In the high-stakes world of private equity and venture capital, particularly in developing markets like Nepal, the role of investors extends far beyond mere financial backing. With 90% of startups failing and 70% of projects falling short of their promises, PE/VC firms must skillfully support their portfolio companies, steering them towards growth and success. This support often includes guidance on financial, operational, strategic and/or governance issues. However, it's crucial to maintain enough distance to avoid becoming entangled in day-to-day management. The challenge lies in striking the perfect balance between active involvement and strategic oversight, ensuring that investments not only survive but thrive. Here we explore the crucial role of PE/VC firms in providing support while maintaining an appropriate distance to ensure portfolio company success.

There are numerous reasons why all PE/VCs maintain active involvement in their portfolio companies. First, to finetune business operations and ensure sustainable growth. If the company is not being run or governed efficiently, investors can leverage their experience to help attain operational efficiency, define long-term and short-term strategies, and enhance corporate governance systems. PE/VCs also play a key role in the financial restructuring or optimisation of a company. They assist in balancing debt and equity, instilling better budgeting, forecasting and reporting practices, and raising additional funds on favourable terms. Additionally, companies can use the investor’s network and the capital provided for market expansion endeavours. Another key benefit of PE/VC backing is their ability to create strong management teams by attracting and retaining top talent through competitive compensation structures and providing supplementary resources and training. Lastly, PE/VCs help identify and mitigate risks through strategic guidance, creating robust compliance frameworks and contingency planning. In times of crisis, PE/VCs also provide crisis financing to help companies navigate periods of uncertainty.

Passive investment, on the other hand, comes with significant risks and pitfalls, especially in a developing and volatile market like Nepal. One of the key challenges in Nepal is achieving operational efficiency and mitigating risk. Smaller Nepali businesses often face numerous operational challenges, including outdated bookkeeping systems, limited service reach beyond their usual networks, and a lack of structured operational systems that are trackable, easily reportable and transparent for identifying weak points. Additionally, the entire Nepali business and financial market operates within an ecosystem often plagued by tax evasion, government corruption and bribery. A hands-off approach can have devastating consequences if the government decides to crack down on compliance issues within your investee company. PE/VC firms are generally able to help with these issues due to the resources they have at their disposal -- such as human resources, technology, software and extensive experience. Furthermore, maintaining regular contact and active involvement also help identify leads for sales, secure additional investments and form strategic partnerships that significantly drive the company's growth.

Supporting portfolio companies, beyond financially, is actually the global norm, with most global PE/VC firms, such as Blackstone, KKR and the Carlyle Group, providing a suite of services to help their portfolio companies scale effectively. For example, Blackstone offers a diverse range of technological and innovation support to their portfolio companies like Bumble, by leveraging their database that has been developed through decades of investments, research and collaborating with companies. Furthermore, they also offer support in all aspects of portfolio company operations in order to “create purposeful, valuable and growth-oriented businesses.” Even in markets like India, PE/VC firms often provide valuable non-financial support to their portfolio companies. For example, Sequoia Capital India not only invests capital but also offers strategic mentorship and operational guidance to its portfolio companies. Their involvement in Zomato, for example, included helping refine its business model and scale its operations effectively. Such support can significantly enhance a company's growth trajectory and operational efficiency. A significant number of Nepali PE/VC firms also provide such support. This article will explore several such examples.

Transformative Impact on Upper Syange Hydropower Limited

Value creation is integral at every stage of the investment cycle at Team Ventures. The company measures not just financial returns, but also societal, business and environmental impact. A notable example is Upper Syange Hydropower where under the leadership of CEO Tenzin Sonam Gonsar, Team Ventures catalysed significant social, economic and environmental value.

Founded by Bir Bahadur Ghale, a seasoned social entrepreneur with extensive experience in micro hydro projects, Upper Syange Hydropower Limited (USHL) benefited greatly from the strategic partnership with Team Ventures. Beyond capital injection through a special purpose vehicle, Team Ventures provided critical governance structures, management expertise and strategic planning. It helped Upper Syange achieve financial closure, secure debt and equity, and navigate challenges such as the COVID-19 pandemic. 

Team Ventures also prioritised corporate governance, ensuring legal compliance, transparent systems, and the implementation of financial and procurement policies. It guided the company’s IPO process and emphasised board diversity, with three of the seven members being women.

This strategic involvement facilitated the successful implementation of a larger 24.5 MW hydropower project in Dobhan Khola. Upper Syange’s partnership with Team Ventures led to a Power Purchase Agreement with the Nepal Electricity Authority and a successful public offering, delivering substantial returns for promoters. This case exemplifies how PE/VC firms can not only drive sustainable growth but also create significant value beyond financial investment.

