Dr Manish Thapa
Founder and Managing Partner, Global Equity Fund
Dr Manish Thapa is the Founder and Managing Partner of Global Equity Fund which is a private equity and venture capital fund that has received a pre-operating licence from the Securities Board of Nepal. The fund plans to invest in startups and growth-stage companies. Additionally, Dr Thapa is on the Board of Directors of Laxmi Bank where he heads the Risk Management Committee. He is also on the Board of Directors of Asian Institute of Management Technology (AITM), and serves as an Expert Member at the FNCCI and at CNI for the education and start-up committees.
Dr Thapa has over 15 years of experience in academia including United Nations University for Peace in Costa Rica, University of Warsaw in Poland, Tribhuvan University in Nepal, McGill University in Canada, and University of Notre Dame in the United States of America.
He is visiting Research Professor of International Relations and Security Studies at Institute of International Relations at University of Warsaw. He was Head of Department and Professor of Peace and Security Studies at Department of Peace and Conflict Studies United Nations mandated University for Peace (UPEACE) in Costa Rica (2015-2018). He is one of the founding members of the Department of Conflict, Peace & Development Studies at Tribhuvan University Nepal (2007-2015). He has served as Research Fellow with several universities and institutes in Europe and North America.
He received his Post-Doctoral Degree (2013) from University of Warsaw, Poland and Doctoral Degree in International Relations (2011) from University of Tokyo, Japan.
Dr Manish Thapa has published numerous books, journal articles and book chapters with leading publishers and journals. His recent publications are Palgrave Encyclopedia of Global Security Studies (Chief Editor), Palgrave Macmillan, 2021; Internal Conflicts & Peacebuilding Challenges (KW Publishers: 2015); India in the Contemporary World (Routledge, 2014).
Excerpts of a conversation with Business 360:
Could you walk us through the concept of Global Equity Fund?
It is a private equity venture type of fund. Private equity and venture capital ecosystem is a mass ecosystem in Nepal which started around 2012-13. The difference between this and a private equity fund is that global equity fund is trying to get a licence from the government to do private equity and venture capital projects. We are trying to get our licence based on the specialisation investment regulation, so if we get the licence we will be one of the first licensed private equity and venture capital funds in operation. Although there were several funds previously, they differ from Global Equity Fund. There are three kinds of private equity and venture capital funds; first is foreign-based Nepal-focused fund. This is a fund which is registered outside of Nepal and focuses their investment in Nepal. The second kind that has been operating in Nepal is a group of friends or individuals coming together and investing in different companies. TeamVenture is a very good example of this model where they created an investment company and also invested in various companies. These type of companies are not governed by SEBON since they are not registered. The third type of funds are those which are registered and governed by SEBON, and I think one of the key differences is this will be a Nepal-registered Nepal-focused fund. We will have a regulator to regulate our funds and operations which is SEBON, and most probably most of the funds will also be raised from local institutions and that capital will be mobilised based in Nepal. Global Equity Fund is a SEBON registered and licensed fund. We are processing for it and hopefully we will get our licence soon. For the first fund that we are trying to operate, we are trying to raise capital from local institutions and high net-worth individuals.
One of the reasons we are doing this is since we are in the process of being licensed, we can convince institutions to raise the capital and inform them that this is a different kind of investment class. So far, Nepali institutions such as insurance companies, pension funds, Social Security Fund, etc. have limited investment sectors such as fixed deposits, stock market or real estate. These were the only investment sectors that were available to them, but now we can also raise capital and create an investment opportunity after obtaining the licence from SEBON. Another reason is that raising capital from outside Nepal is a lengthy process including due diligence, track record, among other procedures and this is why we are presenting a different alternative for companies. The third reason is we are unclear about the legality of foreign funds and this is why we are trying to raise capital from local institutions.
We applied for the licence in April 2019, so it’s almost been three years. But having said that, in May 2021 we got the pre-opportune licence which gives us a boost in terms of starting our operation. We have already hired manpower for our office. We have also looked into the sectors that we are trying to invest in, different sources of investments, and we already have more than 5-6 parties in the pipeline that are committed to investing. We have done all our homework, we just need the final piece of paper so we can start our operation formally in Global Equity Fund.
In what ways is a Private Equity Fund important for the economy?
