Are you seeking private equity funding? See the list of factors that private equity investors evaluate before investing

Thu, Jan 17, 2019 9:13 AM on Economy, Exclusive, Stock Market,

Jonish Maharjan

Research analyst, Aakash Capital Limited

Private Equity (PE) and Venture Capital (VC) are the sources of equity fund which finance new and rapidly growing companies through equity participation. These are high-risk, potentially high return investment to support business creation and growth. Venture capital is not just a capital investment, but also assumes that investor has an active owner involvement through representation in board of directors of the investee company.

Private equity and venture capital investment in Nepal is still in an infant stage. They have not yet been categorized as a separate asset class, but works are going on to recognize these funds as an alternative investment fund. Nonetheless, there are few private equity funds that are engaged in providing risky capital to the companies that are in a growth stage in exchange for certain stake. Some of the notable PE/VCs in Nepal are Dolma Impact Fund, Business Oxygen, One to Watch, iCapital etc.

So, what are the factors these PE/VCs in Nepal take into consideration while investing in an investee company? To answer these questions, a research was conducted amongst various 13 PE/VCs in Nepal. While the result of this research may not be taken as a generalization for the whole PE/VC industry of Nepal, it certainly provides a base to start with. Following factors (rank wise), were found to be the most important factors to evaluate an investee company:

  1. Management Quality: The most important criteria that VCs use to evaluate an investee company is its management quality. PE/VCs in Nepal primarily seek to invest in those companies whose management has a good knowledge of the sector, has honesty and integrity, good leadership qualities and possess skills needed to run the business. The references of the management team are of the least concern to PE/VCs. This means that even though the businesses are referred in by reputed people, the business has to go through the same process as those without a reference by reputed people.

  1. Market Feasibility: The next factor PE/VCs look at is the overall characteristics of the market for the product or service. PE/VCs in Nepal consider potential for market growth, big market size and high demand for the product, and ease of access to market as some of the most important criteria to evaluate business. This comes of no surprise as PE/VCs want to see their investment grow, and this can be attained only if there is demand for the product, high potential for future growth and market is easily accessible.

  1. Product/service Feasibility: With respect to criteria related to product/service, PE/VCs consider competitive advantage, good market acceptance and life cycle of the product as important. This means that PE/VCs in Nepal invest in only those businesses with a certain history rather than investing in businesses at an idea level. Likewise, PE/VCs majorly invest in products that are in the growth stage of product life cycle. This result is quite predictable as equity investors in Nepal are more inclined towards private equity rather than venture capital.

  1. Financial Viability: PE/VCs in Nepal prefer to invest in those companies that have a high upside potential and provide high investment liquidity. They rate potential for earning growth, high IRR, high profit margin projections and an early exit opportunity as being some of the most important financial criteria. PE/VCs generally disregard the need for follow up investment as they usually provide their investment in tranches depending on the milestones of the business.

So, if you, as an entrepreneur, are facing a major constraint in accessing the finance, and meet the criteria discussed above, private equity funding might just be the right option for you.