Recommendations fo Pakistan Private Investment Initiative R the · 2020-01-03 · Nadeem Hussain,...

Pakistan Private Investment InitiativeRecommendations foR the

Dustin Cathcart, Meredith Gloger, & Aaron RoeschJohn F. Kennedy School of Government

Harvard University

a Policy analysis exercise submitted toOffice of the Coordinator for Economic & Development Assistance

U.S. Embassy, Islamabad, PakistanU.S. Department of State

May 2012

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Pakistan Private investment initiative HARVARD KENNEDY SCHOOL POLICY ANALYSIS EXERCISE

Cover Photo: Clifton Beach, Karachi, PakistanCredit: Benny Lin, January 25, 2010

Inset Photo: K2 , Gilgit-Baltistan, Pakistan

Credit: Extreme Design Studio (http://www.extremestudio.ro)

AcknowledgementsAbove all, we would like to thank our principal cli-ent, Vinay Chawla, Deputy Coordinator for Eco-nomic and Development Assistance at the U.S. Embassy in Islamabad. As our main point of con-tact for this project, we owe him a huge debt of gratitude—and we have sincerely enjoyed work-ing with him. (He also housed us for two days in Islamabad, so we are extremely grateful for that, as well.) We further thank Ambassador Cameron Munter and the U.S. Embassy in Islamabad for encouraging and supporting this research project.

We also want to thank Nadia Naviwala, who first introduced us to Vinay, and to many other essen-tial contacts for this project. Thank you as well to Mark Karns, Vinay’s counterpart at USAID, who has been exceptionally helpful throughout this process.

Thanks are due to our advisor, Professor Meghan O’Sullivan, as well as our Policy Area Concentra-tion seminar leaders—Profoessors Monica Toft and Stephen Kosack. Their feedback throughout this process has been invaluable.

We wish to thank Ali Siddiqui and Steve Smith, and everyone at JS Private Equity and JS Bank, for their unbelievably generous support during our trip to Pakistan—and, in particular, an immense thank you to Imran Shaikh, whose hospitality truly knows no bounds.

We also sincerely appreciate the assistance of Nadeem Hussain, Ali Jameel, Kalsoom Lakhani, Vally Khamisani, and the Truman National Securi-ty Project Fellows, who were instrumental in help-ing us set up so many excellent interviews.

And, of course, thank you to everyone, in the States and Pakistan, who met with us during our research, and who shared their insights and perspectives on the Pakistan Private Investment Initiative—we learned so much from, and truly enjoyed, discussing this project with so many in-spiring people over the last few months.

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Promoting Private sector developmentin october 2009, President obama signed into law the enhanced Partnership for Pakistan act. the legis-lation, better known as the Kerry-Lugar-Berman (KLB) bill, introduced a comprehensive policy framework for U.s. assistance to Pakistan, tripling development aid to $7.5b over five years. As part of this package, the United states prioritized support for private sector de-velopment through trade and investment.

Launching a U.s.-sponsored investment fund to sup-port Pakistan’s private sector first garnered attention when secretary clinton, in partnership with the over-seas Private investment corporation (oPic), pledged to provide $50mm for private equity investments in small- and medium-sized enterprises (smes) during the U.s.-Pakistan strategic dialogue in march 2010. that July, senators Lugar and Kerry introduced bill s. 3665, the Pakistani-american enterprise fund act. the bill, inspired by the 1989 support for east european de-mocracy (seed) act and the 1992 freedom support act, which together established 10 ‘enterprise funds’ throughout eastern and central europe after the soviet collapse, authorized an independent fund to provide loans and equity to private Pakistani enterprises, in or-der to create jobs and counter militant extremism.

in december 2011, congress chose not to authorize the $60mm allocation for establishing the Pakistani-american enterprise fund. despite this setback, how-ever, the U.s. department of state, still committed to strengthening support for Pakistan’s private sector, began surveying alternative models for promoting job growth and investment in smes. this paper examines these alternatives and makes recommendations for which to pursue, and how best to pursue them.

Looking Beyond 2014 the U.s. partnership with Pakistan is one of the most strategically significant bilateral relationships in the world, and it will continue to be so long after the ten-tative withdrawal of U.s. forces from afghanistan in 2014. Pakistan, located at a geopolitical crossroads, is locked in an enduring rivalry with neighboring india and holds close alliances with china, saudi arabia, and the broader Muslim world. Its geographic significance is compounded by its demographic composition and powerful military. Pakistan is a nuclear state, home to the world’s second-largest muslim population, and is projected to become the fourth-most populous country in the world by 2050.

several events in 2011 tested the relationship between Pakistan and the United states—in particular, the Ray-mond davis incident in January, the killing of osama bin Laden in may, and the accidental helicopter attack on a

Pakistani border post in november.

the U.s.-Pakistan relationship, however, and ameri-can engagement in the country more broadly, remain crucial to ensuring Pakistan surmounts the immediate challenges it faces—which are substantial. Vital U.s. interests and the economic integration of south asia re-quire a stable Pakistan—but looming social, economic, and political upheaval could compromise any hope for long-term stability.

investing in stabilitythe U.s. Government has various tools at its disposal—aid, trade, technical assistance. But one that has been given relatively little emphasis in Pakistan has been in-vestment. U.s. investment, however, has the potential to both stabilize the economy through effective economic development, and to widen and deepen american ties to powerbrokers in Pakistan—especially those outside the traditional political establishment.

Pakistan’s private sector is essential to any strategy for long-term engagement—bolstering it will increase eco-nomic stability, hamper terrorist recruitment, and draw in a wider array of political allies.

The country’s economy is beset by stagflation and a lack of competitiveness. energy shortages and rising fuel and food costs are closing factories and pushing more Pakistanis below the poverty line. Private invest-ment is the engine that drives economic growth; the middle class expansion that often accompanies such growth will play an important role in promoting econom-ic stability, which undergirds political stability. a robust middle class provides a constituency for free markets, effective governance, democracy, and the rule of law.

as well, job creation is an important tool for countering violent extremism. a burgeoning youth population—an alarming 68% of all Pakistanis are under the age of 30—is engulfing Pakistan’s urban areas, where a lack of jobs, education, clean water, and access to justice cul-tivate a breeding ground for radicalization. an invest-ment fund can help grow businesses, which will create new jobs. Generating employment is essential for re-ducing poverty and lessening the tensions that terrorist networks exploit to radicalize marginalized populations.

finally, direct engagement with business leaders will form new alliances in Pakistani society. the value of diplomacy outside the traditional halls of power has become increasingly clear, especially after last year’s ‘arab spring’ uprisings. Building broader, stronger re-lationships throughout Pakistan is in the american inter-est, helping U.s. policymakers to better prepare for an unpredictable future.

contentsBackground ....................................... 5

Executive Summary ........................... 6

Overview .......................................... 10

Market Analysis ................................12 – Economic Challenges...................... 12 – Development Approaches ................ 16 – Targeting Investment ........................ 20 –– Market Sectors ............................... 21 –– Market Segments ........................... 25

Operational Analysis ....................... 31 – Model & Strategy ............................... 31 – Structure & Implementation ............... 31 – Complements & Alternatives ............. 38

Risk & Impact Analysis ...................... 46

Recommendations .......................... 50 – Key Features .................................... 52

Conclusion ....................................... 56

Appendices ...................................... 58 – Appendix A – Growth Diagnostic .... 58 – Appendix B – Potential Partners ..... 61 – Appendix C – Interviews .................. 65 – Appendix D – Acronyms .................. 67

BAckground

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the U.s. department of state’s coordinator for eco-nomic and development assistance in Pakistan has proposed the creation of a Pakistan Private investment initiative (Pii), to be implemented by Usaid, as an alter-native to a legislated enterprise fund. this study sur-veys a range of potential options for designing the Pii and proposes a model that, we believe, is best suited to increase access to finance for promising SMEs and to foster job creation and long-term economic growth in Pakistan. (We hereinafter refer to this collaboration between the department of state and Usaid simply as ‘state,’ and to the Pakistan Private investment initiative as the Pii, ‘the fund,’ or ‘the initiative.’) state has al-ready expressed a possible interest in partnering with the small enterprise assistance funds (seaf), as one component of the Pii—our recommendations account for and accommodate this proposal.

The Problem despite Pakistan’s vibrant banking sector, credit ration-ing is a major constraint on sme growth and investment. interest rate spreads on commercial loans compare un-favorably to the high-interest, risk-free securities sold by the Government of Pakistan. as a consequence, vora-cious government borrowing is sustaining an investment climate in which banks have little incentive to extend credit to the private sector. the burden of Pakistan’s underserving banks on SMEs is magnified by a void of private equity participation in the market. Alone, the fi-nancial constraint on smes is problematic, but coupled with a rapidly expanding population it becomes urgent. on average, Pakistan’s economy grows 3% annually; just to absorb annual workforce additions, Pakistan will need to grow 6–7% per year—i.e., Pakistan will have to create at least 36 million jobs over the next 10 years to meet the needs of a huge, young, and fast-growing population. Lagging private sector investment under-mines Pakistan’s ability to achieve the strong, sustained growth required to rise to this challenge.

The OpportunityThere is an opportunity today to respond to the unmet fi-nancing needs of Pakistan’s sme sector without crowd-ing out private investment. this urgent need, coupled with an undeveloped private equity market, creates a space in which the United states could play a unique role as a catalyst for investment. By establishing a fund—in some form—state could, at a minimum, gener-ate modest job growth within its portfolio of investment companies and showcase U.s. commitment to private sector development in Pakistan. these alone are valu-able objectives and worth the use of limited U.s. re-sources. Beyond this, there is also an opportunity to draw in greater participation to Pakistan’s investment market by demonstrating the possibility of healthy—even extraordinary—returns. While, ultimately, a single fund cannot mend the underlying policy failures that

discourage investment in Pakistan, it can still have vari-ous, multiplicative positive effects.

The Response In order to best serve the financial needs of Pakistan’s private sector, and to contribute to sustainable econom-ic growth more generally, state should establish a fund with a mandate to provide long-term investment capital for smes. small and medium enterprises are both the most finance-constrained and the most likely sources of job growth. accordingly, sme investment provides an exceptional opportunity to ameliorate Pakistan’s financ-ing constraints and to energize private sector growth. moreover, given the resources allocated to this initiative and the capabilities of state and Usaid, sme invest-ment is both a feasible and judicious intervention.

We recommend designing the fund using the private equity model, to support new and growing smes—i.e., form limited partnerships with professional fund man-agers to direct venture and growth capital to promis-ing businesses. Private equity’s long-term investment horizon, emphasis on value creation, and track record in spurring growth and innovation in emerging markets has the greatest potential to address the need for fi-nancing among smes and to foster broader develop-mental returns, without the risk of crowding-out.

high-quality fund management will be essential to achieving a strong return on U.s. investments and to stimulating the multiplicative impacts that will sustain the fund and develop Pakistan’s nascent private invest-ment industry over the long run. state should look for independent and professional investment firms as the best partners for success. state should also not limit itself to a single partner but, instead, place capital with several firms to target narrower market segments.

additionally, state should include a complementary component to provide support for the development of Pakistan’s entrepreneurial ecosystem. Specifically, the program can work with Pakistani universities to establish and support startup incubators, and it can build linkag-es among universities and individual entrepreneurs, in Pakistan and overseas, to promote knowledge-sharing and mentorship. a fund with these three components—ecosystem development, venture capital, and growth equity—can target the full stream of the business life-cycle, which is crucial to scalable, sustainable success.

The Way Forward Below, we provide eight core recommendations, fol-lowing from our findings. Collectively, they address the financial needs of Pakistan’s private sector, mitigating risk, enhancing developmental impact, facilitating prof-itable investments, and improving U.s. engagement with Pakistan’s private sector.

executive summArymaJoR findinGs1. There is an urgent need for financing among Pakistani

businesses and entrepreneurs.

2. microeconomic risks posed by governance-related failures represent the most binding constraint on private investment and entrepreneurship in Pakistan. the underlying challenge is one of demand for, rather than supply of, capital. there is, however, more than one constraint on investment in Pakistan—and in the short term, Pakistan’s energy shortage, interest rate spread, depreciating rupee, and image as a high-risk country all serve to limit access to finance.

3. A deficit of useful firm- and sector-level information makes market analysis difficult—this presents a spe-cific private sector development challenge in itself.

4. over-prescribing the scope of a fund’s investments inhibits flexibility and risks closing out opportunities for financial and development return.

5. smes are the most capital-constrained businesses and disproportionately overlap with high-growth sec-tors of the economy.

6. There is a need to better define the bounds of the SME segment and, in particular, to distinguish the differ-ences between ‘small’ and ‘medium.’

7. smes in both the venture and growth stages are con-strained by a lack of access to long-term, risk-oriented capital and institutional support, and represent com-pelling investment opportunities.

8. high-quality, professional fund managers, who have a local presence and the capacity to add strategic support to investee companies—operating in private equity’s limited partnership model—are key determi-nants of fund performance in emerging markets.

9. the more participation there is in Pakistan’s invest-ment industry, the better will be the exit options and prospects for scaling investment after donor funding ends—the benefits of partnering with various other donors and investors to establish investment funds far exceed those of branding the Pii as a wholly american initiative.

10. there is also a tremendous need—and substantial opportunity—for supporting the development of Paki-stan’s burgeoning entrepreneurial ecosystem.

11. There is a positive relationship between healthy finan-cial and economic returns in emerging market private equity—but the PII will also face financial and political risks. these can be mitigated by a well-managed, market-oriented investment approach that institution-alizes adaptability, learning, and transparency—and shows the patience to let investments mature.

Recommendations1. establish a vehicle to address Pakistan’s immediate

financing needs, but acknowledge its limitations—ul-timately, governance failures constrain private invest-ment and entrepreneurship.

2. invest U.s. Government resources using the private equity fund model. Work with private sector part-ners. the private equity model is proven in emerging economies and private sector partners bring critical experience to the partnership—both are important for Pii success and attracting new investment.

3. Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with high potential for growth and multiplicative impact in Pakistan’s economy. Prioritize further information collection, collation, and dissemination to address the deficit of good market data in Pakistan and attract new private investment.

4. disaggregate the ‘sme’ space and focus on small and medium firms, separately. Define these as firms in the $50k–$1mm and $1mm–$10mm revenue ranges, respectively. focus on smes with the strongest exit prospects—target investments in companies led by promising entrepreneurs that have vision, but lack the financial and institutional support to scale.

5. structure the Pii to include venture capital and growth equity components. Plan for ticket sizes of $50k–$400k and $2mm–$7mm, respectively. employ the limited partnership structure common in private equity and adopted by the cdc and other major dfis, in line with international industry standards.

6. Work through multiple implementing partners, as a means to create several smaller Pii funds with more targeted investment strategies. select and invest with professional fund management firms with relevant experience, local knowledge, capacity to add com-mercial value to portfolio companies, and ‘skin in the game.’ Consider emerging or first-time fund manag-ers that align with the broader Pii mandate, in addition to experienced teams with proven track records.

7. structure Pii fund partnerships using one or more fea-sible implementing mechanisms that allow for maxi-mum flexibility, commercial sustainability, and lever-age of U.s. Government resources. Prioritize the Gda model but use more traditional contracts and grants as required. seek substantial Pakistani private sector involvement in sourcing and levering investments.

8. incorporate an explicit component to develop Paki-stan’s entrepreneurial ecosystem. allocate between $10mm and $20mm for startup capital and other incu-bator initiatives. Work through local entrepreneurship networks and universities. implement from the level of the Pii as an overarching component or through a partner as a smaller sub-fund.