It’s a very important part of the economy. Like I said earlier, looking into the business culture of Nepal, it has always been concentrated on certain families or classes of people. If we look at South Asian culture, because of the caste differentiation, based on your caste, you lean more towards certain sectors. Because of this, the entrepreneurial mind wasn’t that developed but this has changed, the youths are more interested in entrepreneurship to promote their own ideas and concepts. Having said that, the biggest hurdle most are facing is capital. In Nepal, you either raise capital by yourself via your family or take loans from the bank. Our banks are very traditional and they do not fund an idea, they only fund if you can back it up with collateral. But if you do have collateral, you don’t really need the capital, and hence, the banks are also promoting a certain class of people rather than people who are willing to be involved in entrepreneurship. In such cases, private equity and venture capital play a very important role. The cost of capital is very expensive in traditional models, however private equity and venture capital provides you with a capital to back you up. One of the biggest contributions of this fund in every part of the world is the provision of capital conveniently. Not only capital, it also provides technical support. As an entrepreneur, a person who might be an IT/Software Engineer, might come up with a fantastic idea for a business, but might not have the managerial capacity to run the business, they do not have the expertise to handle the legality needed. So, what private equity and venture capital do is provide all the technical support required to overcome these shortcomings. Most of the startups are tech-based or skill-based, and we create jobs in those sectors with very good salaries. Providing employment opportunities is the other contribution we provide. We also invest in ideas that substitute import of goods, this is also a big contribution. And not only that, we also invest in those products which can be exported, either in terms of services or products. The biggest contribution for the economy is also to bring in foreign investment. If I am a foreigner and want to invest in Nepal, I will not have any sort of information, the know-how or any legality issues. Hence, as a foreign investor, I do not have the local expertise, but since companies like us already have done our research, foreigners will be more encouraged to channel funds towards Nepal. So, these are the contributions that private equity fund has on the economy
What are the differences between private equity and venture capital?
Venture capital is a subset of private equity. Private equity is an investment which is made in the growing stage of a company. For example, there could be a coffee shop which is earning well and the potential for the owner to expand the business and open more outlets is also high. In such cases, they can approach a private equity like us, asking us to invest in them so they can grow faster. This is what PE is, taking a profitable business or prospect of profitability, and funding them to grow and expand. Whereas, venture capital investment is a bit different. Suppose you have an idea, and it is tried and tested, you also believe that it is scalable, it has a great prospect; the funding done to that idea is venture capital. The first initial capital provided to institutionalise that idea and test it is venture capital fund. So, this is the difference between private equity and venture capital.
How would you define private equity in layman terms?
It is basically providing capital to entrepreneurs in the form of equity, so that makes us partners. We are going to be active partners, not the major partner obviously; we want the owner/founder of the company to hold the majority of the shares. Having said that, we are also not a long-term partner, we exit after a certain period of time, normally 5-10 years. We envision the right time to exit the business with a very good return in mind.
Why did the PE concept enter Nepal so late and what is its future in the country?
Even in India, this started around 2005/06 only. There might be a couple of reasons for this, like I already said, the South Asian culture is not that encouraging for entrepreneurship. If we go to our families and tell them we are going to start a business, they are not going to support us or provide us with capital; but if we tell them we want to go to the United States and study, they will most probably sell their property in order to send you there. Hence, I believe that this culture has not yet developed in Nepal and all the entrepreneurs we are seeing are from well-off families or someone who already has a well running business and wants to try their hands at something different. So, we have this mindset in our society, and thus that entrepreneurial mindset never got a chance to develop. Apart from that, the risk-taking ability was almost non-existent. Being an entrepreneur bears its own risk, and the cost of capital is very expensive which in turn increases the risk factors. This is also why that ecosystem never developed in Nepal.
Speaking of the future, it has a very good prospect. First of all, we are a frontier market, capital is of huge necessity in the market. Now the youths don’t want to just work in banks or go abroad to stay there and in my opinion that is a huge enabling aspect of how the entrepreneurial mindset is growing day by day. Various business schools, IT schools, etc have been promoting that mindset. Nowadays, people are attracted towards raising capital, running their business, and working on their ideas. Because of this type of ecosystem and the need for capital, private equity and venture capital funds will thrive further in Nepal. Obviously, there are various companies that are facing problems to bring investments through foreign aid or local institutions, but at the same time there has been a realisation among the bureaucrats, so enabling of Foreign Direct Investment (FDI) rules will probably come into play as well. Growth of the stock market is also necessary for the growth of PE, and based on the increase in penetration and reach in the secondary market in the last two years, I believe this will further help PE in the future.
