“Emergence & Scope of Private Equity in the Developing World with the focus on the concerning Issues in Private Equity Regulations in Pakistan”

Abstract

Private equity is a product of pure capitalism which has emerged as a major component of the alternative investment options and is now broadly accepted as an established asset class with in many institutional portfolios. Private Equity works on the phenomenon of “Buy a business, don't rent stocks.” Though PE is highly international but it is a rather new concept in the Middle East region. The second chapter of the report deals with the rapid growth in the global private equity investment industry, which has played a major role in the emergence of this asset class in the Asian Developing Countries. It focuses how Asian private equity industry has changed profoundly since the last decade. This has been partly the impact of the Asian financial crisis and the bursting of the high tech bubble, which have had a dramatic impact on corporate valuations creating the opportunity to buy good businesses at distressed values and to add value through restructuring. The study further highlights the increased appetite of PE for emerging markets; particularly China and India where we saw investors had pour record sums into private equity funds last year. China is a land of private equity opportunity and its private equity market is booming, with remarkable US$4.96 billion of private equity investments completed in the first five months of 2006, compared to US$4.04 billion for all of 2005. The continuing attraction of the China market is linked in large part to an enormous improvement in returns over the past few years. China's private equity boom has been driven by strong returns and a series of high-profile exits over the past two years. Compared to China though the Indian market is still small from a global perspective, but the US$2.74billion raised in 2005 represents a tenfold increase in fundraising in just two years. Success in Indian private equity has been driven fundamentally by the extraordinary growth of the country's large and liberalizing economy. The third chapter of the report discussed the current economic situation of Pakistan and the scope of Private Equity in Pakistan. In Pakistan, there is a huge mismatch between the growing appetite of institutional and contractual saving institutions for long term investment vehicles and the demand for long gestation mortgage, infrastructure, real estate and project financing. There is a strong need to establish and strengthen institutions required for competitive and free market economy that fosters to growth and prosperity of Pakistan. Substantial progress had been made in not only reviving over all growth of the economy but Pakistan had also been taking initial steps in reducing internal and external micro-imbalances, bridging public and external debt ratio to sustainable levels and maintaining market determined interest rate and exchange rate leading to upgraded creditworthiness for Pakistan in international capital. This betterment in the financial position has also gained the attention of many foreign investors who are particularly interested in venture deals or pooled equities. In Pakistan growth in private equity is almost negligent; perhaps because of the strict rules and regulations implied by the macroeconomic environment of the country. Emergence & Scope of Private Equity in Developing Countries with the focus on the Concerning Issues in Private Equity Regulations in Pakistan NUST Institute of Management Sciences ii The fourth chapter analyzed the issues concerning the private equity regulations in Pakistan where the uncertain political and economic situation in Pakistan has reduced the potential for an increase in Private Sector Business Operations (PSB’s) in the short to medium term. Loss of investor confidence has reduced the country's ability to raise long term financing for projects, both domestically and internationally, and is one of main challenges the country is facing during the current period. The perennial debate within the private equity community and regulators in Pakistan is whether regulations helps or hinders this industry. Some private equity and venture capital associations believe that greater control and increased transparency will attract new investors to this asset class in Pakistan and will result in a higher level of commitment from investors. Concerning issue in regulating this sector is to understand the relationship between private control, private benefits and profit maximization. The findings of the report shows that the contractual savings institutions in Pakistan are highly segmented narrowly focused and making sub-optimal returns on the assets they manage. It is the joint responsibility of the Government, regulators and the industry to mobilize and manage these savings in an optimal and professional manner. As private pension funds, provident funds and endowment funds would be developed and managed in an effective way, the overall domestic savings rate in the country will rise subsequently.