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Macroeconomicgovernment

failures

Microeconomicgovernment

failures

Marketinformation

failures

Marketcoordination

failures

Lowcompetition

High riskof finance

Poorinfrastructure

High costof finance

Low humancapital

OPPORTUNITY

NEED FEASIBILITY

Consolidatefragmented

markets

Tap keydemographic

groups

Look formultipliereffects

Add U.S.value

Capitalize oncore strengths

Medium

Large

Small

Micro

Trade

Investment

Aid(to State Bank,

SMEDA)

Technicalassistance(to banks)

Growthequity

Buyout

Venturecapital

Angelinvestment

Large capitalinvestment

SMEfinancing

Microfinance

Multiplepartners

1 partner,fund of funds

1 partner,1 fund

Grant to publicinternationalorganization

Request forproposals

GlobalDevelopment

Alliance

Partial creditguarantees

Feed-in tarifffor renewable

energy

Social impactbonds

Entrepreneurialecosystem

development

Tradeassistance

Sectoragnosticism

IMPACT

Invest wherethere’s pent-up

demand

Promote exportcompetitiveness

Focus onlocuses of

job creation

Targeting StrategiesEconomicChallenges

Sectors Segments

Model & Strategy Structure & Implementation

Complements & Alternatives

Assistance Types Target SizeInvestment Type No. of Partners Selection Process

Foreigngovernment

lending

Privateequity

Domesticgovernment

lending

Commercialbank

lending

Financing Vehicles

Development Approaches

Financialmarkets

Nonprofitgrants &lending

Low savings &bad international

finance

should we work?shouuld wwe wwork?withh

Macroeconomicgovernment

failures

Microeconomicgovernment

failures

Marketinformation

failures

Marketcoordination

failures

Lowcompetition

High riskof finance

Poorinfrastructure

High costof finance

Low humancapital

OPPORTUNITY

NEED FEASIBILITY

Consolidatefragmented

markets

Tap keydemographic

groups

Look formultipliereffects

Add U.S.value

Capitalize oncore strengths

Medium

Large

Small

Micro

Trade

Investment

Aid(to State Bank,

SMEDA)

Technicalassistance(to banks)

Growthequity

Buyout

Venturecapital

Angelinvestment

Large capitalinvestment

SMEfinancing

Microfinance

Multiplepartners

1 partner,fund of funds

1 partner,1 fund

Grant to publicinternationalorganization

Request forproposals

GlobalDevelopment

Alliance

Partial creditguarantees

Feed-in tarifffor renewable

energy

Social impactbonds

Entrepreneurialecosystem

development

Tradeassistance

Sectoragnosticism

IMPACT

Invest wherethere’s pent-up

demand

Promote exportcompetitiveness

Focus onlocuses of

job creation

Targeting StrategiesEconomicChallenges

Sectors Segments

Model & Strategy Structure & Implementation

Complements & Alternatives

Assistance Types Target SizeInvestment Type No. of Partners Selection Process

Foreigngovernment

lending

Privateequity

Domesticgovernment

lending

Commercialbank

lending

Financing Vehicles

Development Approaches

Financialmarkets

Nonprofitgrants &lending

Low savings &bad international

finance

should we work?shouuld wwe wwork?withh

Market Analysis Operational Analysis

Recommmendations& Key Features

Risk &

impact a

nalysis

summAry diAgrAm

10 11


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Research GoalWith this policy analysis exercise, we seek to inform the ongoing dialogue on U.s. economic and development assistance to Pakistan. our core objective is to pro-vide specific recommendations to the U.S. Department of state for the design and implementation of the pro-posed Pakistan Private investment initiative.

MethodologyThe findings herein are the culmination of field research conducted in cambridge, mass., Washington, d.c., and Pakistan, between november 2011 and april 2012. Research included interviews with entrepreneurs, busi-ness leaders, investors, bankers, policymakers, elected officials, academics, and other experts, in Pakistan and the United states. We held meetings in Karachi, Lahore, and islamabad, in order to gather insights into and per-spectives on the investment environment in Pakistan, and the optimal design for a U.s. fund.

We also reviewed the existing literature on foreign as-sistance and private sector development, policy papers addressing the U.s.-Pakistan bilateral relationship, data and research on the Pakistani investment evironment, and other relevant sources of information. direct refer-ences to published sources are cited in the endnotes. insights and observations gleaned from interviews are not cited explicitly in the document, but appendix c in-cludes a complete list of individuals consulted through-out our research.

Scope Our research examines the specific proposal for a Pri-vate investment initiatve and its role in strengthening the U.s. approach to economic development in Paki-stan, but it does not address other aspects of that en-deavor or this broader policy question itself.

although we evaluated a range of viable options for the design of the fund, we chose not to elaborate on the op-erational details of how these recommendations would be implemented. there are thus legal and technical questions regarding the operation of the fund that are beyond the scope of this study.

analysis of Pakistan’s economic context and market op-portunities informs our recommendations for an optimal fund model. We intentionally refrained, however, from recommending specific investment decisions or strate-gies. such decisions ought to be the responsibility of independent and professionally experienced fund man-agers with local knowledge and technical expertise.

finally, although we consulted a diverse group of stake-holders in Pakistan to produce this study, our interviews were not exhaustive and our time in-country was limited. Further field research on Pakistan’s investment environ-

ment would make a valuable contribution to addressing the existing deficit of useful market data.

Fund Objectivesthe U.s. Government has proposed the creation of the PII to increase the availability of finance for promising small- and medium-sized enterprises in Pakistan.

We define the initiative’s objectives as follows:

1. Promote job growth – support the expansion of businesses, encourage entrepreneurship, and show positive demonstration effects that attract fur-ther private investment.

2. Foster goodwill – establish a visible, long-term american commitment to supporting the develop-ment of Pakistan’s private sector.

Guiding PrinciplesWe identify six overarching principles that underlie the de-sign and implementation of an effective fund. first, the fund should optimize across three dimensions—address-ing pressing economic needs, capitalizing on market op-portunities, and ensuring feasibility. from this foundation, the fund should enshrine the values of independence and transparency, and of adaptability and learning. finally, the fund’s driving motivation should be to have multiplicative impact.

Analytical Frameworkour analytical framework aims to identify the optimal bal-ance of the three foundational principles—addressing need, capitalizing on opportunity, and ensuring feasibil-ity—in two stages.

first, we evaluate the overlaps between need and oppor-tunity. We assess the economic constraints on growth and investment at the country level, by examining the broader economic environment. then we identify the areas where financing need and growth opportunity most overlap at the firm level, by examing the market across two key dimen-sions: sectors and segments.

second, we consider feasibility and impact. We conduct an operational analysis of the range of possible fund mod-els, implementation structures, and alternative approach-es to assess their viability and efficacy. We the perform a risk and impact analysis to identify the main financial and political factors that have the potential to undermine the effectiveness of fund performance, and how best to overcome them.

We conclude with eight core recommendations, plus sev-en more specific design considerations. We also include two (of several potential) models for the fund’s structural design.

overview

ADDRESS!NEED!

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ENSURE!FEASIBILITY!

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MARKET ANALYSIS!

ECONOMIC !CHALLENGES!

TARGET!SECTORS!

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OPERATIONAL ANALYSIS!MODEL &!

STRATEGY!DESIGN &!

IMPLEMENTATION!

COMPLEMENTS &!ALTERNATIVES!

RISK &!IMPACT!

ANALYSIS!

NEEDS & OPPORTUNITIES!FEASIBILITY & IM

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RECOMMENDATIONS!

DEVELOPMENT!APPROACHES!

COUNTRY LEVEL

FIRM LEVEL

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any development program in Pakistan must take into account the larger economic context in which it will op-erate. Be it for an enterprise fund or any alternative model, the needs of Pakistani businesses, the challeng-es they face, and their prospects for growth are distinct from those in eastern europe in the early 1990s and, indeed, from many other emerging markets today. Un-derstanding these nuances is essential for crafting the best possible policy intervention.

economic challenges*Pakistan faces a unique set of economic challenges—some caused by natural and demographic circum-stances, others by poor policy choices. While substan-tial, these challenges are manageable given the right approach, from within the Pakistani government, and from outside partners like the United states. Ultimately, the prospects for resolving Pakistan’s broader political and security difficulties will hinge on how effectively the country navigates this turbulent economic period.

Youth BulgeWith more than 190 million people today, Pakistan will * Portions of this section were written originally by dustin cathcart, andrew fitzpatrick, and meredith Gloger for Ped-130, “Why are so many countries Poor, Volatile, and Unequal?” with Prof. Ricardo haus-mann, Harvard Kennedy School. (“PED-130 Final Assignment: Growth diagnostic—Pakistan,” december 2011).

soon be the fourth-largest country in the world—its population has tripled in less than 50 years and is pro-jected to increase by an additional 85 million by 2030.1 Pakistan is also experiencing an unprecedented youth bulge. about 68% of Pakistanis are under the age of 30, and the size of the workforce is increasing at an average of 3% per year.2

to meet the needs of this surging population, Pakistan’s economy has to grow at an estimated 6–7% annually, for the foreseeable future, and it must add some 36 mil-lion new jobs in the next 10 years.3 this ‘demographic dividend’—as the youth bulge ages and moves into the workforce, the proportion of productive workers will in-

mArket AnAlysis crease—represents both an opportunity and a tremen-dous challenge.

Volatile GrowthPakistan’s ability to rise to this challenge depends on its capacity for strong, sustained growth. While the coun-try has this potential, its economy has been extremely volatile in recent years.

after experiencing anemic growth in the 1990s, the economy bounced back with rapid economic growth in the early- to mid-2000s.* But Pakistan’s external defi-cit in 2007 made it particularly vulnerable to the 2008 financial crisis. High inflation and low levels of domes-tic liquidity became unsustainable with the collapse of global demand. as a result, the imf bailed out Pakistan to avert a balance of payments crisis. in addition to inflation, political instability and rising global commodity prices have further deterred investment and weakened Pakistan’s current account balance.

Pakistan’s economy is currently at risk of ‘overheating.’ That is, its non-accelerating inflation rate of unemploy-ment (naiRU), or its ‘natural’ unemployment rate, has exceeded its real unemployment rate. this suggests that growth in aggregate demand is outpacing growth * the World Bank credits this growth to economic reforms, including fiscal adjustment, energy sector privatization, deregulation of the fi-nancial sector, and liberalization of international trade policy.

in the supply of labor. in recent years, this imbalance has been stoking inflation.4 currently, Pakistan is ex-periencing ‘stagflation’—i.e., high inflation coupled with low growth.

although unemployment itself is not an immediate con-cern, it will become one, if economic growth does no keep pace as the workforce balloons. to achieve such growth, Pakistan needs more investment in its private sector.

Immediate Constraints on Capitalin the short term, Pakistan faces a unique set of inter-woven constraints on financing for investment—particu-larly for smaller, growing businesses.

35%!

36%!

37%!

38%!

39%!

40%!

41%!

42%!

43%!

44%!

45%!

1960! 1965! 1970! 1975! 1980! 1985! 1990! 1995! 2000! 2005! 2010!

Fig. 1 Pakistan's 'Youth Bulge'!Percentage of Population <14yrs!

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Circular Debt5

Pakistan’s most pressing economic challenge is the ac-cumulation of circular debt in the energy sector, which has reverberating effects throughout the economy. in 2008, the Pakistan electric Power company (PePco)—the public umbrella organization for power-generation companies (Gencos) and power-distribution compa-nies (discos), accounting for 90% of energy produc-tion in Pakistan—began facing rising energy production costs, as worldwide oil prices rose, exaggerated by a depreciating rupee. at the same time, due to the gov-ernment’s high external debt amidst the global finan-cial crisis and the resultant credit crunch, public power purchasers fell short on payments. aggravat-ing the shortfall, high rates of energy theft re-mained unaddressed.

in lieu of cracking down on theft or raising tariffs (tariffs remained stag-nant from 2003 to 2007, despite rising energy costs), PePco passed on the growing receiv-able to suppliers—ex-tending the debt up the energy supply chain (GENCOs, refineries, oil and gas exploration companies, etc.).

this mounting debt reduces energy pro-duction, as upstream producers—the only ones with liquid cash reserves—are forced to pay off their receivables rather than invest in ex-pansion. additionally, since 2006, PePco has borrowed from com-mercial banks against government guaran-tees, as have indepen-dent power producers (iPPs) who supply PeP-co, since 2007.

at the end of 2011, the government formally absorbed the accumulated debt from PePco—Rs 391b (about $4.3b), equivalent to 1.8% of GdP—into the public debt.6 in this way, the energy sector feeds the larger debt problem in Pakistan, which in turn is a key factor in suppressing private-sector financing. Further, circu-lar debt dampens energy investment; this exacerbates the electricity shortages that so constrain businesses; these then limit their capacity for growth; and this makes

it more difficult to raise energy tariffs—illuminating the debilitating circularity of this crisis.

Interest Rate Spreadin 2011, Pakistan’s overall public debt grew by 1.76b rupees to Rs 11 trillion (about $121.6b)—representing 60.9% of GdP. today, interest payments themselves eat up 32.8% of government revenue.7 there are many pernicious effects of such a large debt burden—most immediately, though, it is not the size of the debt that poses the biggest problem, but rather how the govern-ment finances it. The government has come to rely on Pakistani commercial banks to supply the majority of

its debt—by borrowing heavily from domestic lenders, the govern-ment thus crowds out private-sector borrow-ers.

following the suspen-sion of the imf’s stand-by agreement (sBa), there are fewer viable sources of external debt. as a result, in 2011 the government borrowed Rs 1.1 trillion from domestic lenders (about $12.2b)—local sources now finance 91% of the deficit.8

heavy government borrowing disincentiv-izes—and thus crowds out—lending to the private sector in three ways:

1) the government offers high interest rates, raising the effec-tive discount rate for banks, and raising the hurdle rate for investing in the private sector in-stead;

2) Government debt is risk-free, and so banks seek a risk premium from private borrowers, further raising their lending rate;

3) transaction costs are lower for government borrow-ing.

taken together, these three factors serve to push inter-est rates seen by private borrowers too high to often be viable, and to reduce banks’ inclination to seek oppor-tunities for lending to the private sector in the first place.

in 2011, for instance, while lending to the government increased by 74.5%, credit to the private sector grew only by 4%.9

Depreciating RupeeDuring the financial shock of 2008, the Pakistani rupee experienced a swift devaluation—from march 2007 to october 2008, the rupee lost 27.31% of its value against the U.s. dollar. Because Pakistan’s external debt was so heavily invested in foreign exchange reserves, it was particularly vulnerable. in the years since, following a brief recovery, the exchange value against other major currencies has been in steady, gradual decline.

currency depreciation can have ambiguous effects on an economy—for instance, a weaker rupee might strengthen Pakistan’s export sector. But volatility adds risk for investors outside Pakistan and businesses with-in. and, compared to neighbors like india, Pakistan has seen markedly higher volatility.

in particular, a continuous fall in the rupee against other major currencies will depreciate the value of foreign debt for Pakistani firms—a loan in U.S. dollars, for in-stance, will require constantly accelerating growth to repay, as local earnings have to stretch ever further to reimburse foreign debts.

Outside Perceptions of Riskduring the last two decades, foreign investment has been sensitive to instability in Pakistan. an increase in violence in the mid-1990s (much of it linked to mQm-backed political attacks in Karachi),10 saw a corre-

sponding decrease in fdi; investment dropped each year from 1995 to 2001. then, in the early-2000s, Paki-stan experienced an economic surge—GdP growth in-creased each year from 2001 to 2005, rising from 1.98% at the start of the decade to 7.67% annually.11 An influx of foreign investment paralleled this boom; fdi rose each of those years, from $322.5 million in 2001, up to a peak of $5.41 billion in 2007. But the reemergence of instability in the second half of the decade, coupled with the financial crisis in 2008, saw a sharp downturn in fdi, which has dropped each year since 2007—falling to less than $1.5 billion in 2011–2012.

Pakistan’s ‘Binding Constraint’Pakistan undoubtedly faces a host of economic chal-lenges—from the immediate debt, financing, exchange, and perception problems, described above, to longer-term infrastructure deficiencies in the energy and edu-cation sectors, current account imbalances, and mar-ket failures related to corruption, monopolization, rent-seeking, and lack of information. it is important to ask, however, which of these are underlying ailments and which are merely symptoms, and, from a policy per-spective, which constraint, if loosened, would unleash the most investment and growth—i.e., what are their ‘shadow prices’ and which has the highest one?

Ricardo hausmann, dani Rodrik, and andrés Velasco12 introduced a model—called a growth diagnostic—for determining a country’s ‘binding constraint’ on invest-ment. this methodology uses a standardized, staged process for isolating the most constraining factor in an economy. in appendix a, we employ this approach to

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identify Pakistan’s binding constraint .

