Private equity has always played a pivotal role in the development of small and medium-sized enterprises (SMEs) globally by providing not only capital but also operational expertise, managerial bandwidth, leadership and vision.
In Pakistan, although the regulatory framework for private equity and venture capital was first introduced by the Securities and Exchange Commission of Pakistan (SECP) in 1995 and has been revised thrice in 2001, 2008 and most recently in 2015, the industry is yet to make its mark in any significant manner.
A number of local and international players showed keen interest in the private equity space in the mid-2000s, when many of the local brokerage houses and investment banks such as Arif Habib, AKD, BMA and JS looked at setting up private equity businesses, however, most of the local investment houses dropped the idea either due to the unfavourable regulatory regime or later due to the global financial crisis in 2007-08.
JS was the only local player to set up a fund at the time, however, the fund was registered offshore due to the low tax, superior regulatory regime and the double tax treaty with Pakistan.
Abraaj also entered the Pakistan private equity market around the same time with its investments in BMA and in Mannan Shahid Forgings. Abraaj later made larger investments in Byco and K-Electric (formerly known as KESC). Both firms, Abraaj and JS, have struggled to deploy their capital in Pakistan.
The second wave of private equity funds came in around 2012-13 when USAID came up with the Private Public Investment Initiative (PPII) programme, which provided three private equity players, The Abraaj Group, JS and Baltoro with $24 million in capital commitments.
All three funds were registered offshore as the local regulatory framework was not finalised till 2015.
The second wave of private equity funds has also not been able to generate much fanfare. JS is yet to make its first investment and The Abraaj Group is rumoured to have frozen its funds and returned un-invested cash capital to its investors. The Baltoro Growth Fund, which launched in 2016, has made two investments - one in AGP Limited, which recently got listed on the Pakistan Stock Exchange, and the other one in a wind power company in Jhimpir. But, by the definition of the State Bank of Pakistan, it has not invested in the SME space..
In both cases, most of the investors have been development financial institutions and not private capital.
Since the SECP announced the new private equity and venture capital regulations in 2015, we are now witnessing the third wave of private equity funds in Pakistan. Currently, there are three domestically registered private equity funds which include Ijarah Capital, Lakson Investments Private Equity (similar to Tribune, a Lakson Group company) and PNO Capital.
In addition to family offices such as the House of Habib, Gul Ahmed, JS, Arif Habib, etc, which have always been active in the direct investment landscape, there are a number of new institutional players actively looking at the space.
These include Karandaaz (a DFID-backed development fund), Ithaca Capital (previous experience with JS Group with co-investment in close to 10 transactions), Adira Capital (led by professionals and industry veterans) and Cyan Capital (a listed private equity fund sponsored by the Dawood Hercules group).
The impact of these institutional players is yet to be seen, but one would hope that the increased private equity activity will be able to significantly contribute to the growth of the SME sector and increase employment opportunities for the youth of Pakistan.
Published in The Express Tribune, March 14th, 2018.
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