Pashupati Renewables: A Nexus of Social and Economic Value

Pashupati Renewables, another standout portfolio company of Team Ventures, highlights the impact of effective stakeholder engagement and community involvement in securing investment sustainability. Promoter Dr Sandip Shah, with local ties, partnered with Team Ventures to not only advance a solar project but also generate local economic benefits through strategic stakeholder engagement.

Understanding the project's potential to transform local livelihoods, Team Ventures supported Dr Shah's comprehensive stakeholder consultations, including Key Informant Interviews and Focus Group Discussions. This collaborative effort refined the stakeholder engagement strategy and facilitated financial restructuring, bringing in institutional investors and achieving financial closure.

Pashupati Renewables has launched several CSR initiatives, such as enhancing sanitation, solid waste management and scholarships, with a focus on girls' education. Future plans include upgrading infrastructure, like irrigation and access roads, and training local workers in construction skills, boosting local employment and creating a skilled workforce. Team Ventures' early investment was crucial in steering Pashupati Renewables with industry best practices. Their commitment to strong corporate governance, effective stakeholder engagement, and impactful CSR has minimised risks, strengthened community relationships, and fostered economic development. This approach not only ensures long-term project success but also benefits both the company and the community.

Value Creation in the Nepali PE/VC Industry

Dr Manish Thapa, one of the founding partners of Global Equity Fund, says that PE/VC investors should avoid actively managing the companies they support for two important reasons. “First, from a practical standpoint, PE/VCs may lack the specific knowledge or expertise needed for day-to-day operations. Second, on a cultural level, many businesses in Nepal are family-owned or closely linked to the founder's identity, leading to a reluctance to bring in equity investors,” he said. “If these investors begin micromanaging without substantial experience in running the business, it can be perceived as intrusive, potentially straining the relationship between investor and founder.”

Global Equity Fund addresses this by striking a balance between providing support and avoiding micromanagement. It collaborates with founders early on to create a business canvas, clearly defining roles and setting expectations. This process helps pinpoint key areas where support is needed and establishes boundaries for involvement. After investment, a representative from Global Equity Fund joins the board of the portfolio company to monitor progress and work closely with the founders. The firm further mitigates excessive control by typically taking minority stakes, which fosters a healthy and respectful investor-founder relationship.

Dr Thapa added that Global Equity recently added significant value to a portfolio company by leveraging their network to secure product placements in major grocery stores like Bhat-Bhateni Supermarket. “We also helped another portfolio company secure loans on more favourable terms than those initially offered by the bank,” he said. Dr Thapa believes that PE/VC firms have become invaluable resources for Nepali startup founders and first-generation entrepreneurs, particularly those lacking the capital or network to raise funds independently. Beyond funding, these firms also provide additional resources that startups can access at little to no cost, making them a preferred choice over traditional financing, he added.

However, Dr Thapa also highlighted challenges within Nepal's private investment market. He pointed out a gap between the support PE/VC firms claim to offer and the actual number of startups receiving funding. This discrepancy, according to Dr Thapa, is partly due to the government's lack of active support for entrepreneurs, which has limited the growth of PE/VC funding for startups. As a result, despite the promises, the delivery of support often falls short, he added. Lastly, Dr Thapa highlighted several challenges that are impeding value creation in Nepal. “A deep-seated negative perception of business persons and investors pervades Nepali society and extends to government institutions. This widespread scepticism subjects businesses, investors, funds and financial activities to relentless scrutiny,” he said. “Moreover, the country’s cumbersome bureaucracy adds further complications, making it especially difficult for firms to navigate governmental and tax-related hurdles. As a result, a significant amount of time is spent dealing with bureaucratic red tape, which stifles genuine value creation.”

He concluded that these are the key reasons why PE/VC firms and startups have struggled to thrive in Nepal, unlike in other global markets.

Collective Efforts in Value Creation

As Nepal's PE/VC industry continues to expand, it is crucial to view investment and value creation as collaborative efforts. Firms like Team Ventures play a key role in connecting diverse economic players, generating returns, and driving domestic growth and development. The transformative impact of strategic investments is evident in projects like Upper Syange Hydropower Limited and Pashupati Renewables, where a blend of strategic support and community involvement has led to success.

PE/VC firms must prioritise robust governance, financial restructuring, stakeholder engagement and CSR initiatives to create lasting societal and economic value. This approach not only strengthens businesses but also contributes to broader development goals. Stakeholders like Dr Thapa recognise the critical role these firms play in overcoming financial and operational challenges in Nepal. By offering strategic support without micromanagement, leveraging networks and navigating bureaucratic hurdles, PE/VC firms can unlock real value and drive sustained growth across the nation.

(TEAM Ventures, is an industry-agnostic alternative investment firm with a diverse portfolio spanning the energy, technology, real estate, manufacturing, financial institutions, agro-infrastructure, and electric-vehicles sectors.)

(This opinion article was originally published in  September 2024   issue of New Business Age Magazine.)