We find that microeconomic risks posed by government failures most constrain investment. in other words, the government’s over-involvement in the economy—e.g., by creating and enabling monopolies, paying untar-geted subsidies, enforcing cumbersome and ineffi-cient regulations, and engaging in direct corruption—discourages investment at the firm level, by distorting companies’ incentives. these practices, more than anything, dampen Pakistan’s growth.

this observation should serve to frame the Pii. Ultimate-ly, a U.s. fund cannot directly rectify these policy failures that fundamentally discourage investment in Pakistan. the initiative may demonstrate that investors can earn high returns, but until Pakistan’s growth-constricting policies are reformed, many investors will remain wary, and the economy will be unlikely to see high, sustained economic growth across the board.

nevertheless, Pakistan faces a diverse set of imminent economic challenges, so we do not intend to imply that addressing the financing gap is not worthwhile—it certainly is. But it is important that such an initiative is not viewed as a panacea. as well, it is important that the initiative itself recognize the deeper problems the Pakistani market faces, and that it incorporate these in-sights into its design. a fund, for instance, could help coalesce a stronger private-sector lobby for policy re-form, by connecting investees and wider networks of entrepreneurs. It could also find ways to support more forward-thinking policymaking, as initiated by the Plan-ning commission’s Framework for Economic Growth.

development approachessome of Pakistan’s economic problems—like those re-lated to the government’s macroeconomic policies or micro-level market interventions—are beyond the scope of any direct U.s. initiative. among those that are within reach, Pakistan’s financing gap for small- and medium-sized businesses is perhaps both the most pressing and the one on which state can have the most impact. finding a way to channel capital to young, growing businesses will most directly generate new jobs, and, if achieved through wider market mechanisms, the dem-onstration effects of successful investments can multi-ply well beyond the ambit of any single U.s. program.

state has a core set of tools at its disposal for any pro-gram of this sort: aid, trade, technical assistance, and investment. and there are several broad approaches whereby State could attempt to increase access to fi-nance for smes. one would be to provide technical assistance to Pakistani banks, government institutions, or other potential lenders, to encourage them and to strengthen their capacity to lend to smaller businesses. A second would entail offering loan guarantees or first-loss capital to domestic lenders, thereby absorbing their risk and incentivizing private-sector lending. a third is to establish a fund to make such investments—equity and debt, paired with strategic guidance—directly.

Rationale for an Investment Approach Working through preexisting institutions in Pakistan—whether public or private—has proved difficult: The Pakistani government is ill-placed to finance business growth (especially when so many of Pakistan’s eco-nomic woes are tied to government over-involvement and rent-seeking in the first place). At the same time, capacity-building of or technical assistance to com-mercial banks is misplaced, as it is simply not in their interest to provide capital to smes at present, given the government’s reliance on banks to finance the pub-lic debt, risk-free and at high interest rates. Likewise, loan guarantees for these banks might require working through the state Bank—a government body—and it is also unclear, given their exorbitantly high investment in government securities, whether this would do enough to incentivize more lending without further prodding (e.g., substantial changes to the tax code to reward private-sector lending and penalize debt financing).

A fund—providing a new source of capital—can fill the financing gap without fighting the interests or incentives of other actors. if successful, it can catalyze further in-vestment (local and international) to address this need more sustainably. trade preferences for Pakistani ex-porters could also play a crucial role in spurring private-sector growth, but such accommodations would have a less immediate effect, are not as politically feasible in the current U.s. climate, and, anyway, are beyond the scope of this intervention by state—though they could serve as an important complement to an investment ve-hicle.*

* the center for Global development, for one, has written extensively on the need for trade concessions as a means to development in Pakistan. the european Union’s recent decision to reduce tariffs on 75 Pakistani products, for instance, could produce $100–300mm in new annual revenue. For more on this, see: http://blogs.cgdev.org/globaldevelopment/2012/02/trading-up-pakistan-the-eu-and-trade-as-development.php; http://www.cgdev.org/content/publications/detail/1425847/; and http://www.cgdev.org/content/publications/de-

congress’s decision not to authorize funding for the Pakistani-american enterprise fund at the end of 2011 eliminated the possibility, in the immediate term, of establishing an independent institution, capitalized by the U.s. Government, to invest directly in Pakistani businesses. there are nevertheless other options for partnering with private-sector, nonprofit, or multilateral organizations to provide a conduit for such financing.

Given the nature of Pakistan’s investment climate, how-ever, private sector institutions—namely, professional private equity and venture capital fund managers—of-fer a particularly attractive partnership opportunity. as such, investment, rather than traditional aid, could pose substantial benefits.

John donahue and Richard Zeckhauser13 lay out four rationales for collaborating with private sector actors like these to achieve a goal usually relegated to the public sector.

• Resources – Private partners offer the opportunity to leverage american capital for greater impact. By partnering with investors who can raise their own equity—from other institutional or international in-vestors, local investors, or the diaspora—the fund can multiply its size and thus increase its effect.

• Productivity – the human capital, incentive schemes, and institutional structures of the private sector are better-equipped for making productive investments into Pakistani firms than are those of Usaid or the department of state.

• Information – Likewise, at both the institutional and individual levels, potential private-sector partners possess substantially more know-how and on-the-ground knowledge about investment opportunities in the Pakistani market than does the department of state, Usaid, or either’s staff.

• Legitimacy – Private investors have more credibility than the U.S. Government for two reasons: 1) their track records and professional expertise render them more suitable strategic partners for Pakistani firms; 2) in Pakistan’s complicated political climate, private investors will be a step removed, and thus more insulated, from any negative connotations of U.s. involvement.

Precedentsthe U.s. Government has engaged previously in a number of collaborations with the private sector to pro-mote investment as a means to development. as well, a number of other development finance institutions (DFIs) exist, financed by sovereign governments and multilat-eral institutions. We highlight below two in particular—the World Bank’s international finance corporation and

tail/1425136/.

the United Kingdom’s cdc—as potential models for the Pii.

Enterprise FundsUnder the 1989 seed act, followed by the freedom support act in 1992, congress established 10 ‘enter-prise funds’ covering 18 countries in eastern and cen-tral europe. the funds combined lending programs (debt), equity investments, and technical assistance for establishing local financial institutions. Over their lifes-pans, the funds were obligated $1.175b by congress and earned an overall return of $1.704b. they directly invested a total of $2.973b, leveraged an additional $3.326b in equity through fund managers, plus $3.581b of debt and co-investment. They also provided signifi-cant technical assistance, including for the creation of 30 financial institutions (banks, venture capital firms, leasing companies, microfinance institutions, etc.).14

The enterprise funds were private, nonprofit corpora-tions, capitalized by Usaid grants. they had indepen-dent, White house-appointed boards, which then hired in-house professional fund managers. each fund re-ceived ‘notwithstanding authority,’ and thus was exempt from many standard rules and regulations, such as for procurement procedures or ‘Buy american’ require-ments. The individual boards had significant leeway to determine investment strategy, and the funds often took divergent approaches country by country.

today, all but one fund has fully liquidated (the West-ern nis fund is scheduled to liquidate by 2013)—but all have been rolled over into legacy institutions, like the Polish-american freedom foundation and the hungari-an-american enterprise scholarship fund.15

more recently, congress authorized enterprise funds for egypt, Jordan, and tunisia. sen. Richard Lugar has also sponsored legislation for a haitian-american en-terprise fund.

Overseas Private Investment Corporation (OPIC)congress founded oPic in 1971 as the U.s. dfi, in or-der to “mobilize and facilitate the participation of United

Recommendation 1establish a vehicle to address Pakistan’s immediate financing needs, but acknowl-edge its limitations—ultimately, governance failures constrain private investment and entrepreneurship. design the Pii to invest in relatively unconstrained market areas and to act as a catalyst for reforms to im-prove the business environment.

A fund—providing a new source of capital—canfillthefinancinggapwithoutfightingtheinterestsorincen-tives of other actors.

http://blogs.cgdev.org/globaldevelopment/2012/02/trading-up-pakistan-the-eu-and-trade-as-development.php



http://www.cgdev.org/content/publications/detail/1425847/




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states private capital and skills in the economic and social development of less developed countries.” Un-der its original mandate, oPic provided risk insurance to foreign investors to promote fdi. in the late 1980s, oPic added support to private equity investment funds to its mission. oPic provides loan guarantees to fund managers—typically for 30–65% of the fund’s total value.16 OPIC also provides loan financing directly to SMEs (revenues less than $250mm), and structured fi-nancing for large-scale capital projects to businesses with revenues greater than $250mm.17

to date, oPic has committed $3.6b to more than 50 pri-vate equity funds, which have then invested more than $4.6b in 470 businesses in 53 developing countries.18 In 2010, OPIC provided $2.4b in total financing and

insurance, and earned a net income of $259.9mm—returning money to the treasury for the 33rd straight year.19

there is substantial evidence that oPic’s activities have a positive impact. from 1969 to 2003, oPic supported $145b of private investment, generating more than $11b in revenues for local governments and 680,000 jobs in developing countries.20 anecdotally, fund managers re-port that oPic’s presence has encouraged their entry into emerging markets, and has made it easier to then raise follow-on funds to sustain and grow private invest-ment.21

oPic, by statute, cannot take equity positions, and in-stead focuses on the provision of debt and insurance. oPic is authorized, however, to pilot a program for mak-ing equity investments.22

Task Force for Business and Stability Operations (TFBSO)the department of defense (dod) established tfBso in 2006 to channel counterinsurgency funds directly to iraqi businesses. tfBso leveraged $484mm of public funding into $500mm in private commercial real-estate development proposals and more than $8b in private investment commitments to state-owned enterprises. it also channeled $6b of dod contracts to more than 4,400 local businesses.23

tfBso focuses on building institutions, providing tech-nical assistance, and facilitating relationships between foreign investors and local businesses, to foster a more vibrant business environment and stronger global link-ages. it works to form partnerships among iraqi and multinational firms, such as GE, Boeing, Microsoft, and Google.24

tfBso places particular emphasis on operating with a business mindset. it hires employees out of the pri-vate sector (with an eye toward both country-specific and professional expertise), it encourages extended in-country stays (rather than limited, 12- to 18-month tours), and it stresses the importance of establishing trust and strong local connections, such as by wearing civilian clothes, using civilian vehicles, and living and working ‘outside the wire.’25

in January 2010, tfBso expanded operations to af-ghanistan, where it focuses on mining sector develop-ment, encouraging private investment in energy and it, industrial development in traditional activities (e.g., carpet-weaving, dried fruit production, and cashmere production), and increasing women’s economic partici-

pation through skills training, literacy courses, the es-tablishment of a center for women’s economic develop-ment, and other initiatives.26

International Finance Corporation (IFC)the ifc, part of the World Bank Group, is the world’s largest dfi. founded in 1956, it is jointly owned by 182 member countries and works in more than 100 devel-oping countries. it accounts for roughly one-third of all financing provided by DFIs to the private sector in the developing world.27

in 2011, the ifc invested $12.2b in 518 projects in 102 countries from its own account, and mobilized an additional $6.2b in co-financing. IFC also provided $206.7mm in technical assistance. about half of invest-ments and two-thirds of advisory services went to poor countries (i.e., aid recipients, as designated by the in-ternational development association).28

The IFC has three core divisions: Investment Services, advisory services, and asset management. through these, the ifc provides direct investment (loans, equity, trade finance, structured finance, and syndications); technical assistance to individual companies, indus-try groups, and governments to improve the business environment; and acts as a fund manager for other in-vestors, including sovereign funds, pension funds, and other dfis.29

CDC Groupthe cdc was founded in 1948 and is wholly owned by the U.K.’s department for international development (dfid). it is the world’s oldest dfi. cdc’s core mission is to strengthen the private sector in and attract new investment to developing countries—75% of its invest-ments are made in countries with annual per capita Gni

of less than $905.30 In the last five years, 44% of its new investments have been in africa, 28% in south asia, 20% in Asia Pacific, and 8% in the Americas.31

cdc made £420mm of new investment in 2010—over the last five years, annual new investments have ranged from £257mm to £436mm. as of 2011, its active portfo-lio totaled to £1.933b. this is managed by 74 fund man-agers, and is invested in more than 1,000 businesses.32

CDC has been wholly self-sufficient for more than 15 years—it has not received taxpayer money since 1995, as profits from exited investments cover all operating costs. in 2010, the cdc earned an after-tax return of £269mm.33

CDC provides an excellent model for the PII: It is a sov-ereign dfi with an explicit development focus. it has operated primarily as a ‘fund of funds’—i.e., investing in preexisting private equity funds—but also makes direct investments through fund managers. cdc earns com-petitive market returns by working through the private sector, while maintaining clear government oversight under the direct auspices of dfid.

The Role of Private Equitythe term ‘private equity’ (Pe) covers investments of a wide array of sizes, and for a variety of purposes—but they share some common features. first, private equity involves private placements—distinguished from pur-chases of shares in publicly traded companies (e.g., through stock exchanges). second, the typical private equity model, particularly in emerging markets, takes a standard structure: a general partner (fund manager), along with limited partners (additional investors), invest equity (perhaps paired with debt) into portfolio compa-nies. the relationship among the general partner (GP) and its limited partners (LPs) is formalized in a fixed-term limited partnership, in which the GP has authority over investment decisions, while the LPs have limited liability for losses.34

PE funds also have a standard incentive and profit-sharing structure, known as two-and-twenty (2&20). fund managers are paid a set, annual management fee

equivalent to 2% of the fund’s total assets. Beyond this, any profits are split 20/80 between the GP and LPs—i.e., managers are entitled to 20% of all profits (so-called ‘carried interest’).35

in the United states and other developed markets, we typically think of PE firms as turnaround agents—inves-tors who buy out firms, restructure them (often with se-vere cost-cutting), and then sell them for a profit. But in emerging markets like Pakistan’s, the model often looks quite different. Private equity in this context usually en-tails minority stakes (rather than buyouts); focuses on smaller, younger companies (rather than larger, dis-tressed ones); and its goal is to provide firms capital and strategic guidance to help them grow, rather than to restructure them into profitable businesses.

Private equity can carry negative connotations—lay-offs, downsizing, etc. But in emerging markets, private equity’s role is rarely about squeezing efficiency out of underperforming firms, and is much more often aimed at bringing scarce capital to promising businesses with the potential for growth.

evidence on the performance of private equity in Paki-stan, in particular, is extremely thin because there has been very little activity to date—which is why there is such a need. even in emerging markets generally, though, the evidence is little better—there is especially a lack of exit data for assessing success or failure.

a 2010 report by the World economic forum, however, which combined datasets from private equity invest-ments in both developed and developing countries, found that industries in which Pe funds are active grow

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From 1969 to 2003, OPIC supported $145b of private investment, generating more than $11b in revenues for local governments and 680,000 jobs in develop-ing countries.

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3) on the other hand, not constraining by segment could encourage investments in larger businesses (as has been the trend in the limited private equity activity in Pakistan to date). While large firms may present more attractive options to highly risk-averse investors, they are less in need of financing, and such investments could feed the entrenched inter-ests and rent-seeking behaviors underlying Paki-stan’s economic problems, rather than fostering new growth.

4) it is dangerous to over-prescribe the fund’s strate-gy—targeting by both segments and sectors (e.g., smes only in the energy, ict, and textile sectors) is likely to constrict fund managers and possibly doom the fund’s prospects.

It is important to note that there is a dearth of good firm- or sector-level data on emerging markets—especially for Pakistan. this makes effective market analysis dif-ficult. The lack of information adds another reason not to over-constrain the strategy ex ante—market oppor-tunities may be overlooked or overhyped, because the information is imperfect. this also points to the sub-stantial need for collecting better information—which, itself, should be a prime objective of the fund.

Market SectorsPerformance and revenue growth in emerging markets tend to vary widely from sector to sector, even within countries. a survey of the performance of ifc-invested funds from 1978 to 2009, for instance, shows that re-turns fluctuated across sectors, and that sector selec-tion can make a significant difference for fund perfor-mance.41 that said, there are myriad and often contra-dictory reasons for choosing one sector or another ex ante. Lack of good market data and competing objec-tives can make selecting sectors of focus difficult.

Pakistan’s Structural Transformationthe structure of Pakistan’s economy has evolved sig-nificantly over the past four decades. In broad strokes,

agricultural sectors, which accounted for 39.9% of GdP in 1970, have declined steadily in their share of the economy, falling to 20.9% by 2011. in this period, Paki-stan shifted toward a more service-based economy, with service sectors now accounting for 52% of GdP. industrial sectors’ share of the economy remained stag-nant (~16%) for nearly three decades, but increased somewhat in the last 10 years to 18.7%.42

increasingly, services have been the drivers of growth in the Pakistani economy—they hold an outsized share of GdP growth, relative to their share of overall GdP, and they have been, on average, by far the largest con-tributors to real GdP growth in the last decade.

in 2011, services accounted for 89.6% of real GdP growth; agriculture and industry contributed only 10.8% and -0.8%, respectively. manufacturing (as a subset of industry) contributed 23.0%, but this gain was offset by declines in other industrial sectors—especially electric-ity and gas distribution.43

High-performing Sectorsover the last half-century, export growth has been driv-en by the textile, garment, leather-product, and agricul-tural sectors. these are Pakistan’s traditional areas of dominance—and for which products it is known glob-ally.

