By the end of 2015, a new private investment fund worth $150 million will be launched by USAID and three private companies: Abraaj Group, JS Bank and Indus Basin Holdings.
The idea for the investment fund comes from the 5 year old Kerry-Lugar bill, which was sponsored by John Kerry and Richard Lugar, but never passed the Congress. The $1.5 billion package had a Enterprise Fund designated to invest and help Pakistani businesses grow.
Now that the bill has expired, the idea is being adopted under the name Pakistan Private Investment Initiative (PPII) by USAID. The organization has spent two years working around rules that prevent money designated for aid being used for generating profits.
Three funds, each worth around $50 million, will invest in SMEs with revenues between $500k and $30 million
A further two years were taken up by Abraaj, JS Bank and Indus Basin to come up with the money to match the $24 million put up by USAID.
As a result, there are three funds, each worth around $50 million which will be used to invest in small and medium enterprises (SMEs) in Pakistan. These SMEs will have revenues between $500,000 to $30 million and high potential for growth.
The funds will have a stake in the businesses in return for the investment which will then be sold for profit.
This is welcome news since banks in Pakistan tend to view SMEs with suspicion. They’re considered too risky a proposition so the result is big companies keep growing since they can get loans and smaller ones tend to stay small.
Banks in Pakistan consider SMEs a risky proposition so funding is usually limited to bigger companies
In addition to monetary input, the partner banks will also work with the State Bank and SECP to change rules and regulations to make Pakistan a more hospitable environment for foreign investors.
The funds haven’t even started but already local regulations are changing and private equity is emerging as an industry.
For example, it’s easy for investors to bring large investments into the country. But when investments are ready to be sold, the State Bank can put up hurdles.
The oil, gas, and textiles sectors have worked these issues out. The financial companies need a similar push.
The setting up of funds could also help improve business practices since investment will hinge upon whether the companies are regularly audited, have a single set of books and pay their taxes.
While it’s an equal partnership with USAID, the Pakistani investment firms are going to be the ones who determine the investment strategy and decisions for the funds.