Strict regulations bar private equity funds from investment

Globally, foreign equity funds have helped grow big companies

KARACHI: Private equity funds have done a massive job of nurturing and growing companies including Microsoft, Coca-Cola, Burger King and Uber across the globe and helped their respective countries gain economic stimulus, experts said on Thursday.

Such foreign funds have turned the loss-making power company K-Electric into profit and nurtured Byco Petroleum that has emerged as the largest petroleum refinery in Pakistan.

However, Pakistan-based private equity funds are far away from playing their due role of supporting and growing companies in different sectors of the national economy due to a tight regulatory regime.

“Pakistan-based private equity funds have the potential to raise $50-100 billion in the next 5-10 years (from potential local and foreign investors) and have plans to invest in sectors like healthcare, education, logistics, fashion outlets and tech companies,” Lakson Investments Executive Director and COO Kashif Mustafa said. He was speaking at a consultative workshop on “Pakistan private equity regulatory regime” organised by USAID in collaboration with the Securities and Exchange Commission of Pakistan (SECP).



“The share of Pakistan-based private equity funds is next to nil (estimated at $200 million) in the global market of $4.6 trillion as of December 2016,” he said. “The funds raised $600 billion in 2016 alone.”

The reason why Pakistan-based funds have failed to raise the equity is that the SECP and State Bank of Pakistan (SBP) have framed tight regulations that have barred potential local and foreign investors from pooling into private equity funds, speakers said.

SECP should allow pension funds, provident funds and insurance companies to pool investment in private equity funds and the SBP should soften rules to let foreign investors pool investments in Pakistan’s private equity funds, they said.

“Pension funds’ share in global private equity investment (of $4.6 trillion) stands at 33% and of insurance companies at 11%,” Mustafa added.

Let potential investors ie pension funds, provident funds and insurance companies decide whether they want to take the risk of investing in private equity funds. Legal expert Muneeb Zia elaborated that SBP regulations allow general foreign investment such as in listed companies, but discourage the negotiated foreign investment in underdeveloped and developing companies in Pakistan.

The central bank demands that foreign investors obtain a no-objection certificate (NOC) in negotiated investment cases and does not allow repatriation of matured divestment if it appears higher than the break-up value, he said.

“India has done away with such stringent regulations in preceding years and is attracting significant foreign investment,” he said. “It is time for us to take action otherwise foreign investors have multiple avenues across the world.”

PNO Capital Private Equity Chief Investment Officer Shamoun Ilyas said, “we are in contact with many potential foreign investors...but regulations need to be changed to tap the potential investors.”

What the SECP says

SECP Executive Director Imran Inayat Butt said they do not allow pension funds, provident funds and insurance companies to invest in private equity funds as they are highly risky.

“We cannot put the public money at stake in private equity funds as there are people who have invested their life savings in pension funds, provident funds and insurance companies. People invest in such funds to spend a peaceful life while private equity funds do not guarantee protection,” he said. The SECP has asked them to send their recommendations and if it finds them appropriate it may review the regulation.



SBP’s viewpoint

SBP official Shafiqur Rehman said the central bank does not restrict repatriation of dividend income and matured divestment to abroad. However, foreign investors need to obtain NOC in case the size of investment is lesser than the book value of a company and size of repatriation is higher than potential one.

“We have just asked foreign investors to respect our regulations... US and UK regulations are not found fit for Pakistan,” he said.

Published in The Express Tribune, December 22^nd, 2017.

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