But these have not been the sectors seeing the high-est growth, or that have been driving the recent growth in the services sector. the allWorld network has published lists the last two years of Pakistan’s fastest-growing companies (the Pakistan 25 in 2011 and the Pakistan 100 in 2012). these lists give an indication for where Pakistan’s economy is accelerating most rapidly today.

AllWorld ranks firms according to their revenue growth over three-year periods (2007–2009 for the Pakistan 25, and 2008–2010 for the Pakistan 100). these high-performing companies grew at an average 200% over-all (281% in the Pakistan 25 and 178% in the Pakistan

more quickly than other sectors—in terms of produc-tivity, value addition, and employment. Private equity also either reduced or had no effect on sectors’ volatil-ity. these results can be shown with lagged effects, indicating the direction of causality is from investment to growth (rather than PE funds having identified sec-tors already primed to grow).36

The report also finds that, when governments actively promote venture capital (Vc), whether through direct in-vestment, via professional funds, or through tax breaks or subsidies to incentivize venture capitalists, enterpris-es benefit—businesses with moderate government VC support outperform others.37

in particular, funds with only partial or indirect govern-ment involvement (i.e., those working through private-sector partners) were more successful than fully owned government ventures.38

in emerging markets, deal sizes tend to be smaller than in developed countries—the entire investment spec-trum is pushed downward. a survey of deals on the capital iQ database from the middle east, north africa, and south asia shows that the large density of private placements were under $10mm.

Capital IQ also provides a rough sense of firm valua-tions. EV/EBITDA is a proxy for an investment’s poten-tial—higher ratios (i.e., more value relative to earnings) make better targets, though these are not comparable across sectors. (fast-growth sectors will have higher average multiples than slower-growth ones, though this does not imply the investment opportunities are nec-essarily better in the former.) nevertheless, looking at the mid-range of available target multiples can give a sense of the broader investment environment fund managers see. it does underline, however, the lack of good data in these markets—and the need for more on-the-ground, qualitative due diligence when assessing investment opportunities, as well as for concerted ef-forts to improve the breadth and rigor of quantitative data collection.

Private equity in emerging markets also requires a lon-ger investment horizon—typically, at least five years. the cdc, for instance, holds equity positions in a com-pany for 10 years, on average.39 some models—like acumen fund’s ‘patient capital’—anticipate even lon-ger time horizons.40

Pe portfolios also usually exhibit ‘J-curve’ returns—i.e., negative returns in early years, followed by growing re-turns as the fund begins to exit investments. in general, emerging-market portfolios will tend to see longer up-front dips, but with the prospect for steeper subsequent returns. for example, the Polish-american enterprise fund, which began operations in 1989, only saw a posi-tive net return in 1997—but this was followed by con-sistently high returns until the fund phased out in 2008.

targeting investmentWhat is the best way to address Pakistan’s economic needs while capitalizing on its market opportunities? and what investments will best fuel the engines of growth—particularly job growth? in order to achieve optimal impact, the fund must be targeted, to best ex-ploit this overlap between need and opportunity.

Disaggregating the Economyto assess targeting strategies, we try to disaggregate Pakistan’s market. there are two basic ways to distin-guish businesses: by sectors (i.e., industry), or by seg-ments (i.e., firm size). Below, we offer detailed analysis along both dimensions.

Ultimately, we recommend focusing the fund on certain segments (namely, small- and medium-sized business-es—defined and discussed further, below), while being sector-agnostic. there are four main reasons for this approach:

1) the characteristics of the sme segments of the market align most closely with the objectives of the fund—these are both the most finance-constrained businesses, and the ones most likely to be sources of job growth.

2) While there are many valid reasons to focus on any one sector or set of sectors, these often conflict and suggest different areas of focus—instead of betting on one, it is better to take a more open approach.

Recommendation 2invest U.s. Government resources using the private equity fund model and work with private sector partners. the private equity model is proven in emerging economies and private sector partners bring critical experience to the partnership—both are important for Pii success and for attracting new investment.

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Security Services! Media, Publishing and Printing!

Food Industries! Conventional Energy!

Computer Networking and Software! Advertising and Marketing! Energy and Power, Water!

Professional and Consulting Services! Public Relations, Media and Publishing, Advertising!

Education and Training! Medical Services and Supplies!

Textiles and Fashion! Manufacturing and Packaging!

Education! E-commerce and Web services!

Travel and Tourism! Finance and Insurance!

Automotive! Software Services and Products!

Agriculture and Mining! Entertainment and Recreation!

Building Materials! Professional and Consulting!

Recruitment and Training! Professional, Scientific and Tech Services!

Consumer Goods! High-Tech and Telecommunications!

Import/Export Trade! Construction and Engineering!

Health and HealthCare! Transportation and Aviation!

Log. Scale Growth Rate!

Fig. 12 AllWorld Avg. Growth Rates by Sector & Firm Size!(Small, Medium, Large)!

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100).44

about 27% of the companies in the two lists were tech-nology-related, and a large majority were in service sectors.45

Prospects for GrowthParticularly relevant for investors, though, is trying to pick the next high-growth area. the atlas of economic complexity offers one useful tool for trying to project future growth. the products a coun-try makes today deter-mine which products it will be most likely to make tomorrow—tech-nology and physical and human capital expand first and most easily to products of like kind. so, the prod-ucts in which a country is competitive today—that is, where it is com-petitive in the export market—can signal where it is most likely to become competitive in the future, by map-ping products based on their relative simi-larities. Products clos-est to similar, export-competitive products are good bets; clusters of export-competitive products indicate en-tire industries that have good prospects.

Risk-adjusted Performance46

Returns only paint half the picture—the canvas inves-tors look at is also colored by risk. it is the risk-return tradeoffs that are most salient from an investment per-spective. taking volatility into account, then, we see notable changes in the growth performance of certain sectors. small-scale manufacturing and social and community services, among other sectors, have sus-tained relatively stable, positive growth rates over the last 10 years. other sectors that recorded strong av-erage annual growth from 2002 to 2011—including fi-nance and insurance, large-scale manufacturing, and construction—showed significant volatility over the same period and, consequently, a less favorable risk-adjusted performance. These findings suggest that small-scale manufacturing and some services have

been relatively insulated from the challenges faced by the rest of the economy.

Government ConstraintsMost of the top-100 firms listed on the Karachi Stock Ex-

change are in sectors characterized by sub-stantial government protection or involve-ment—such as tex-tiles, fertilizer, cement, sugar, and oil and gas. No firm in the index is from an entrepreneurial sector, like software, it, or retail. there is also a significant mismatch between sector con-tributions to economic growth and public trad-ability—i.e., firms in the highest-performing sectors tend not to be publicly traded. Pro-tected sectors, despite the rents their firms receive, have not per-formed exceptionally well. for instance, only three out of more than 200 textile companies have made it to the Kse 100.47 this mis-match, combined with Pakistan’s low market capitalization to GdP, indicates substantial untapped investment opportunity in Paki-stan’s private sector.

Sector Targetingthere are a number of

viable, persuasive sector-targeting strategies. each is attractive for different reasons—and, given very partic-ular objectives, some might prove advisable. But from a wider perspective, seeking only to maximize financial return and development impact, it is harder to predict if any one sectoral strategy is preferable.

Capitalize on Pakistan’s core strengthsPakistan’s core strengths—particularly its rich demo-graphic profile—will drive growth over the long run. identifying sectors that stand to gain the most from both a young and growing workforce and a burgeoning consumer base—namely, those with labor- and knowl-edge-intensive industries that provide opportunity for Pakistan’s youth and tap the talent of a growing middle class, and those generating products sought by this same demographic.

targeted sectors might include agribusiness and foods, logistics and transportation, retail and consumer prod-ucts, and technology and communications.

Invest in Sectors with Pent-up Domestic Demandinadequate investment in a number of key, domestically focused sectors has resulted in severe service deliv-ery shortfalls and capacity constraints. these struc-tural supply problems, combined with a rapidly grow-ing population, have resulted in pent-up demand and opportunities for substantial private investment. this presents an opportunity to transform traditional sectors of high importance through innovative business mod-els and increased private sector involvement. investors would seek out sectors facing historic underinvestment and strong domestic consumption growth.

targeted sectors might include social infrastructure (e.g., education, healthcare) and energy (e.g., alterna-tive energy).

Consolidate Fragmented Marketsmany industries in Pakistan lack competitiveness be-cause, at home, they see high competition and structur-al impediment, while their competitors overseas benefit from maturing markets and new technologies. Pakistan loses out in economies of scale in sectors where con-solidation is an advantage, but legal and other impedi-ments prevent it. Particular opportunities exist in sec-tors in need of consolidation and strategic reposition-ing, where SMEs occupy significant or dominant market positions.

targeted sectors might include light manufacturing (e.g., surgical instruments and sports goods).

Promote Export-competitive IndustriesPakistan’s lack of export competitiveness makes it vul-nerable. Pakistan’s export base has failed to diversify, remaining concentrated in the textile manufacturing in-dustry. the share of Pakistan’s services exports has been minimal but it has the potential to grow. this pres-ents an opportunity to facilitate the identification of new export activities and diversify into high value-added products, as well as increase the productivity of exist-ing export industries through knowledge and regional relationships. Look for export-oriented sectors with tradable products and services that have the potential to compete in regional markets.

targeted sectors might include business process out-sourcing, it, consultancy services (e.g., accounting, le-gal, financial), medical tourism, architecture, and con-struction.48

Targeting for Development Impactdfis and other ‘impact investors’ might as well consider targeting strategies, geared less toward profit maximi-zation, than toward have the greatest development ef-fect.

Focus on Loci of Job Creationishrat husain, former state Bank chairman and current dean of the institute of Business administration in Ka-rachi, conducted a comparative sector analysis, iden-tifying which sectors were creating the most jobs, and which were stagnating or losing jobs.49 He found:

Sectors creating jobs:• mobile phone, wireless loop, & Ldi• Public call offices• internet & broadband services• cable services• electronic media• Private & nonprofit education• Scientific R&D• Private & philanthropic hospitals & clinics• agriculture farm machinery sales & workshops• automobile service stations & show rooms• automotive vendor industries• fertilizer, pesticide, seed, & agrochemical distribu-

tion• dairy & milk processing, packaging, & marketing• Livestock, fisheries, fruits, & vegetables• feed mills• new private banks (e.g., islamic banking, mfis)• advertising, marketing, & creative services• inter-city & intra-city coach, bus, & transport• CNG filling stations• hotels & restaurants• it & internet-related companies• accountancy & management consultancy• construction services (e.g., plumbers, electricians,

masons)• Private airlines• oil & gas exploration & drilling

Sectors losing jobs:• federal ministries & attached departments• Provincial departments & agencies• Public sector corporations• nationalized commercial banks• Public sector universities & colleges• Print media companies• Pakistan international airlines, Pakistan steel,

Pakistan Railways• Water & Power development authority• Provincial government-owned enterprises

Tap the Talent of Key Demographic Groupscapitalize on opportunities that draw on parts of the population that suffer disproportionately from unem-ployment, including youth and women. the it sector, for instance, has low barriers to entry (the cost of a computer and internet connection), is less constrained by traditional gender roles and favors people who may otherwise struggle with transport or mobility (women can operate an it business from home), and it favors a younger generation more adept at using new technol-ogy.

Scroll to zoom in/outClick and drag to pan

9.94!

7.75!

7.31!

6.75!

6.05!

5.59!

5.22!

4.54!

4.49!

4.47!

4.25!

3.32!

3.26!

2.27!

0.98!

-4.92!

0.6!

5.3!

9.0!

0.8!

0.4!

1.4!

1.1!

1.1!

1.1!

0.5!

0.1!

6.2!

2.8!

0.3!

0.2!

-0.4!

Finance & Insurance!

Social & Community Services!

Small Scale Manufacturing!

Large Scale Manufacturing!

Construction!

Public Admin. & Defense!

Mining & Quarrying!

Livestock!

Wholesale & Retail Trade!

Fishing!

Electricity & Gas Distribution!

Ownership of Dwellings!

Transport, Storage & Comm.!

Major Crops!

Minor Crops!

Forestry!

Fig. 14 Avg. vs. 10yr Risk-adjusted Growth per Sector 2001–2011!

Avg. Growth! Risk-adjusted Growth!

Fig. 13 Pakistan's 'Atlas of Economic Complexity,' 2009

24 25


Invest where there are multiplier effects Look for sectors with strong backward and forward link-ages, and high potential to have multiplicative impact in Pakistan’s broader economy. education or it, for in-stance, can add human capital or develop new tech-nologies that will have reverberating effects throughout the economy.

Invest where there is U.S. added valuea U.s. fund, in particular, can leverage american com-plementary resources than another fund could not. the United states is especially strong in the it and higher-education sectors, for example—it has the most innova-tive technology companies and the best universities in

the world. creating strong linkages between such in-stitutions and promising Pakistani businesses or entre-preneurs could be invaluable—as valuable as financ-ing itself.

SMEs by Sectorsmall-scale manufacturing and social, community, and personal services—all of which have a dominant or sig-nificant SME presence—have sustained high growth rates with little volatility. on average, over the last 10 years, these sectors have outperformed both total GdP growth and other sectors dominated by larger corpora-tions or those that benefit from substantial government protection.

SME Presence Correlates with Growthsmes contribute approximately 40% to Pakistan’s over-all GdP and are spread across the economy with vary-ing density.50 according to Pakistan’s 2005 economic census, smes operate disproportionately in the larger services sector—particularly wholesale and retail trade; restaurants and hotels; social, community, and personal services; followed by manufacturing. smeda estimates that about 80% of smes in Pakistan are service-based enterprises, reflecting concentration in the high-growth portion of the economy.

in allWorld’s lists, a few large transport and healthcare firms saw exceptionally high growth—but among the

star performers were companies in the business and professional service sub-sectors that are dominated by smes. in fact, the overall highest-performing individual company was exceed, an engineering and construc-tion firm that started as a medium-sized firm (revenue range of $5–10mm). also, among the fastest growers were small firms, like Innovative Technologies (ranked #9), arbisoft (#11), and Umer trading company (#13), which had revenues less than $1mm.

Overall, 70% of ranked companies would be classified as smes—19% with revenues less than $1mm, 38% with revenues of $1–5mm, and 13% with revenues of $5–10mm.

SME Focus, Sector AgnosticismResearch has shown that over-prescribing a fund’s sec-tor focus produces lower returns in emerging markets.51 Funds need to be adaptable and able to find high-growth, high-impact opportunities across the economy. there is a clear need to focus on smes (explored fur-ther, below), to best address financing needs, capital-ize on market opportunities, and contribute to private sector development, rather than reinforce entrenched interests and rent-seeking behaviors. there is little rea-son to constrain the fund beyond this though—it should remain sector-agnostic. specifying certain sectors for investment might close out important opportunities for both financial return and development impact.

Market Segmentsin Pakistan, the broad category of ‘sme’—including mi-croenterprises—accounts for roughly 99% of all busi-ness in the country. according to Pakistan’s small and medium enterprises development authority (smeda), smes employ 80% of the non-agricultural labor force, and their share of annual GdP is approximately 40%. smes also account for the vast—and unmeasured—amount of informal business activity.

smes play a vital role in the industrial development of most countries. they have historically been crucial in the transformation of economies from low- to middle-income.52 Unlike large firms, who have business rela-tionships with commercial and investment banks and access to international sources of capital, small and medium enterprises often face significant financing constraints—which is an impediment to growth.

if Pakistan is to achieve sustained growth—and, espe-cially, if it is to find productive employment for its bur-geoning labor force—it will be on the back of smes. Pakistan needs to both provide resources to promising businesses so they can achieve scale, and create the conditions for entrepreneurs to found new businesses. according to some interviewees, Pakistan will need to double the roughly 45,000 firms in this middle segment.

Constraints on SMEsthe severely underserved sme banking market in Paki-stan is characterized by firms whose financial require-ments are too large for microfinance but too small to be

effectively served by commercial banks. there is, of course, a financing gap across firms of all sizes in Paki-stan—but it is especially deep for this middle segment of the economy.

in its 2010 enterprise survey,* the World Bank asked * it is important to note that the World Bank’s enterprise surveys do not use random selection and are not representative. While firms of all sizes (micro, small, medium, and large) are represented in

business owners from where they received their financ-ing. A large majority of all firms’ financing came from internal sources—but the proportion from banks drops off sharply between large and medium-sized firms. About 20.5% of all financing for large firms came from banks, whereas only about 8.0% and 8.1% of medium

and small firms’ financing did, respectively.53

Likewise, in re-sponse to a question about the severity of constraints they

faced, large portions of both small and medium enter-prises listed access to finance as an obstacle to some degree—36% of medium-sized firms, and 56% of small firms.

