"Entrepreneurship development calls for an effective market which efficiently connects ideas with investments. Hence, the capital market in Nepal needs to understand its role in providing risk capital to entrepreneurs."
Easy access to finance should mean easy access to both debt and equity capital. In Nepal, access to finance has been largely gauged by businesses/entrepreneurs accessing debt financing from formal financing channels. But, the need for availing required equity capital has been left to "friends and family" and not to a formal capital market. "If we cannot develop formal capital markets that serve the need for equity capital we cannot think of entrepreneurship development; it is a primary source of capital for start-ups," says Deepesh Vaidya, Managing Director of Kriti Capital. Further he says "Entrepreneurship development calls for an effective market that efficiently connects ideas with investments. Hence, the capital market in Nepal needs to understand its role in providing risk capital to entrepreneurs."
Currently, a capital market is largely understood to mean stock market trading (Post IPO) and to a small extent Public Offerings market (IPO) where companies offer their securities to the public at large. The capital market in Nepal has been largely absent in terms of providing equity to companies at their inception stage as seed capital (or as growth capital to companies with few years of operating history may not be in a position to go public). For such companies, availing equity capital is not just crucial but a necessity. Because, you cannot avail debt financing without having equity capital. For example, if you provide Rs 100 as equity to an entrepreneur, s/he can avail debt financing of up to Rs 150 (at 60% debt/capital ratio) and start business with Rs. 250 as total capital. Equity capital increases economic activities. Hence, availing equity capital is a primary prerequisite for entrepreneurs and easy access to equity capital through developed capital market is important for entrepreneurship development.
Why SME Market
Kriti Capital & Investments Ltd
Vaidya refers to various studies and notes that SMEs account for about 90% of businesses and more than 50% of employment worldwide. Further, SMEs in Nepal form more than 95% of the total industries and contribute more than 80% of the industrial employment generation.
Development of Small and Medium Enterprises is essential for economic growth of a country. It is not just because of the number but their underlying desire to upgrade from small to medium and medium to big drives the economy to higher potential growth. Further, investment required for growth of such sector can be, to some extent, served by domestic investment itself. "Nepali investors will certainly not ask for sovereign guarantee for the country risk that the foreign investors would ask for. Hence a lot of projects become feasible," notes Vaidya. Kriti Capital, therefore, is primarily focusing on serving the entrepreneurs at SME level and is striving to develop capital market that works for easy access to equity capital.
Vaidya says, in parallel to providing equity capital, there is also need for capacity building of SMEs. SMEs will need support to manage the acquired investment, either equity or debt, for productive use. It is because, even equity has cost, i.e. sharing the business potential of the idea with investors. Hence, in addition to providing equity capital to SMEs, the market ecosystem should also provide managerial expertise to them. Vaidya notes that in every company where Kriti Capital has helped raise equity, the company has invariably provided financial advisory and strategic advisory services. Strategic planning defines how should the capital be deployed, what the expected returns are and how they are to be achieved. Financial management ensures proper financial recording, reporting and checks the performance vis-à-vis the plan. Such periodic reviews provide proper indications if strategic plan has succeeded in achieving the target or needs revision.
“We are working with investors, both existing and new, to understand their needs and help them identify investment targets and create growth opportunities. Different investment opportunities have different risks and corresponding expected returns. Our job is to understand the risk and make the investors understand the same so that the assumed risk matches with the risk capacity of the investor and potential return matches with investor's expectation,” says Vaidya. He gives an example: For someone, 15% average return provided by the stock market might be very lucrative but for others this might be low and they may be willing to take more risk as venture financier for expected higher returns.
To cater investors, Kriti Capital has obtained Portfolio Management Service license from Securities Board of Nepal. Under this service, Kriti Capital manages clients’ investment in stock market, mutual funds and fixed income market, mainly in government/corporate bonds, deposits at financial institutions and other investment options. Currently Kriti Capital manages portfolio funds of around Rs 27 crores. "We provide customized fund management services to individual or institutional clients to provide benefit of active long term investment management strategy. Investing in the stock market invariably requires a long term perspective but with active management we benefit our clients by cashing in on the market mispricing as well," says Vaidya.
For investors willing to enter a venture through venture financing, Kriti Capital provides investment advisory so that investors make informed investment decisions. For this Kriti Capital is building industry expertise, claims Vaidya. “We have built fairly good expertise in health, hydropower, road infrastructure, tourism, education, manufacturing of FMCGs and are expanding our expertise in other sectors,” he adds.
To grow further, any service needs an ecosystem. For this, the company believes in proper coordination of every sector. “We want to help create an investment ecosystem that serves investment transactions without which the capital market cannot perform its due responsibility in either Pre-IPO, IPO or Post IPO market," says Vaidya.
