying dynamic businesses with growth prospects and investing in them to expand their market share, innovating product and service lines, and ultimately create jobs and increase incomes.

Without access to capital, Pakistan’s businesses cannot play a critical role in expanding the economy and creating jobs. Each fund will invest in well-run Pakistani companies with growth potential. Companies that receive investments will also receive professional management consulting services to strengthen their governance, sales, marketing, and overall business operations. The funds will last for 10 years: a five-year window to make investments and a five-year holding-and-liquidation period that closes out the fund’s operations.

The Dubai conference brought 200 Pakistani, American, and Emirati companies together. The main goal was to help Pakistani and American companies and investors identify new business opportunities together. Apart from major Pakistani companies, a ministerial delegation led by finance minister Ishaq Dar also participated in the two-day event.

Over the course of two days, the participants discussed a wide range of US-Pakistan business opportunities, including in agri-business, energy, and education, as well as opportunities in entrepreneurship, access to the US market, consumer goods and franchising opportunities, venture capital, information technology, and the new economic and investment policies.

A Pakistani businessman who participated in the Dubai conference told Dawn that the event had helped both the countries understand the issues — such as duty free access to Pakistani products to the United States — hampering expansion of bilateral trade and discuss solutions to them. “Pakistani businessmen made a very strong case for our major exports for duty free access to the American market. This was appreciated both by the American officials and businessmen present there,” he said.

Americans say Pakistani exporters already have duty-free market access to the United States for 3,511 products under the Generalized System of Preferences (GSP) programme. It is just that Pakistanis are not taking enough advantage of this facility.

The US is the largest buyer of exports from Pakistan and its imports from Pakistan under the GSP programme rose by 49 per in 2012 to reach $195 million.

Still the volume of exports under the GSP facility represents only a fraction of the total American imports from Pakistan. Pakistan exported $3.6 billion worth of goods to the United States in 2012, yet only 5.7 per cent of that amount took advantage of the duty-free treatment available, according to the US officials.

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