In terms of the single-largest constraint firms face, across all segments, lack of energy and inconsistency in its supply poses the greatest concern. following this, firms also saw political instability as a major hindrance. Access to finance, however, is the single-largest con-straint for about 2.9% of small firms and 3.3% of medi-um-sized firms.comparable numbers, the sample is thus heavily biased toward the larger end of the spectrum in terms of proportional representation.

53.1%!

22.3%!

19.7%!

1.7%!1.6%!

1.6%!

Fig. 15 Sector Distribution of SMEs!

Wholesale & Retail Trade, Restaurants, & Hotels!Social & Community Services!

Manufacturing!

Transport, Storage, & Communication!Agriculture, Forestry, & Fishing!

Financing, Insurance, & Business Services!

Recommendation 3Remain sector-agnostic absent any more specific objectives, but seek diversifica-tion across sectors with high potential for growth and multiplicative impact in Paki-stan’s economy. Prioritize further informa-tion collection, collation, and dissemination to address the deficit of good market data in Pakistan and attract new private invest-ment.

Overall,70%ofAllWorld’stop-rankedcompanieswouldbeclassifiedasSMEs.

0.0!

0.1!

0.2!

0.3!

0.4!

0.5!

0.6!

<Rs 10mm! Rs 200mm! Rs 400mm! Rs 600mm! Rs 800mm! >Rs 1b!

Fig. 17 Firm Density, by Revenue (PKR)!

-200%!

0%!

200%!

400%!

600%!

800%!

1000%!

$100! $1,000! $10,000! $100,000! $1,000,000! $10,000,000! $100,000,000!

2007

–201

0 R

even

ue G

row

th R

ate!

2007 Revenue (Log. Scale) in 1,000s!

Fig. 18 2007–2010 Revenue Growth, by Firm Size (# of employees)!

Micro! Small! Medium! Large!

10%!

100%!

1,000%!

$0mm! $10mm! $20mm! $30mm! $40mm! $50mm! $60mm!

Log.

Sca

le!

Bubble Size Indicate # of Firms per Sector!

Fig. 16 AllWorld Avg. Growth by Avg. Revenue, per Sector!

0–5 6–10 11–20 21+0–10 0% 0% 0% 0% 0%11–49 0% 35% 0% 0% 29%50–99 100% 67% 75% 15% 50%100+ 100% 75% 75% 83% 80%Total 50% 67% 64% 50% 59%

Manufacturing & Export SMEswith Access to Formal Credit

HeadcountAge of Firm (yrs)

Total

Source: “SME Development in Pakistan: Analyzing the Constraints to Growth,” Asian Development Bank, 2005

26 27


Defining SMEsWhile a continual refrain in our research has been this need to target smes, the notion of what, exactly, consti-tutes an SME is nebulous—by some definitions, as much as 99.5% of Pakistan’s businesses count as smes. to better define ‘SME’ in the Pakistani context, and to de-compose the term—in particular, to distinguish between ‘S’ and ‘M’—we survey working definitions in Pakistan and then create functional classifications for ‘small’ and ‘medium-sized’ businesses (distinct from ‘micro’ and ‘large’ firms), in the context relevant to the PII.

The Government of Pakistan has no official definition for what constitutes an SME. In fact, definitions vary widely among government organizations and other in-stitutions operating in Pakistan, and, as a result, statis-tics and information on smes are incongruent. almost all organizations, however, classify smes using one or more of three metrics: 1) headcount (i.e., number of employees), 2) maximum asset value, and 3) maximum revenue.

each measure returns different results, and each has benefits and drawbacks in practice and for use in poli-cymaking.

Headcountheadcount is often the easiest metric to measure but can prove problematic, as it does not account for vary-ing labor requirements across sectors. for example, a small IT services firm with 30 employees may have an annual turnover equal to or greater than a textile mill with 100 employees. one thus fails to account for dif-ferences between more labor-intensive and more capi-tal-intensive sectors. there are further problems when accounting for workers who are not formally employed (e.g., in firms relying heavily on subcontractors or out-sourcing, or who use informal hiring practices, which are common in Pakistan).

AssetsUsing total assets is problematic for many of the same reasons that using headcount is. Whereas headcount ignores differing labor requirements across sectors, as-set value cannot account for different capital require-ments. moreover, the values of assets held in buildings or land, for instance, which can differ considerably even within a sector, may distort determinations of firm size.

Revenueannual turnover or revenue better approximates busi-ness size—it is easily quantifiable, assesses a firm’s contribution to the economy, and captures growth (in

absolute and market share terms) over time. Revenue is also a metric commonly used by investment profes-sionals to assess a firm’s value or performance. (Of-ten, in valuations, potential investors use it as part of a multiple, such as EV/EBITDA—‘enterprise value’ over ‘earnings before interest, tax, depreciation, and amor-tization.’)

This metric can prove difficult in a global context, as firms’ revenues may vary widely from one country to the next, even within one industry—but within a single-country context, like Pakistan’s, this is less problematic.By any metric, it is clear that Pakistan’s economy is weighted heavily toward smaller enterprises. Less than 1% of firms has revenues greater than $100k or more than 20 employees.

Delineating the Bounds of ‘SME’54

While smes are often distinguished from larger com-panies, many group microenterprises with small- and medium-sized businesses. But, in practice—especially in Pakistan—firms in the middle of this spectrum face a unique set of opportunities and challenges, distinct from those seen by firms at both the large and small extremes of the market.

MicroenterprisesMost SME definitions have no lower bound. Microen-terprises, however—typically consisting of five or few-er employees—are vastly different from small firms in terms of sector participation, management sophistica-tion, formalization, and revenue size.

microenterprises tend to be informal—i.e., unregistered and tax-evasive. they less frequently provide employ-ee benefits, such as paid sick leave or skills training. They can also rarely finance accounts receivable or make long-term investments (e.g., capital projects with payback periods longer than a few months). and they are unlikely to join or form networks, engage formally with local communities, or make charitable donations.55

the informality of microenterprises makes them unin-vestible. Js Private equity, for instance, estimates that close to 99% of such ‘small’ firms do not maintain ad-equate business practices (e.g., they keep two sets of books) for being viable investments from its perspec-tive.

classifying enterprises with either the state Bank or smeda’s sme revenue metric results in an sme market segment that incorporates roughly 97% of the economy. But this includes a vast number of such microenterpris-

es that earn, on average, less than $50k in annual rev-enue, and draws in a vast swath of informal businesses that are typically in the realm of microfinance. Given that the stated purpose of the Pii is to invest in smes—but with an eye specifically toward scalability and at-traction of new investment—a narrower, functional dis-ambiguation is useful.

Large EnterprisesLarge enterprises, on the other hand, from which smes are more often distinguished, also operate in a starkly different environment.

In particular, they are much more likely to have signifi-cant personal contacts at high levels of government and in the financial sector—they are thus better-placed to gain government rents or negotiate favorable financ-ing packages. consequently, they are more likely to be complicit in—and benefit from—government corrup-tion.

Large firms also tend to have professionalized manage-ment (rather than being managed by owners), to be less centralized, and to have stronger delegation authority and departmentalization. they rely less on unskilled or

untrained workers, and are generally less dependent on personal relationships between managers and em-ployees, or between management and customers.

Larger companies’ stronger institutional structures and more professionalized staff then allow them to focus more on long-term profitability and increasing market share, rather than being preoccupied with immediate needs or short-term survival. they are likewise more likely to have and follow formal business plans, and to employ new or sophisticated technologies.

evidence suggests, however, that such companies are also less flexible and unable to adapt quickly to chang-es in the economy or regulatory environment. and they are less likely to be deeply rooted and active in their communities.56

in Pakistan, an especially important aspect of the di-vision between small and medium, on the one hand, and large, on the other, is the tendency of large firms to benefit from close government connections, rent-seeking behavior, or outright corruption. from an in-vestment perspective, there may be attractive oppor-tunities on the larger end of the spectrum, and often at less risk—but a primary reason one can earn relatively high returns at relatively low risk with such investments

Notonlyarelargefirmslessfinance-constrained,butsupportingthempotentiallyenables and encourages the government’s intrusion into the market that crowds outmorewidespreadparticipationandstymiesbusinessgrowthinthefirstplace.

94.453%!

4.410%!

0.840%!

0.240%!

0.037%!

0.012%!

0.005%!

0.002%!

0.001%!

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%!

1–4!

5–9!

10–19!

20–49!

50–99!

100–199!

200–499!

500–999!

>1000!

Fig. 21 Proportion of Pakistani Businesses by Employment !

84.074%!

9.179%!

3.876%!

1.908%!

0.572%!

0.325%!

0.040%!

0.011%!

0.004%!

0.003%!

0.001%!

0.007%!

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%!

<$8.4k!

$8.4k–$16.8k!

$16.8k–$33.6k!

$33.6k–$83.9k!

$83.9k–$167.8k!

$167.8k–$838.9k!

$838.9k–$1.68mm!

$1.68mm–$2.52mm!

$2.52mm–$3.36mm!

$3.36mm–$4.19mm!

$4.19mm–$5.03mm!

>$5.03mm!

Fig. 22 Proportion of Pakistani Businesses by Revenue !

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%!

Micro (0–5)!

Small (1–19)!

Medium (20–99)!

Large (100+)!

Fig. 19 Financing Sources, by Firm Size!

Internal! Banks! Owner/New Equity! Supplier/Customer Credit! Non-bank FIs! Other!

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%!

Large (100+)!

Medium (20–99)!

Small (6–19)!

Micro (0-5)!

Fig. 20 Severity of Financing Constraint, by Firm Size!

Severe! Major! Moderate! Minor! None! Doesn't Know! N/A!

Organization Headcount Assets (PKR) Revenue (PKR)≤ 250

(manufacturing)≤ 100mm

(manufacturing)≤ 50

(trade/services)≤ 50mm

(trade/services)SMEDA ≤ 25 ≤ 25mm ≤ 250mm

Small: ≤ 20mmMedium: ≤ 100mm

Fed. Bureau of Statistics < 10 N/A N/A

Official Definitions of SMEs in Pakistan

State Bank

SME Bank N/A N/A

Source: SMEDA website, http://www.smeda.org.pk/main.php?id=2

≤ 300mm

soURces1 Philip auerswald, elmira Bayrasli, and sara Shroff, “Creating a Place for the Future: Toward a new development approach for the islamic Republic of Pakistan,” competitiveness support fund (december 2010), 23–24.2 Pakistan: Framework for Economic Growth, Plan-ning commission, Government of Pakistan (may 2011), 11. http://www.pc.gov.pk/hot%20links/growth_document_english_version.pdf3 auerswald et al. (2010), 23–24. 4 Khalid Zaman, muhammad Khan, mehboob Ahmad,and Waseem Ikram, “Inflation, Unemploy-ment, and the naiRU in Pakistan (1975-2009),” In-ternational Journal of Economics and Finance 3:1 (february 2011).5 syed sajid ali and sadia Badar, “dynamics of circular debt in Pakistan and its Resolution,” The Lahore Journal of Economics 15:SE (September 2010), 61–74.6 Khaleeq Kiani, “Govt takes over circular debt,” Dawn.com (november 5, 2011). http://www.dawn.com/2011/11/05/govt-takes-over-circular-debt.html 7 “state Bank of Pakistan annual Report 2010–2011: Economic Outlook,” State Bank of Pakistan (december 19, 2011), 2. http://www.sbp.org.pk/reports/annual/arFY11/Economic_Outlook.pdf 8 Ibid., 3.9 Ibid.10 “Pakistan: Information on Mohajir/Muttahida Qaumi movement-altaf (mQm-a),” United states Bureau of citizenship and immigration services, PaK04002.oGc (february 9, 2004). http://www.unhcr.org/refworld/docid/414fe5aa4.html11 World Bank, World development indicators (march 2012). http://data.worldbank.org/indicator 12 Ricardo hausmann, dani Rodrik, and andres Velasco, “Growth diagnostics,” John f. Kennedy school of Government, harvard University (march 2005). http://www.hks.harvard.edu/fs/drodrik/Re-search%20papers/barcelonafinalmarch2005.pdf13 John d. donahue and Richard Zeckhauser, “Public-Private collaboration,” Oxford Handbook of Public Policy, eds. Robert Goodin, michael mo-ran, and Martin Rein, (UK: Oxford University Press, 2006), 496–525. http://www.hks.harvard.edu/fs/rzeckhau/oxford_paper.pdf 14 Richard Johnson and steve c. eastham, “Us-AID Enterprise Funds Europe & Eurasia: Funding, Liquidation, & Legacy,” Usaid (July 2011).15 Ibid.16 carol Lancaster, Kwaku nuamah, matthew Li-eber, and todd Johnson, “foreign aid and Private sector development,” Watson institute for interna-tional studies (2006), 64.17 “financing,” overseas Private investment cor-porations (accessed march 2012). http://www.opic.gov/financing 18 “investment funds – overview,” overseas Pri-vate investment corporation (accessed march 2012). http://www.opic.gov/investment-funds 19 “2010 annual Report,” overseas Private invest-ment corporation (2010), 3. http://www.opic.gov/sites/default/files/docs/annualreport_2010.pdf 20 Lancaster et al. (2006), 65. 21 Ibid., 66. 22 Foreign Assistance Act of 1961 (P.L. 87–195), sec. 234 (2008), in “Legislation on foreign Rela-tions through 2008,” U.s. senate committee on foreign Relations & U.s. house of Representa-tives committee on foreign affairs Vol. 1-a (march 2010). http://www.opic.gov/sites/default/files/statute1.pdf 23 “history & impact in iraq,” task force for Busi-ness & stability operations, U.s. department of defense (may 2011), 2. http://tfbso.defense.gov/www/attachments/TFBSO_Iraq_History_and_Impact_Brief.pdf 24 Ibid., 13.25 Ibid., 8.26 “Fact Sheet: Afghanistan,” Task Force for Busi-ness & stability operations, U.s. department of

defense (January 2012). http://tfbso.defense.gov/www/attachments/TFBSO%20Afghanistan%20fact%20sheet-January%202012.pdf 27 “about ifc,” international finance corporation, World Bank Group (accessed march 2012). http://www1.ifc.org/wps/wcm/connect/corp_ext_con-tent/ifc_external_corporate_site/about+ifc 28 “I Am Opportunity: IFC Annual Report 2011,” international finance corporation, World Bank Group (2011), 10. http://www1.ifc.org/wps/wcm/connect/e800ef80484524eeb9d0fb9a28555046/aR2011_english.pdf?mod=aJPeRes 29 “What We do,” international finance corpora-tion, World Bank Group (accessed march 2012). http://www1.ifc.org/wps/wcm/connect/CORP_EXT_Content/IFC_External_Corporate_Site/What+We+Do/ 30 “annual Report and accounts 2010,” cdc Group plc (2010), i. http://www.cdcgroup.com/up-loads/cdc_annualreport_2010.pdf 31 “about Us – Who We are – Key facts,” cdc Group plc (2011). http://www.cdcgroup.com/key-facts.aspx 32 Ibid. 33 Ibid.34 Lancaster et al. (2006), 61. 35 Ibid., 62.36 anuradha Gurung and Josh Lerner (eds.), “Globalization of alternative investments Working Papers Volume 3: The Global Economic Impact of Private equity Report 2010,” World economic fo-rum (december 2009), viii. http://www3.weforum.org/docs/WEF_IV_PrivateEquity_Report_2010.pdf37 Ibid.38 Ibid.39 “about Us,” cdc (2011). 40 “What is Patient capital? a new approach to tackling Poverty,” acumen fund (accessed march 2012). http://www.acumenfund.org/about-us/what-is-patient-capital.html41 heino meerkatt and heinrich Liechtenstein, “New Markets, New Rules: Will Emerging Markets Reshape Private equity,” the Boston consulting Group and iese Business school (november 2010), 10. http://www1.ifc.org/wps/wcm/connect/9c197b8049bdb99b960cd6a8c6a8312a/BCG%2BNew%2BMarkets%2Bnew%2BRules%2Bnov%2B10.pdf?mod=aJPeRes 42 “Pakistan Economic Survey 2010-2011: Growth and investment,” ministry of finance, Government of Pakistan (June 2011), 13. http://www.finance.gov.pk/survey/chapter_11/01-Growth%20and%20Investment.pdf 43 Ibid., 10.44 “Pakistan 25 Leading indicators Report” and “Pakistan fast Growth 100 Research Report,” all-World network (march 2012). http://www.allworldlive.com/research/pakistan-25-leading-indicators-report; http://www.allworldlive.com/sites/default/files/research/PaK100%20Research%20Report%20final.pdf45 Ibid.46 “Pakistan economic survey” (2011), 13; “state Bank of Pakistan Annual Report 2010-2011: Ag-gregate supply,” state Bank of Pakistan (decem-ber 19, 2011), 14-25. http://www.sbp.org.pk/reports/annual/arFY11/Aggregate_Supply.pdf; “state Bank of Pakistan handbook of statistics on Pakistan Economy 2010: National Income, Saving and In-vestment,” state Bank of Pakistan (2010), 34-35. http://www.sbp.org.pk/departments/stats/PakEcono-my_HandBook/Chap-1.3.pdf 47 Framework for Economic Growth (2011).48 “Trade in Services: An Answer Book for Small and medium-sized exporters,” international trade Centre UNCTAD/WTO, Small & Medium Enterprise development authority (2007), iii. http://www.sm-eda.org/downloads/TradeinServices-Pakistan.pdf 49 ishrat husain, “education, employment, and economic development in Pakistan,” inaugural address, conference on education, Woodrow Wil-son center (april 15, 2005), 15. http://ishrathusain.iba.edu.pk/speeches/humanDevelopment/Edu_Emp_Dev_Apr_15.pdf 50 shahab Khawaja, “Unleashing the poten-tial of the sme sector with a focus on productiv-ity improvements,” small and medium enterprise

