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VENTURE CAPITAL IN PAKISTAN

Prepared By:
Sara Akhtar
Capital Market Development Specialist
VENTURE CAPITAL IN PAKISTAN

The business incubator/venture capital window of the CSF will be used to promote Venture
Capital (VC) in Pakistan. This facility will lead to the creation of business incubators and
provide funding for them. Furthermore, it aims at setting up a VC Fund company with a
paid up capital of US$ 50m. CSF in collaboration with the Pakistan Business Council will
also support the Securities & Exchange Commission of Pakistan in its efforts to improve
the legal framework surrounding Venture Capital.

Driven by the current government’s commitment to economic liberalization Pakistan is


forecast to grow at around 7% per annum, exceeding the Asian average. Moreover,
Pakistan’s strategic geographic location makes it a trading and energy bridge for Asia
and the Middle East.

In the year 2007, there are three companies engaged in venture capital business in
Pakistan namely:

1. Name: TMT Ventures Ltd.

2. Name: TRG Ltd.

3. Name: AMZ Ventures

So far, there are no tangible results or notable success stories of these funds in the
Pakistani venture capital market. The reason is because of underlying factors both on
the demand and supply side that need to be addressed in order to make venture capital
industry a success in Pakistan. Pakistan’s economy has yet to reach its full potential and
growth of the Venture Capital industry may help it reach this potential. The country’s
investment policies are generally recognized as some of the most favorable in the
region. In short, Pakistan presents a number of investment opportunities that are
supported by very favorable and rapidly improving conditions in the marketplace.

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Our Findings

After thorough research and consultation with industry stakeholders we identified the
following issues that need to be addressed in order for the Venture Capital industry to
thrive in Pakistan.

• Insurance companies and Pension funds in Pakistan are not allowed to invest in high
risk sectors such as the venture capital Industry.

• SECP has already issued draft ‘Private equity and Venture Capital Funds Regulations’
2007 to provide seed capital to local corporate sector.

• Minimum capital requirement to set a Fund Management company in Pakistan is US$


4,200,000 compared to US$ 100,000 internationally.

• Annual renewal of licenses is required by the SECP for Fund Management companies.

• No ‘practical’ implementation of Intellectual Property Protection rights exists in


Pakistan.

• Lack of ‘business angel’ networks that can act as a matching facility for funds and
entrepreneurs.

Currently, CSF is in the process of setting up a Task Force for Venture Capital which
will be chaired by the Ministry of Finance and CSF will act as its Secretariat.

It is expected to achieve the following objectives within one year:

• Act as a Catalyst to Promote Venture Capital & Take SMEs To Higher


Level of Growth

• Identify Priority Areas for Policy Level Issues On Supply & Demand Side

• Draft Policy Recommendations for Effective Operations of Venture Capital

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Furthermore we have identified opportunities in Engineering, Health & Environment,
Agriculture and Energy sectors which could not only benefit from investment but also
give high returns to potential investors.

Venture Capital Funding Opportunities in Pakistan – Some Sub-


Sectors

Engineering Sector
Sub-Sector Rationale
Motorcycle Parts Tremendous growth in sales of new motorcycles, potential for
catering to both OEMs and after market. Support needed for
technology transfer and selling in international markets
Forgings / Castings Domestic market especially the auto industry can be big consumer,
however large castings still imported. Technology transfer &
linkages can open up markets of the region especially for use in the
oil and gas sectors
Agricultural Farm Corporate agriculture will lead to greater use of mechanized tools
Implements in agriculture especially important to reduce damage through
manual handling of agricultural produce. Technology and
marketing access issues
Pumps / Motors Country competitive in manufacture of pumps of lower flow rates,
support needed in implementing standards and access to
international market
Textile Machinery Most equipment used in the processing industry is manufactured
locally. Support is needed in getting technology which will
improve efficiencies and allow newer processes which are more
environmentally friendly
Boilers for Home Industry exists for gas boilers (geysers) however energy losses a
Use major factor hampering development. Technology required in the
areas of heat efficiency and controls to reduce wastage. Option also
to enter regional markets with boilers which use fuels other than
natural gas

Agricultural Sector
Sub-Sector Rationale
Seeds (Genetic / Agricultural output stagnating, unable to keep pace with
hybrid) population growth. Genetically modified seeds and more disease
and drought resistant seed required. Linkages with international

