By Ariba Shahid and Taimoor Hassan
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hat are your options if you want to start a business? You could either start your own company or buy an existing one. And no, you do not always have to resort to the stock market to buy a company or a part of it. In fact, a less explored option in Pakistan is equity investment in well-established but privately held businesses that have the potential to be more than they are now. Similarly, if you’re an existing business owner aiming to raise capital to try a new risky idea, you could get a bank loan, but that would require you to come up with an acceptable collateral and with it the constant worry about repayments and losing the collateral just in case the bet doesn’t pay-off. You could go public but your business might not be big enough and since you do not account for all your revenue, your books are a mess. On paper your case is right up private equity’s alley. And you are not alone. Considering the low number of businesses that avail bank loans or are publicly listed, the private equity space must then be booming in Pakistan? Well, not even close. Private equity in Pakistan is either shied away from or not widely available to small and medium sized enterprises (SMEs) that need it the most. And with banks not providing loans as they should, more private equity investment is the need of the hour. And it is also possible. Recently the Pakistan Aluminum Beverages Company went public. You must be thinking so what? Well the interesting part about this IPO was the fact that it marked an exit for Ashmore, a FTSE 250 British investment manager dedicated to the emerging markets. This exit was well within the investment horizon planned out by the group and also proves to be a case study into how Private equity in Pakistan can work,
and exits can happen successfully. To understand what private equity is, we spoke to different players that either have taken or provide private equity. But before we get to those directly involved, Profit explains what private equity is, how you can apply for it, and why you should consider it.
What is private equity
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n very simple words, the way it works is that different people go to an investment management firm or a private equity company and give them money to invest. The company then forms a fund. Private equity transactions are carried out in the form of acquisitions, funding to support operational growth or expansion. Now, when a company that doesn’t want to take a loan from the bank or go to the stock market (yet) wants to expand, they come to this investment firm and they use the fund to provide the company with money. In exchange for this money the firm gives them some stake, allow a new member on their board, and jaraha voice to shed guidance and experience, but for the large part, the private equity investors are patient partners. They wait for an agreed amount of time and then exit, hopefully with profits. The private equity firms themselves charge money for management in addition to performance fees from investors in a fund. The valuations, however, are mutually decided instead of in an open market. Despite that, for a company, private equity investment is relatively easier for them to deal with considering limited stress of quarterly performance by investors. Private equity investors are often considered patient when it comes to their investment and the returns they anticipate. They need to dedicate substantial investment for an extended period of time. Usually investors withstand long holding periods for a greater turnaround period which culminates in the form of the sale of the business or an IPO, marking an exit. The investment
horizon is usually 5-7 years.
Treading history
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nstitutionalised private equity started taking off in 1995 in Pakistan when the Securities and Exchange Commission of Pakistan (SECP) introduced a regulatory framework that enabled setting up fund management companies in Pakistan. Pakistan is late in almost everything. And it was late in private equity fund management as well. The concept of private equity and fund management predates Pakistan itself and while there is no concrete timeline to trace the genesis of private equity, historical records suggest that initial private equity transactions can be traced back to the industrial revolution in the 1850’s when prominent merchants financed industrial establishments in the West. It was only later on, after almost half a century, that the first notable instance of private equity transaction that can be classified as the transaction closest to a modern day buyout was JP Morgan’s acquisition of Carnegie Steel for $480 million in the US in 1901. In 1946, however, the first two venture capital firms came into being, the American Research and Development Corporation (ARDC), founded by Georges Doriot who is considered the father of venture capitalism with two other partners, and J. H. Whitney & Company founded by John Hay Whitney and Benno Schmidt. It is also important to note that Doriot was a former dean at Harvard Business School and one of his partners Karl Compton was the former president of MIT. The ARDC worked with the goal to encourage investment in businesses that were run by World War II soldiers upon their return. The ARDC has an important place in the history of private equity considering the fact that it was the first of its kind, an institutional private equity investment firm that was not restricted to capital from wealthy families.
The private equity firms themselves charge PE localized: Offices money for management in addition to performance Family ow that we have a preliminary understanding of what private fees from investors in a fund. The valuations, equity is and how it began, the however, are mutually decided instead of in an open question we are now heading to answer is private equity in Pakistan. market. Despite that, for a company, private equity One could say that private equity investment is relatively easier for them to deal formally entered Pakistan significantly late, 1995, Since then three revisions have been with considering limited stress of quarterly inmade in 2001, 2008, and then finalized in 2015. However, given the changes in the performance by investors industry dynamics and Pakistan’s formaliza-
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