development authority (may 2006), 1. http://siteresources.worldbank.org/PAKISTANEXTN/Re-sources/293051-1147261112833/Session-3-2.pdf51 meerkatt et al. (2010), 10. 52 faisal Bari, ali cheema, and ehsan-ul-haque, “SME Development in Pakistan: Analyzing the constraints to Growth,” asian development Bank, Pakistan Resident mission Working Paper series, Working Paper no. 3 (2005), 34. http://www2.adb.org/Documents/PRM/Working_Papers/wp-03.pdf 53 anjum asim shahid, “final framework Plan for market survey, for sme market segmenta-tion,” Grant thornton PowerPoint presentation to ifc (2010). http://www.sbp.org.pk/departments/ihfd/Final%20framework%20and%20work%20plan%20for%20market%20survey.pdf54 Tom Gibson and H. J. van der Vaart, “Defining SMEs: A Less Imperfect Way of Defining Small and medium enterprises in developing countries,” Brookings Global economy and development (september 2008), 10–12. http://www.brookings.edu/~/media/Files/rc/papers/2008/09_develop-ment_gibson/09_development_gibson.pdf 55 Ibid.56 Ibid.57 Ibid.

Fig. 1 World Bank, World development indicators (march 2012). http://data.worldbank.org/indicatorFig. 2 Ibid.Fig. 3 Ibid. & trading economics, Pakistan Govern-ment Bond 10Y (March 2012). http://www.trading-economics.com/pakistan/government-bond-yieldFig. 4 oanda corporation, historical exchange Rates (march 2012). http://www.oanda.com/Fig. 5 WB/WDI & National Consortium for the study of terrorism and Responses to terrorism (staRt), Global terrorism database (2011). http://www.start.umd.edu/gtdFig. 8 Private Placement transactions from mena-sa, capital iQ, inc., a division of standard & Poor’s (2012). http://www.capitaliq.comFig. 9 Ibid.Fig. 10 Paef annual Reports (1990–2008), the enterprise funds association (accessed may 2012). http://www.seedact.com/paef-1990-po-land/annual-reports-1990-2008Fig. 11 “Pakistan Economic Survey 2010–2011: Growth and investment,” ministry of finance, Gov-ernment of Pakistan (June 2011), 10. http://www.finance.gov.pk/survey/chapter_11/01-Growth%20and%20investment.pdfFig. 12 Pakistan fast Growth 100, allWorld net-work (2012). http://www.allworldlive.com/asia-500/winners/2012-pakistan-100Fig. 13 alexander simoes, the observatory of economic complexity (2012). http://atlas.media.mit.edu/explore/product_space/export/pak/all/show/2010/Fig. 14 allWorldFig. 15 “trade in services” (2007), 144.Fig. 16 allWorldFig. 17 World Bank, enterprise surveys (2012). http://www.enterprisesurveys.org (WB/ES)Fig. 18 Ibid.Fig. 19 Ibid.Fig. 20 Ibid.Fig. 21 “number of establishments by employ-ment size, status of enterprise, area, and Prov-ince,” 2005 Pakistan economic census, appendix 17 (2005). http://www.pbs.gov.pk/content/eco-nomic-census-2005Fig. 22 “number of establishments by major in-dustry division and sale Revenue Groups, area, and Province,” 2005 Pakistan economic census, appendix 15 (2005). http://www.pbs.gov.pk/con-tent/economic-census-2005Fig 23. Ibid.

28 29


is precisely because of this government cooptation. in-vesting in large firms of this sort may reap short-term returns, but diverges from any development objectives. Not only are these firms less finance-constrained, but supporting them potentially enables and encourages the government’s intrusion into the market that crowds out more widespread participation and stymies busi-ness growth in the first place.

Distinguishing ‘Small’ from ‘Medium’While small and medium firms are more similar than dif-ferent when compared to their micro and large coun-terparts, there are also some important distinctions be-tween these two groups. although most organizations in Pakistan refer to ‘small’ and ‘medium’ separately, this distinction is rarely clear, and seldom manifests in policies targeting smes.

smeda and the state Bank’s sme-support programs suggest that any distinction be-tween small and medium is rarely used as a disposi-tive criterion for eligibility. in fact, almost all sme programs in Paki-stan effectively lump small- and medium-sized en-terprises together as a monolithic business class.

Yet, while small- and medium-sized businesses tend to be functionally similar, almost al-ways eligible for the same benefits, and academic studies seldom distinguish between the two, they do have different financing needs—both in terms of investment size and purpose. smaller busi-nesses tend to be younger and less experienced—they often seek startup capital and know-how for breaking into markets. medium-sized businesses, on the other hand, tend to be more established and mature. they often seek larger investments for achieving scale.

Revenue is an imperfect metric for segregating busi-nesses of these two types. except through case-by-case evaluation, however, it is difficult to draw any clearer line—but revenue boundaries between ‘micro, ‘small,’ ‘medium,’ and ‘large’ will inevitably be arbitrary. Yet absent more thorough market information, this is the

best heuristic available.57

A Functional Definition of SEs & MEsWe thus suggest a workable revenue-based classifica-tion for SMEs in Pakistan:

Small enterprise: a business earning between $50k and $1mm in annual pre-tax revenue.

Medium-sized enterprise: a business earning be-tween $1mm and $10mm in annual pre-tax revenue.

These classifications account for the composition of Pakistan’s businesses by revenue using 2005 census data, as well as qualitative feedback received during our field research.

more importantly, we believe these classifications strike an optimal balance between specificity and sensitivity. that is, a lower bound of $50k excludes the vast majority of informal microen-terprises without rejecting high-po-tential businesses with low revenue streams; a middle division of $1mm separates the bulk of young firms in need of seed, startup, or venture capital, from some-what larger firms in need of growth eq-uity; and an upper bound of $10mm includes the high end of the range of ‘medium-sized’

businesses, but effectively excludes large corporations.

Recommendation 4disaggregate the ‘sme’ space and focus on small and medium firms, separately. Define these as firms in the $50k–$1mm and $1mm–$10mm revenue ranges, re-spectively. focus on smes with the stron-gest exit prospects—target investments in companies led by promising entrepreneurs that have vision, but lack the financial and institutional support to scale.

Fig. 23 SME Market Segments, Disaggregated!

84.07%!

9.12%!

3.88%!

1.91%!

0.90%!0.04%!0.01%!

0.007%!0.009%!

Annual Revenue Range

Less than $10k

Between $10–20k

Between $20–50k

Between $50–100k

Between $100k–1mm

Between $1–2mm

Between $2–3mm

Between $3–4mm

Greater than $4mm

Target !Market !

Segment!

Lower Bound: $50k!

Upper Bound: $10mm!

Microenterprises constitute nearly 85% of the entire market.!

small!

medium

!

Investment!Strategy!

http://www.pc.gov.pk/hot%20links/growth_document_english_version.pdf


http://www.dawn.com/2011/11/05/govt-takes-over-circular-debt.html

http://www.dawn.com/2011/11/05/govt-takes-over-circular-debt.html

http://www.sbp.org.pk/reports/annual/arFY11/Economic_Outlook.pdf

http://www.sbp.org.pk/reports/annual/arFY11/Economic_Outlook.pdf

http://www.unhcr.org/refworld/docid/414fe5aa4.html

http://www.unhcr.org/refworld/docid/414fe5aa4.html

http://data.worldbank.org/indicator

http://www.hks.harvard.edu/fs/drodrik/Research%20papers/barcelonafinalmarch2005.pdf

http://www.hks.harvard.edu/fs/drodrik/Research%20papers/barcelonafinalmarch2005.pdf

http://www.hks.harvard.edu/fs/rzeckhau/oxford_paper.pdf

http://www.hks.harvard.edu/fs/rzeckhau/oxford_paper.pdf

http://www.opic.gov/financing

http://www.opic.gov/financing

http://www.opic.gov/investment-funds

http://www.opic.gov/sites/default/files/docs/annualreport_2010.pdf

http://www.opic.gov/sites/default/files/docs/annualreport_2010.pdf

http://www.opic.gov/sites/default/files/statute1.pdf

http://tfbso.defense.gov/www/attachments/TFBSO_Iraq_History_and_Impact_Brief.pdf

http://tfbso.defense.gov/www/attachments/TFBSO_Iraq_History_and_Impact_Brief.pdf

http://tfbso.defense.gov/www/attachments/TFBSO%20Afghanistan%20Fact%20Sheet-January%202012.pdf



http://www1.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc



http://www1.ifc.org/wps/wcm/connect/e800ef80484524eeb9d0fb9a28555046/AR2011_English.pdf?MOD=AJPERES





http://www.cdcgroup.com/uploads/cdc_annualreport_2010.pdf

http://www.cdcgroup.com/uploads/cdc_annualreport_2010.pdf

http://www.cdcgroup.com/key-facts.aspx

http://www3.weforum.org/docs/WEF_IV_PrivateEquity_Report_2010.pdf

http://www3.weforum.org/docs/WEF_IV_PrivateEquity_Report_2010.pdf

http://www.acumenfund.org/about-us/what-is-patient-capital.html

http://www.acumenfund.org/about-us/what-is-patient-capital.html

http://www1.ifc.org/wps/wcm/connect/9c197b8049bdb99b960cd6a8c6a8312a/BCG%2BNew%2BMarkets%2BNew%2BRules%2BNov%2B10.pdf?MOD=AJPERES



http://www.finance.gov.pk/survey/chapter_11/01-Growth%20and%20Investment.pdf


http://www.allworldlive.com/research/pakistan-25-leading-indicators-report

http://www.allworldlive.com/research/pakistan-25-leading-indicators-report

http://www.allworldlive.com/sites/default/files/research/PAK100%20Research%20Report%20Final.pdf

http://www.allworldlive.com/sites/default/files/research/PAK100%20Research%20Report%20Final.pdf

http://www.sbp.org.pk/reports/annual/arFY11/Aggregate_Supply.pdf

http://www.sbp.org.pk/reports/annual/arFY11/Aggregate_Supply.pdf

http://www.sbp.org.pk/departments/stats/PakEconomy_HandBook/Chap-1.3.pdf

http://www.sbp.org.pk/departments/stats/PakEconomy_HandBook/Chap-1.3.pdf

http://www.smeda.org/downloads/TradeinServices-Pakistan.pdf

http://www.smeda.org/downloads/TradeinServices-Pakistan.pdf

http://ishrathusain.iba.edu.pk/speeches/humanDevelopment/Edu_Emp_Dev_Apr_15.pdf

http://ishrathusain.iba.edu.pk/speeches/humanDevelopment/Edu_Emp_Dev_Apr_15.pdf

http://siteresources.worldbank.org/PAKISTANEXTN/Resources/293051-1147261112833/Session-3-2.pdf



http://www2.adb.org/Documents/PRM/Working_Papers/wp-03.pdf

http://www2.adb.org/Documents/PRM/Working_Papers/wp-03.pdf

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http://www.tradingeconomics.com/pakistan/government-bond-yield

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http://www.pbs.gov.pk/content/economic-census-2005




30 31


model & strategytaxonomies of private equity tend to focus on the stage of investment—early, middle, or late. early-stage in-vestments include angel investing, seed funding, and other support for startups, and then traditional venture capital at a slightly later stage. middle-stage invest-ments can include growth and expansion capital, and bridge financing for companies headed toward public offerings (iPos). Late-stage investments include ac-quisitions and leveraged buyouts, sometimes of dis-tressed companies or those otherwise in ‘turnaround’ situations.1

one can likewise classify investments by their size (i.e., ticket size)—and thus the scale of the target compa-ny—ranging from microfinance, to SME financing, to funding for large enterprises or capital projects.

comparing across both dimensions, then, we can specify an investment strategy that encompasses both target size and funding stage.

Our analysis, above, finds that sector-specific invest-ment strategies would be ill-advised at this stage: there is too little good information about the market, and too many compelling reasons to focus on one sector or an-other. Instead, though, we find that there is both par-ticular need and substantial opportunity to focus the fund on SMEs—i.e., small and medium-sized firms, dis-tinguished from both microenterprises and larger, more established corporations.

it then follows that the stage of investments will be ven-ture capital—for smaller, younger companies—and growth equity—for the more established, scaling firms.

it is important, though, that these two strategies be pursued in parallel, but separately—e.g., through the creation of distinct funds under the Pii. the nature of investment, the needs of businesses, and the expertise required of fund managers is unique and quite differ-ent between the venture and growth stages. cleanly

separating these components of the larger strategy, therefore, will help ensure each prong is pursued pro-ductively.

Based on discussions with investors active in the Paki-stani market, in revenue terms, the target size for the venture capital fund should be roughly $50k to $1mm, while the target size for the growth capital fund should be roughly $1mm to $10mm. Likewise, we expect tick-et sizes of investments to range from $50k–$400k for the venture fund and $2mm–$7mm for the growth fund.

design & implementationas we note, above, the private equity market commonly operates through limited partnerships. oPic-support-ed funds, for instance, are established by investment professionals and are typically structured as limited partnerships or limited liability companies.2 fund man-agers raise equity capital from outside investors and make, manage, and exit investments in portfolio com-panies with attractive return prospects. LPs commit equity capital and may provide counsel to the Board of directors, but are not directly involved in the manage-ment or governance of the fund.

Management & Governance the standard private equity limited partnership model includes essential features for making the Pii a viable and productive investor:

• a skilled and credentialed professional manage-ment team that uses local knowledge and technical

operAtionAl AnAlysis

Microfinance! SME Financing! Large Capital Investment!

Angel Investment! Venture Capital! Growth Equity! Buyout!

TARGET SIZE!

STRATEGY!

Fig. 24 Proposed PII Investment Approach!

Recommendation 5structure the Pii to include venture capital and growth equity components. Plan for ticket sizes of $50k–$400k and $2mm–$7mm, respectively. employ the limited partnership structure common in private equity and adopted by the cdc and other major dfis, in line with international indus-try standards.

32 33


expertise to make and manage investments.

• a market-competitive incentive structure for fund managers negotiated upfront, using the standard 2&20 fee and carried interest system, to ensure a top-quality staff, with adequate ‘skin in the game,’ who are driven to optimize performance.

• an ability to leverage state’s resources through complementary investment from other donors, mul-tilaterals, sovereign funds, private investors, and the fund managers themselves.

• an independent Board of directors overseeing the fund manager and ensuring proper governance and accountability.