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firms can provide the know how needed
Animal Feed Animal husbandry suffering due to lack of proper feed for mulch
animals and animals reared for meat. Use of proper feed can lead
to Country becoming big exporter of meat & meat products.
Linkages can lead to transfer of feed formulations
Silos Crop losses due to non-availability of grain silos. Most of the
technology locally available, opportunity in management of the
silos
Cold Storages Significant portion of fruit and horticultural production wasted due
to non-availability of cold storages. Specialized, product specific
technology which will help local growers to become part of
international supply chains
Fruit Preservation International market opportunities for dry and persevered fruits not
fully exploited. Opportunity for improving both quality of the
product and finding international market access
Dairy & Meat Opportunity in organizing and managing animal clusters,
opportunity for supplying feed, veterinary services and acting as
conduit for output from the clusters

Energy Sector
Sub-Sector Rationale
Small Hydel Power Tremendous opportunity for run of the river hydel projects.
Plants Opportunities for setting up and managing small hydel units in
isolated communities
Energy Efficiency Energy efficiency services for both industrial as well as domestic
Services clients. Access to international best practices and know how are
the issues
Bio Mass Managing municipal dumping sites to produce electricity.
Developing supply chain for producing plants used as bio-fuels.
Opportunities in international linkages for technology and local
sources of raw material
Bio-Gas Using manure from the peri-urban locations and utilizing it for
generating heat. Opportunities relate to management of the manure
collection and power distribution
Solar energy for Replacing kerosene lamps used in rural areas with solar powered
lighting purposes lamps. Technology available at competitive prices challenge lies in
technology transfer and setting up the marketing network

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Health & Environment
Sub-Sector Rationale
Diagnostic Centers Demand for diagnostic, dialysis and other services exist especially
in the smaller towns and cities. Opportunity for acting as collection
centers for larger diagnostic centers exists. High initial capital cost
is major impediment
Tertiary Hospitals Pakistan is missing out on the worldwide medical tourism boom.
Opportunity exists for corrective surgery, important to be able to
use Pakistani Diaspora worldwide to promote the service
Common Industrial International buyers especially in the textile sector insisting on
Effluent Treatment environmental compliance. Individual effluent treatment plants
Plants very expensive. Opportunity in setting up and managing common
effluent plants
Water Recycling Domestic and industrial waste water recycling and distribution for
domestic and industrial usage. Opportunity in managing this
venture.

Action Steps for promoting Venture Capital in Pakistan

1. Removal of restriction placed on pension funds and insurance companies by the SECP
to invest in the venture capital sector.

2. Government needs to establish a number of ‘seed-stage’ funds which will facilitate


start-ups and provide the necessary impetus to the sector.

3. Lower ‘Minimum Capital’ requirement to set up a Fund Management company (FMC)


from US$ 250,000 to US$ 100,000 (in accordance with international standards).

4. Current regulations require FMC’s to renew their licenses annually, this needs to be
changed as FMC’s operate on long-term contractual agreements.

5. A secondary market (such as the NASDAQ) needs to be in place for listing of smaller
firms and their eventual IPO’s.

6. Regional/provincial ‘business angel networks’ that are linked to emerging venture


capital funds should be created across Pakistan.

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7. Government should be involved in the monitoring of Intellectual Property Protection
rights implementation across the venture capital industry in Pakistan as well as impose
penalties on violations in this regard.

Key Policy Recommendations

1. Although the Government of Pakistan has incentives in place for both foreign and local
investors in terms of tax breaks and smooth ‘exit’ options it can provide additional
support for the early stage or start-up businesses caught in the equity gap. One possible
approach to meeting this need might be a variant of the Small Business Investment
Company (SBIC) model in the US. A Pakistan SBIC Programme would aim to improve
the availability of risk capital to start-ups facing the equity gap, by bringing more
‘entrepreneurial investors’ into the management of funds which specialize in making
small, early-stage deals; offering incentives to make these investments; and enhancing
the impact of business angel networks.

2. Govt. can help offer incentives to foreign investors by having a well developed
secondary stock market and an adequate supply of well trained professionals especially
at the ‘due diligence’ stage.

3. Since Intellectual Property Protection rights violations are still not dealt with stricter
penalties international investors feel deterred and thus take their investments elsewhere.
The Government should be more proactive in the implementation of this process.

4. Focus needs to be placed on the demand side by identifying areas in addition to IT,
Telecom and media, where potential VC opportunities can exist.

Conclusion

The Venture Capital business is a success story in the West, especially in the US where the
industry is almost fully free of regulation. The Pakistani Government too, has given full tax
exemption to VC funds till 2014, taking that into account, this asset class should be
encouraged to grow by regulators and investors so that unemployment and poverty can be
tackled on larger scale through the financing of ideas in Pakistan by VC Fund managers

Lastly, a strong judicial system, reasonable standards of corporate governance and an open
economy with a large private sector presence needs to be in place in order to make Pakistan
an attractive option for VC business.

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