How can we increase foreign investment in Nepal?
First of all, FDI regulations are absolutely important. One among the many problems foreign investors are facing is bringing the money first. There is a huge painful bureaucratic process for bringing in money. Secondly, taking your profit and dividend outside after the investment is another pain in the neck. Hence, I believe structuring FDI regulations is of utmost importance. There needs to be a one-stop shop for all the investments to come in together. Another hurdle is the threshold that is quoted which is also discouraging small foreign investors from coming into Nepal. For instance, for an IT company, you don’t need a huge investment, but that threshold is discouraging foreign investment in Nepal. Apart from that, especially funds like us, we still do not have proper clarity on how this foreign investment business is taken. If it takes almost a year to get that investment fund for you as an entrepreneur, that is a lost opportunity for you as well as the foreign investors. If the fund takes a year to reach here, the loss in terms of interest that they have to pay for that capital is definitely there. Similarly, there are limitations as well for certain funds into certain sectors. As a fund manager, wherever I see the opportunity that is where I would like to invest, but if I have to face being blacklisted, it will be very difficult to do business. I believe there needs to be more clarity on these topics.
Till date how much investment has Global Equity Fund brought into Nepal?
Our first fund is going to be about Rs three billion and we have already achieved 50% commitment from local institutions and high net-worth individuals. We have yet to receive the funds which will only happen after we get the licence. We are confident that after a year of getting the licence, we will be able to achieve that goal. In terms of our investment, we will basically be concentrating our funds in six different sectors: clean energy, agriculture, education, health care, IT and basic service sector. We will diversify our funds into these sectors, and we have already made a pipeline of portfolio companies that we have committed to investing in. We have committed to a solar company, e-commerce companies, etc and the moment we have the licence we will raise our funds and disburse them to these companies.
What are the criteria that you have set for providing funds to companies?
We basically look into five aspects with the first being the nature of the business. It has to fall into one of the six priority sectors I mentioned earlier. The business has to have a prospect, it has to make some mark in terms of profitability, scalability, impact that it can create in that sector. We are also interested in making an impact through the investment we are trying to make. Either it has to impact the environment, or there should be a positive impact in terms of society and compliance that the business is trying to follow. Secondly, we see who are the founders, their background, credibility and the setup of the team and their potential. Thirdly, we also look into compliance because in Nepal, the compliance aspect is weak for startups. At least there should be legality, taxation, and accounting principle compliance in their companies. The fourth aspect is that we are not going to invest in any business where as an investor we cannot contribute in any way in that business. It’s not like we invest in any company that earns a profit, we would like to invest in such companies where we can also contribute some expertise either via network, technical support, etc. If we cannot see a clear exit after a certain time period of our investment, we will not invest in it. There are three ways we can exit a business, firstly we sell our shares in the secondary market; secondly, a strategic partner will come in and buy our shares at a good valuation; and thirdly founders will buy back our shares after being in partnership for say five-six years. So, this is the fifth aspect that we look into while investing in a company.
Policies that you would like to see changed to improve the investment climate in Nepal?
Obviously, policy change will only be relevant when a majority of people are facing it. Now we are trying to bring in foreign investment, and we need it to grow as well, so now the bottleneck is the policy. It will eventually change and it has to. In order to develop that entrepreneurial mindset, prevent brain drain, and promote local jobs, there will be a need for some policy changes. One thing that is good about Nepal is the youth population. The potential of such a country will be pretty good, but bureaucracy will need to bring in enabling policies. They have also felt that the 40-year old policies will not be able to govern the 21st century, and this realisation will bring in gradual changes. For instance, when ride-hailing services such as Tootle and Pathao started in Nepal, there were no policies regarding this. The policy said that only vehicles with black number plates are allowed to take fares. But now, the majority of youths has been employed by them and it has created a culture of giving prominence to work. Even youths who have a Master’s degree have started doing Pathao rides, and because of that respect for work the government has to bring in changes even if they don’t want to because they have no other choice, since they cannot stop them as well. Likewise, there will be change in policies according to the need.