Advisory Boardadditionally, an overarching Pii advisory Board, estab-lished by state to provide general oversight and guid-ance to fund managers and board members, would be an important component, given the nature of this pub-lic-private collaboration. advisory committees are one of several standard channels used to facilitate commu-nication and manage conflicts of interest between GPs and LPs in the private equity industry. Unlike LP advi-sory committees, which are common to many private equity funds, however, the Pii advisory Board would be most effective—and be perceived as most credible—if it comprised Pii investors, including U.s. Government representatives, as well as external industry experts.

through active participation on an advisory Board, state can play a critical role in ensuring that taxpayer dollars are invested in a way that minimizes risk and maximizes economic returns, while safeguarding the independence of fund managers and the commercial viability of fund operations. ideally, the advisory Board would provide a mechanism through which state, co-investors, and investment experts work collaboratively and engage regularly with fund managers and board members to: • secure alignment of interests among investors,

fund managers, and investees. • monitor Pii investment processes to ensure invest-

ments are made and managed responsibly. • Provide fund managers with knowledge and re-

sources to support value creation at the portfolio company level.

• collect and evaluate information on Pii investments and performance.

the advisory Board would best include a manageable

number of representatives and be split equally between americans and Pakistanis. important considerations for membership include: 1) relevant investment or pri-vate sector experience; 2) extensive knowledge of the broader industry, in addition to specialized expertise on the Pakistani or emerging market investment context; 3) commitment to and competence in the application of responsible investment approaches; 4) independence; and 5) credibility among both american and Pakistani audiences.

While the identification of Pakistani candidates who are both highly qualified and removed from any con-flict of interest may pose challenges, we believe that local participation on the advisory Board is both es-sential and, based on our consultations in the country,

feasible. state should seek out a diverse group of Paki-stani private sector leaders with strong networks and expertise, but also a commitment to supporting aspir-ing entrepreneurs and fostering longer-term policy re-form. although certainly not an exhaustive list, we offer a few examples of the types of Pakistani individuals who we believe would be well-suited for Pii advisory Board membership:

• Visionary and highly reputable private sector lead-ers who have navigated among business, govern-ment, academia, and philanthropy, and represent strong advocates for reform. Examples include: ishrat hussain, dean of the institute of Business administration (iBa) and former Governor of Paki-stan’s state Bank; syed Babar ali, entrepreneur, former finance minister, and founder of the Lahore University of management sciences (LUms); and moeen Qureshi, chair of the Washington, d.c.-based private equity firm EMP Global and former Prime minister of Pakistan.

• successful, well-connected entrepreneurs who have launched and expanded innovative business-es in fast-growing sectors of Pakistan’s economy—in particular, entrepreneurs who have secured the backing of global venture capital investors. exam-ples include: Monis Rahman, Chairman and CEO of naseeb networks, President of the indus entre-preneurs (tie) Lahore chapter, and acumen fund Partner; and ali Jameel, ceo of tPL holdings.

• Young and dynamic private sector innovators with bold ideas for building Pakistan’s entrepreneur-ial ecosystem and strong local and international networks. Examples include: Umar Saif, Profes-sor at LUms, founder of the saif center of innova-

tion (sci), co-founder of four technology startups, and the first Pakistani to be recognized by the MIT technology Review as one of the 35 “World’s top Young Innovators for the year 2011”; and Kalsoom Lakhani, the Washington, d.c.-based founder and ceo of invest2innovate.

from the United states, state should draw on individu-als who offer a combination of american business acu-men and emerging market investment experience to the PII. Strong candidates would include: experienced private equity and venture capital investors, renowned philanthropists and impact investors, and reputable scholars and thought leaders in the areas of private eq-uity, venture capital, and entrepreneurship.*

state should also consider investment experts from multilaterals and other global institutions with relevant experience in emerging market private equity or impact investing. dfis, for instance, play an increasingly im-portant role in the emerging market LP community and have extensive experience engaging with fund man-agers on esG-related matters—representatives from groups such as the ifc and cdc would add substantial value to the work of the Board, whether brought on as Pii co-investors or independent advisory Board mem-bers.

Potential Challengesit is important to note that, historically, Usaid support for Pe funds—for instance, in the equity fund for east african agribusiness3—has generally consisted of ei-ther direct grant-financing to the fund, or the provision of guarantees to investors. similarly, oPic provides long-term debt and risk insurance.4 there is no indica-tion either has ever taken direct equity positions through limited partnerships. there are thus open questions about the legal implications of such an arrangement, which necessitate further research into the exact pos-sibilities and parameters of state’s becoming an LP.

there are, however, alternative Pe fund structures, ac-counting for differing investor needs (e.g., tax, regula-tory, or other legal considerations), which may provide options even if the standard LP model proves difficult. these include master-feeder funds, parallel or co-in-vestment funds, consortia, and special-purpose vehi-cles (sPVs), among others.

For example, if using State financing for direct equity investments appeared problematic, a fund manager or sponsor could create an sPV. Usaid could then pro-vide a grant to the sPV, which could in turn invest in the fund, which would then take equity positions. Likewise, * For ideas in these categories, see: the Emerging Markets Private equity association advisory council (http://www.empea.net/main-menu-category/about/advisory-council.aspx), the Global impact in-vesting network investors’ council (http://www.thegiin.org/cgi-bin/iowa/council/member/index.html), and the ewing marion Kauffman foundation’s team of senior advisors (http://www.kauffman.org/about-foundation/senior-advisors.aspx).

consortium structures can help pool resources from partner investors (e.g., other dfis, like the ifc or cdc) for joint investment in a fund.

Leverageflexibility to leverage U.s. capital investment through engagement and strategic partnership with other do-nors and investors is essential. the fund manager’s role in contributing its own equity and raising additional in-vestment from other LPs provides the most established and easiest way to multiply the fund’s capitalization—state can effectively outsource fundraising to the GP. But, alongside the fund manager, state can also play a critical role in mobilizing third-party capital:

• U.s. Government backing can help leverage U.s. investor networks to raise and, if feasible, pool ad-ditional capital. the combined credibility of state oversight and a strong fund management team can help attract private investors who might not other-wise have been willing to take on such exposure.

• minimizing ex ante constraints on the fund’s strat-egy or the GP’s authority and decision-making will maximize the likelihood of earning strong returns. state can still ensure development impact through a well-defined performance measurement system, robust monitoring and evaluation, and transparen-cy. then, if there is a second stage of investment, lessons learned can be applied to select follow-on partners and restructure contracts.

• making a strong business case for investment in Pakistan will be the best means to sustained and scalable impact. Allowing the time and flexibility for initial investments to see success will demonstrate the viability of Pakistan’s market, and offers the best prospect for substantially increasing job creation.

Potential sources of leverage include:

• OPIC – The fund could benefit from OPIC involve-ment in multiple ways. oPic can provide both additional debt financing and loan guarantees to encourage equity investors. oPic can also capital-ize on existing relationships in Pakistan to bring in investors.

• Other DFIs – The knowledge, resources, and shared objectives of other, more established dfis—like the ifc and cdc—including extensive experience in Pakistan, would help ensure the fund’s design is tailored to the Pakistani context. dfis can also serve as additional LPs for funds or, potentially, as members of a larger Pii consortium that pools dfi resources into a single, larger fund of funds.

• ‘Responsible’ Capital – New sources of so-called responsible capital—such as foundations, impact investors, sovereign wealth funds, and pension

For the Advisory Board, State should seek out a diverse group of Pakistani private sector leaders with strong networks and expertise, but also a commitment to sup-porting aspiring entrepreneurs and fostering longer-term policy reform.

http://www.empea.net/main-menu-category/about/advisory-council.aspx

http://www.empea.net/main-menu-category/about/advisory-council.aspx

(http://www.thegiin.org/cgi-bin/iowa/council/member/index.html

(http://www.thegiin.org/cgi-bin/iowa/council/member/index.html

http://www.kauffman.org/about-foundation/senior-advisors.aspx

http://www.kauffman.org/about-foundation/senior-advisors.aspx

34 35


funds—who likewise seek returns but with a dual de-velopment objective, are potential co-investors. ex-amples include the Bill & melinda Gates foundation, the Rockefeller foundation, and the Gatsby charita-ble foundation.* Usaid’s east africa agribusiness fund, for example, worked with partners like these.

• ‘Patriotic’ capital – Pakistan has the seventh-largest Diaspora community in the world, with nearly five million people.5 Pakistani expatriates want to give back—the World Bank ranks Pakistan #11 in terms of remittances; many Pakistanis overseas are highly skilled entrepreneurs and professionals who could provide essential support to the development of a knowledge-based economy in Pakistan. accord-ing to interviews, however, these expatriates have not invested directly in local companies, due to the perceived inability to monitor them. the Pii can therefore provide expatriate Pakistanis a credible platform for investing in Pakistani enterprises. a number of private equity firms and other organiza-tions have existing networks for mobilizing diaspora resources, including abraaj capital’s Riyada enter-prise development (Red) and oPen silicon Valley.

• Local Investment – Local investor participation is vital to long-term sustainability and success. fund managers with strong local connections, as well as other partners in the program—e.g., advisory board members—can help mobilize financing from domestic sources.

Implementation Mechanisms

Number of Partnersin contrast to an enterprise fund, the Pii does not need to be a monolithic institution with a single fund manager. there is scope for—and potential value in—supporting multiple investment platforms, with distinct implement-ing partners (i.e., GPs), under a broader Pii umbrella.

a key question, then, is whether it is preferable to es-tablish a single investment vehicle—one large fund for investing in a wider range of smes—or to divide the pool of resources to invest in multiple, smaller, more tar-geted funds?

this choice presents three broad options. each em-ploys the general limited partnership model, and each allows the fund to be levered through outside invest-ment—but they differ in the degree to which authority is dispersed and in how many partners are involved.

Option 1: One Partner, One FundApproach: USAID selects and then invests with one GP. the GP then establishes, raises, and manages the en-tire Pii. the fund manager invests in Pakistani smes at

* A good resource for finding potential partners of this type is the Global Impact Investing Network: http://www.thegiin.org/cgi-bin/iowa/council/member/index.html

both venture and growth stages.

this option closely resembles the basic private equity structure, described above.

advantages• offers a streamlined management structure and the

most direct investment route, facilitating state over-sight of investments

• is potentially the quickest to set up• Provides the selected GP the largest potential re-

turn

drawbacks• Does not benefit from specialized management in

either the venture or growth spaces• Has no diversification across fund managers, so

adds idiosyncratic risk• Reduces the demonstration effect from multiple

new investors entering the Pakistani market

Option 2: One Partner, ‘Fund of Funds’Approach: USAID selects and then invests with one GP. the GP then establishes and manages the Pii as a ‘fund of funds’ (fof)—a strategy of pooling investor capital and investing in other equity funds, rather than directly in portfolio companies. the fund of funds then estab-lishes or invests in external funds, which in turn invest in portfolio companies.

a fund of funds (e.g., the U.K.’s cdc) operates like a master private equity fund that spawns and manages a portfolio of sub-funds, each with its own fund manager. fof managers may invest in sub-funds established by the same investment firm or in external funds, but gen-erally they aim to diversify a portfolio across a variety of investment managers, investment strategies, and mar-kets.

advantages• Takes a flexible and decentralized approach• Reduces risk through diversification• allows specialized sub-fund managers to target dif-

ferent market segments • Potentially creates more leverage possibilities• Lowers the barrier to entry for GPs in terms of equity

contribution• Diffuses benefits, so limits accusations of favoritism

drawbacks• Has questionable feasibility—finding an implement-

ing partner that can operate as an fof may be challenging

• can raise overall administrative costs—fees are typically higher because they add part of the fees charged by the underlying funds

• adds a layer of complexity, and so may make moni-toring and oversight more difficult

Option 3: Multiple Partners, Multiple FundsApproach: USAID does not limit itself to a single firm and, instead, makes smaller investments in two or more GPs. each GP establishes and manages a fund. each fund targets a narrower market segment.

this option is not technically a fund of funds, as Usaid would not operate like a typical active fund manager. But it replicates the advantages of the fof approach without adding complexity.

advantages• all of the advantages of option 2• adds potential for visibility and demonstration ef-

fects from investing with two or more firms• incentivizes high performance through competi-

tion among funds managers, especially if a second round of funding will be limited to top-performing GPs

• fosters a learning environment in the Pii and the broader Pakistani private equity market by provid-ing exposure to different managers and investment strategies and demonstrating cases of profitable investing

drawbacks• may be constrained by the number of viable GPs• Raises questions about how to structure the Pii it-

self and at what level to seek leverage (at the larger Pii level, or alongside each GP)

While each approach seems practicable in Pakistan, option 3—selecting multiple GPs to manage several smaller, specialized funds—has the greatest potential for engagement and impact, without introducing a Byz-antine organizational structure.

Potential PartnersResearch on emerging market private equity reveals a clear linkage between competent fund management and fund performance. the experience of the ifc, for instance, demonstrates that the key factor contributing to the success or failure of its funds has been the quality of the GP—not the risk that comes with a first-time fund or frontier country focus.6

State should select the most qualified investment teams to manage Pii capital, while avoiding excessively high selection requirements that crowd out viable or interest-ed candidates. clearly, an experienced fund manage-ment firm with a proven track record of positive invest-ment returns and successful exits would be the best candidate for a GP. the nascent nature of Pakistan’s private equity industry, however, could pose challeng-es to identifying candidates with long track records of success. moreover, inherent in the Pii mandate are the dual goals of generating financial return and achieving development impact and visibility. Beyond firms with track records, therefore, it is worth considering emerg-ing fund managers and nontraditional players with mis-sions that align with this broader Pii mandate—bringing higher risk, but potentially greater rewards.

The IFC provides insight on specific criteria that may prove useful for selecting fund managers in an emerg-ing market context. suggested indicators for gauging the potential success of a management team include: whether the GP is locally based; the number of local national staff; fund manager skill-set or capacity to add value to investee companies (e.g., prior experience in running companies, as entrepreneurs or consultants); and prior experience in private equity. ifc funds that have met these criteria are overwhelmingly associated with better performance—both in terms of financial re-turns and overall development impact.7

strong local knowledge and presence is especially im-

http://www.thegiin.org/cgi-bin/iowa/council/member/index.html

http://www.thegiin.org/cgi-bin/iowa/council/member/index.html

36 37


portant for successful fund performance. a local man-agement approach is a key factor driving the success of Pe funds in any emerging market. an extensive survey of ifc funds indicates that domestic and international funds with local offices significantly outperform funds without a local presence—generating, on average, five times the returns.8

the Pakistani market, in particular, is characterized by very specific risks and a pervasive trust deficit. These factors, combined with the unavailability of good market data, make in-depth market knowledge and proximity of fund managers to investees all the more important. most aspects of Pii fund management and opera-tions—from gaining market access and conducting due diligence to acquiring talent and raising capital—will be highly local.

While a fully local operation with qualified Pakistani GPs would be ideal, the options may be limited given Paki-stan’s underdeveloped Pe industry. that said, there are a handful of seasoned Pakistani Pe fund managers—such as Js Group—and the industry is beginning to draw new entrants with attractive investment approach-es and strong value-addition strategies. cyan Limited and indus Basin holding Limited (iBh), for instance, are both recently established PE firms focused on high-growth areas of the economy, and which have already attracted international partnership or co-investment.*

alternatively, the fund can prioritize foreign partners—U.S. or regional investment management firms—that have a local presence or track record in the country. although the options may be limited in this scenario as well, there are a handful of qualified regional investment firms—such as Abraaj Capital and RHT Partners, for in-stance—that can bring local investment experience to the table.

another alternative would be to seek foreign fund man-agers that have credible plans and means to either open a local office or establish affiliations with local financial institutions that have market access and can help to catalyze deal flow and create value in investee companies. the small enterprise assistance funds (SEAF), a nonprofit fund manager, is one example—while new to Pakistan, seaf has a proven track record in emerging market sme investing, including in india and afghanistan, and the capacity to support a rapid start-up in Pakistan.

there are also U.s. private equity and venture capital firms with an existing connection to Pakistan and expe-rience in emerging markets that may be less adverse to the perceived risk of investing in Pakistan. Partner-ships with these firms—such as the Washington, D.C.-based emP Global (run by former Prime minister mooen

* See the Cyan and IBH websites for more detail on the firms’ invest-ment strategies, management teams, and partnerships: http://www.cyanlimited.com and http://www.indusbasin.com.

Qureshi) or san francisco-based draper fisher Jurvet-son (founder and managing director tim draper is a co-investor in some iBh investments)—should also be pursued.

there are also several banks and investors in Pakistan that could help administer Pii funds in some capacity. United Bank Limited, for instance, is a commercial bank in Pakistan that provides private equity financing to startups. Pakistani investment management firms such as Bma capital management and arif habib Group also have local Pe experience and substantial market insight to offer the Pii. moreover, as we explore further, below, Pakistan offers a number of local organizations and social enterprises that would be ideal partners for a Pii component dedicated to promoting entrepreneur-ship and supporting the growth of startups in the coun-try.

in appendix B, we provide a list of potential Pii invest-ment fund managers. the list includes information drawn from the capital iQ database on local and foreign firms with an investment interest or track record in Paki-stan, as well as information on firms that we identified as possible partners through our research. We mention the Pakistani firms either as potential fund managers, or as local affiliates with the capacity and resources to support Pii investment operations.