“Market ecosystem includes facilitating regulations, aware and active investors, willing entrepreneurs/businesses and efficient intermediaries including merchant bankers like us, media, professionals, legal advisors etc.,” he adds.
According to him, for regulatory framework, efforts should be made from the regulator and all the market intermediaries to enforce changes in the existing regulation to incorporate wider reach of the capital market. “We have seen that happening; merchant bankers through merchant banking association have been in constant dialogue with Securities Board of Nepal (SEBON) for required changes. SEBON has been receptive and actively working in this regard,” he adds.
Problems and Limitations
The company believes regulatory limitation is a major problem in the growth of investment banking services in Nepal. It also thinks that the government has not been able to push domestic investment ahead. The government is obsessed with FDI but not able to provide platform/tools to create different class of risk assets within Nepal. Further, SEBON has limited mandate in terms of facilitating and regulating the broader reach of the capital markets.
The company believes that the country must encourage informed investment rather than just savings. People must start investing in the economy and the market needs to provide different tools to choose from. “Nepali economy has been growing and people need to take the benefit of this growth by investing in the economy. It is the job of merchant bankers like us to navigate investors to find right investment size, sector and tame expectations according to investors' risk appetite. Merchant bankers hence also need to know that they have a broader role to play than what they have been doing traditionally,” says Vaidya.
Through the Kriti Knowledge Center (K2 Centre), the company has also been trying to talk to a larger public to convince them that informed investment is necessary. It recently organised a round table discussion with regulators for widening the reach of capital market. It has been regularly interacting with Kathmandu University School of Management students through presentations and discussions, so that the MBA/BBA students are aware of the capital market and investment banking services. "We believe that educating these students is a must because they are the people who are going to work in the corporate sector in the future. So, in terms of awareness, we are working full time. If there is awareness about the service then automatically the business will grow," says Vaidya.
Kriti Capital was established on December 28, 2011. Inception of Kriti Capital is also an entrepreneurial initiative, remembers Vaidya. "We know how important and difficult it is to collect equity capital, your seed capital, to realize your entrepreneurial dream." Kriti Capital came into establishment with an aim to provide broader aspects of investment banking services. He adds, “We believed, the company can facilitate transaction of investments from source to target in the same way commercial banks facilitate deposits to loan.”
Kriti Capital boasts a team of nine professionals with cumulative professional experience of more than 35 years. The company employs managerial skill sets of six MBAs and accounting professionals to provide Investment Management/Advisory Services to individuals and institutions; and Venture Financing advisory services including but not limited to business due diligence, valuation, capital structure planning, investment transaction facilitation, business handover management, financial reporting and strategic analysis.
The company is currently working with diverse industry sectors. Duirng last three years of establishment, it has served more than 17 companies across 10 business sectors. However, it is trying to specialize its expertise in small and medium enterprises. "They are our main targets and we believe that there is possibility of growth if we work with them," says Vaidya.
The company has been providing licensed Portfolio Management Services to clients and has managed a fund size of more than Rs 27 crores. “Our portfolio size is growing and people are now more interested in availing our services. They have started to understand that better value can be created through effective financial intermediation," says Vaidya.
The company claims that its customers are very happy with its work. However, there are challenges regarding developing trust. "We believe that trust comes with time and performance. So, we are performing and ensuring customers’ confidence over time. With the continued business relationship with most of our clients, our confidence has been high. Moreover, we are happy that the domestic market has positively responded to our services even though they are very new to the market", says Vaidya.
Along with challenges, the company believes to have lots of opportunities. "In the context of frontier market in Nepal, we only have the potential for growth," says Vaidya.
The company considers that the country has economic potential and waiting for a trigger. It believes that investment is always required for economic growth and as long as investment is required there is also the need for investment banking services. Moreover, intermediation is also always required for informed investment decisions.
"I believe that Kriti Capital is very much relevant in the present context because investment is present everywhere. We believe that if investment is done properly then it will lead to long term mutually beneficial partnership," says Vaidya.
The company's plan is to provide full-fledged investment banking services. "We believe that different services are scattered in investment banking so we are trying to bring them together,” says Vaidya. It aims at providing all the services under one roof and is trying to involve Pre-IPO, IPO and Post-IPO under one roof. But, such moves need to be resonated from the regulatory environment. Regulators need to understand the potential of the capital market and the role that merchant banks can play to make the capital market work for economic development. Similarly, even market intermediaries need to take the challenges and be in forefront to provide innovative investment banking services. "Nepal has a huge potential for investment and there are loads of work to be done accordingly" says Vaidya.