Selection of Partnersthere are three main mechanisms available to state for partnering with private investment firms to manage one or more Pii investment funds. although there may be other possible approaches, these offer the most fea-sible solutions:

Option 1: Global Development AllianceState identifies prospective partners and negotiates a Global development alliance (Gda), partnering with anywhere from one firm to a consortium of resource part-ners. after negotiations, state directly obligates fund-ing to one or more fund management firms by means of a Usaid collaboration agreement, which offers a more flexible tool compared with traditional awards.†

† the Gda model allows Usaid to disburse funding through a variety

The GDA approach has the potential to add significant value to the Pii. a Gda is an innovative public-private alliance model that allows state to work with non-tradi-tional private sector actors to advance mutual business and development objectives,* while leveraging resourc-es from partners at a level that equals or exceeds the U.S. contribution (at least a 1:1 ratio, in cash or in-kind).† the model requires joint planning and management, and would thus give state a platform to share responsi-bility and capital risk among multiple partners. a Gda also offers the best mechanism for raising additional private sector and donor resources to leverage the U.s. investment in the Pii. structuring one or more Pii funds through a Gda consortium, in particular, would have the potential to provide a high level of U.s. engagement with strategic partners and open the door to a wide range of co-investment and technical expertise.

the feasibility of a Gda, however, depends on partners having available funding to contribute and the ability of state and potential alliance members to align core in-terests and objectives. Using a Gda to structure Pii funds may require a very lengthy process of identify-ing and negotiating with partners, and attracting suffi-cient resources for leverage. moreover, the Gda model places a strong emphasis on involving local partners in the alliance as implementing or resource partners. While state should explore partnerships with Pakistani investment firms or local financial institutions, raising sufficient co-investment may pose challenges.

Option 2: Partner via competitive bidding processState selects one or multiple firms to create and man-age a Pii fund through a competitive bidding process, and invests U.s. capital through a Usaid contract or grant. this option may be the most straightforward means to establish a Pii investment fund, although the time required to implement the process and the degree of U.s. involvement differs across grants and contracts (e.g., procurements can be lengthy but allow for high design input).

Under this scenario, state would be able to open up the bidding process to a wide range of competition, providing an opportunity to choose one or several part-ners from a potentially broad audience of Pakistani and

of mechanisms and processes, but the feasibility of a collaboration agreement should be explored as an alternative to more standard obligating tools: http://idea.usaid.gov/gp/collaboration-agreement.* Non-traditional partners may include private businesses, financial institutions, social entrepreneurs, venture capitalists and investors, philanthropists, foundations, diaspora organizations, and other for- and non-profit non-governmental entities. Resource partners are organizations that contribute resources—cash and/or in-kind—to a Gda, including technical expertise, goods and services, market ac-cess, etc. for more on the Gda model and what counts as leverage, see http://idea.usaid.gov/gp/aps † Only private resources count toward the 1:1 leverage requirement. the Gda model, however, does allow Public international organiza-tions (PIO) and bi/multilateral donors to participate as members of an alliance and contribute resources as leverage. See the FY12 GDA APS for more detail: http://idea.usaid.gov/sites/default/files/attach-ments/2012_GDA_APS.pdf

international applicants. additional donors or private investors could invest directly into the funds to lever the U.s. investment, but securing this co-investment may be challenging. Usaid has contracted directly with pri-vate equity firms in the past, but further inquiry into the legal requirements may be required to know if the ex-ecution of a limited partnership model is feasible.‡

Option 3: Support public international organizationstate selects a public international organization (Pio) with experience investing in emerging market private equity funds and a local presence in Pakistan, such as the ifc, and grants U.s. Government resources to man-age one or more investment funds. in options 1 and 2, state partners with a professional fund management team that, in turn, creates a fund entity and governance structure to invest in Pakistan; under this scenario, state supports a Pio’s existing mandate to carry out private equity investing in Pakistan. the Pio, in turn, uses the grant to back one or more private equity funds (e.g., one growth equity fund and one venture capital fund) to invest in Pakistani smes.

this approach may have certain advantages—partner-ing with a reputable Pio would add expertise, credibil-ity, and accountability for financial resources. It would also facilitate significant leverage of U.S. funds—PIOs are well-positioned to catalyze additional donor and pri-vate investment, as well as longer-term policy reforms on the ground in Pakistan, in a way that a bilateral insti-tution acting alone cannot. the Pii would be branded as a truly international initiative.

on the other hand, a Pio grant offers a more passive and potentially less pioneering and impactful approach to stimulating investment in Pakistan. While the built-in expertise, multi-donor coordination, and more subtle american branding associated with a Pio grant are valuable, the U.s. would lose some of the essential ben-efits that come with partnering directly with the private sector. there would be less of an opportunity for the U.s. to innovate and highlight american engagement, and the benefit of determining how to distribute pro-ceeds from fund liquidation would no longer be viable.

moreover, most of the key advantages of granting fund-ing to a PIO can be achieved through either of the first two options—particularly a Gda that leverages the ex-pertise and capital of institutions such as the ifc in a strategic public-private alliance. a Pio grant would thus be best pursued as a third alternative, in the case some combination of options 1 and 2 prove unfeasible.

Strategic GuidancePrivate equity investing entails more than mere capital transfer—often, knowledge transfer is as important a component. smes in Pakistan need capital to grow, but

‡ as one example, Usaid signed a 5-year contract with the Ban-croft Group, L.P. in 1995: http://www.bancroftgroup.com/en/history/index_history.shtml

Recommendation 6Work through multiple implementing part-ners, as a means to create several smaller Pii funds with more targeted investment strategies. select and invest with profes-sional fund management firms with relevant experience, local knowledge, capacity to add commercial value to portfolio com-panies, and ‘skin in the game.’ consider emerging or first-time fund managers that align with the broader Pii mandate, in ad-dition to experienced teams with a proven track record.

http://www.cyanlimited.com

http://www.cyanlimited.com

http://www.indusbasin.com

http://idea.usaid.gov/gp/collaboration-agreement

http://idea.usaid.gov/gp/aps

http://idea.usaid.gov/sites/default/files/attachments/2012_GDA_APS.pdf

http://idea.usaid.gov/sites/default/files/attachments/2012_GDA_APS.pdf

http://www.bancroftgroup.com/en/history/index_history.shtml

http://www.bancroftgroup.com/en/history/index_history.shtml

38 39


some—particularly those toward the smaller end of the spectrum—arguably need mentorship and know-how even more than financing. Management teams that provide hands-on strategic and operational support will be most likely to accelerate expansion, maximize com-petitiveness, and foster innovation.

fund managers, however, are not the only source of guidance; state can design this capacity directly into the Pii. a thoughtfully selected advisory board, in par-ticular, could provide invaluable guidance to investee firms, fund managers, and USAID staff managing the larger program.

Recommendation 7structure Pii fund partnerships using one or more feasible implementing mechanisms that allow for maximum flexibility, com-mercial sustainability, and leverage of U.s. Government resources—prioritize the Gda model but use more traditional contracts and grants as required. seek substantial Pakistani private sector involvement in sourcing and levering investments.

complements & alternativesthere are compelling reasons, given its objectives, for state to focus on generating investment through the establishment of some type of fund or funds. But it is also important to consider both alternatives to this ap-proach, as well as complementary elements that could enhance its impact. the initiatives, below, do not con-stitute an exhaustive list of either parallel or substitute policy options—but we identify these as some of the most promising and feasible, and those with the great-est potential for impact.

Entrepreneurial Ecosystem Supportthe call for directly supporting entrepreneurship in Pak-istan is resounding. During our fieldwork, promoting entrepreneurship was one of the most-cited and most-impassioned recommendations we heard for strength-ening U.s. private sector assistance to Pakistan. Pro-ponents of this type of support also made some of the most compelling arguments for its inclusion.

state has already made an effort to support Pakistan’s young entrepreneurs. in march 2012, for instance, the U.s. embassy and the islamabad chamber of com-merce and Industry organized the inaugural Pakistan Young Entrepreneurs Forum.* at the launch, secretary clinton and ambassador munter each commended the Pakistani entrepreneurial spirit and pledged support for Pakistan’s entrepreneurs.9 the Pii can build on such

* in 2009, Usaid also began Pakistan entrepreneurs, an economic development project that aims to raise the incomes of more than 75,000 predominantly female micro-entrepreneurs.

programs—scaling them to maximize the impact of the initiative’s corresponding investments.

there is substantial value to be gained by complement-ing growth capital with startup capital and entrepreneur-ial ecosystem support, since each stage of the business cycle is dependent on another. entrepreneurs need encouragement, technical assistance, and funding to start companies, and young and small companies need growth capital and technical assistance to scale—but entrepreneurs also need to know that growth capital is available, if their companies reach that stage, while venture and growth funds rely on entrepreneurs’ hav-ing successfully navigating the startup phase. these initiatives are thus symbiotic and their prospects of suc-cess improve if state pursues them in tandem. By us-ing the Pii to address the ‘full stream’ of the business cycle—startup to growth capital and support—state will better address deficiencies in the Pakistani market and achieve greater impact.

the overwhelming demand for entrepreneurship train-ing and services that we observed during our fieldwork in Pakistan is reinforced by a national development strat-egy—the Framework for Economic Growth—that calls explicitly for entrepreneurship support and inter-univer-sity alliances to foster research and the commercializa-tion of technology.10 in a february 2012 study, Robert Looney of the Navel Postgraduate School affirmed the importance of the entrepreneurial strategy outlined in the Framework. the study, through extensive quanti-tative analysis of countries’ growth patterns, finds that those that followed an entrepreneur-led growth strategy sustained their growth and that, in the short term, sup-port for entrepreneurship efforts could be expanded even without national governance reform.11

Perhaps the best argument for supporting entrepre-neurs, however, lies in the expected return on invest-ment. the probability that any major commercial suc-cess will emerge from a U.s.-backed incubator is of course small—but this small chance that the Pii could help develop a Pakistani instagram, Linkedin, or even facebook is well worth the relatively minor investment in resources. The returns—not just financially, but in both development impact and public goodwill—would be immense.

DefiningtheEntrepreneurialEcosysteman entrepreneurial ecosystem, in its broadest sense, is an enabling environment for startups, at the local, regional, and national levels. this ecosystem can be divided into six domains—conducive culture, enabling policies and leadership, availability of appropriate fi-nance, high quality human capital, venture-friendly markets for products, and a range of institutional and infrastructural supports—that interact in complex ways. alone, each dimension is conducive to entrepreneur-ship, but insufficient to sustain it.12

in Pakistan there exists a small but promising network of organizations and initiatives in place to support entre-preneurship.* But there is a need to further develop and * When we refer to the ‘entrepreneurial ecosystem’ and Pakistan’s network of entrepreneurial organizations, we are referring to organi-zations and programs that promote the growth of professional entre-preneurial companies, such as software development firms. Previous U.s.-sponsored interventions, such as Usaid’s Pakistan entrepre-neurs program, have aimed to lift low-income, vulnerable populations out of poverty by fostering micro-enterprise development. While such programs are vital to Pakistan’s long-term stability, we focus our entre-preneurial assessment and recommendations on activities that pos-sess the most potential to strengthen Pakistan’s private sector and attract investment. micro-enterprise development is an appropriate intervention for poverty reduction, but not for attracting professional

integrate Pakistan’s existing entrepreneurial infrastruc-ture, in order to create a startup environment that is both sustainable and broadly accessible. among the many recommendations we received from entrepreneurs and others working to promote entrepreneurship, five stand out as areas where state could provide assistance.

1) Startup capital – the lack of startup capital is one of the most binding constraints to starting or scaling a business in Pakistan. injecting capital is of course the main objective of the PII in the first place—but a state-sponsored initative that establishes a distinct Vc fund, or even provides initial seed funding, in conjunction with a later-stage growth fund, could provide much-needed financing to Pakistan’s en-trepreneurs.

2) University programs – there is a shortage of high-quality entrepreneurial education programs with-in Pakistan’s university system. in 2006, Usaid launched an initiative with the institute of Business administration to establish a center for entrepre-neurial development, but later diverted financing to support flood relief operations.13 While such pro-grams would bolster entrepreneurship in Pakistan, in the short-run there are other initiatives, which are less resource-intensive, that may be more feasible but of equal impact. among the many entrepre-neurs we met, there was a common call to establish business incubators† in Pakistan’s universities. in-

investment and fostering entrepreneurial companies that may grow to be large firms. † Business incubators are programs designed to support the suc-cessful development of entrepreneurial companies through an array of business support resources and services. More specifically, busi-ness incubators can enable technology transfer and innovation, as-sist disadvantaged communities or individuals with projects, promote

Domain Category• Initiatives (investment, support) • Financial support (R&D, jump-start funds) • Regulator framework incentives (tax incentives) • Research institutes

• Unequivocal Support • Entrepreneurship strategy • Social Legitimacy • Urgency and advocacy • Venture capital funds • Private equity • Zero-stage venture capital • Angel investors • Public capital markets • Debt • Visible successes • International reputation

• Tolerance of risks, mistakes, failure • Innovation, creation, experimentation • Social status of entrepreneur • Ambition, drive, hunger • Entrepreneurship promotion • Entrepreneur-friendly associations• Conferences • Business plan competitions • Telecommunications • Transportation and logistics • Energy • Zones, business incubators, clusters

Support Professionals Labor • Skilled and unskilled • Serial entrepreneurs

• Professional and academic degrees • Specific entrepreneurship training • University linkages, collaboration • Business incubators

Networks • Expertise in commercializing • First reviews • Early adopters for proof-of-concept • Distribution channels

Source: Daniel Isenberg, “Introducing the Entrepreneurship Ecosystem: Four Defining Characteristics,” Forbes Online Magazine (May 2011), < http://www.forbes.com/sites/danisenbe rg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/>

Human Capital Educational Institutions

Markets • Entrepreneurs, diaspora, universities, multinationals, investment professionals

Early Customers

Elements of the Entrepreneurial Ecosystem

Culture Success Stories • Wealth generation for founders

Societal Norms

Supports

NGOs

Infrastructure

• Legal, accounting, investment bankers, technical experts

Elements

PolicyGovernment

• Venture-friendly legislation (bankruptcy, contract enforcement, etc.)

Leadership

Finance Financial Capital

Policy!

Entrepreneurship!

© 2011 Daniel Isenberg!

Non-Government Institutions !

Infrastructure!

Labor!

Educational Institutions !

Networks!

Early Customers!

Leadership !

Financial Capital !

Success Stories!

Societal Norms!

Government!

Support Professions !

Fig. 28 Constellation of Elements in the Entrepreneurial Ecosystem!

Markets!

Human !Capital ! Culture!

Finance!

Supports!

40 41


cubators can be housed within existing university building space; universities can use them as platforms to integrate entrepreneurs across the country. Giv-en greater resources availability, build-ing new, well-equipped physical spaces within universities, designated for use as incubators, would be especially helpful.*

the university business incubator model is an inviting approach because it can be tailored to the resources, academic strengths, and location of any univer-sity in Pakistan. While some universities may resource their incubators with high-tech equipment and a full staff—such as nUst—other universities would likely benefit from a simple physical space from which to work and the part-time as-sistance of a professor.

it is also important that the Pii takes a broad view in terms of university programming, and seeks rela-tionships beyond just the most elite institutions (like LUms and iBa), and beyond the biggest cities (Ka-rachi and Lahore). an ideal program would target a range of geographically diverse universities in both large and second-tier cities.

3) Mentorship – there is a shortage of good mentors for Pakistan’s entrepreneurs. almost every entre-preneur we met cited the importance of mentorship. strengthening existing entrepreneurial networks, leveraging U.s. private-sector expertise, and con-necting entrepreneurs with business leaders in Pakistan are all important, tangible interventions state could undertake to address this need.

4) Linkages – current entrepreneurial initiatives in Pak-istan are disjointed and exclusive. improving link-ages should be a component of any entrepreneurial support program in Pakistan. state should empha-size establishing linkages among universities, do-mestically and abroad, and connecting entrepre-neurs with mentors and business opportunities in the United states. the incubator model would also serve as a conduit to channel startup capital and to facilitate mentorship and business linkages.†

local job creation, and help universities and R&d centers commercial-ize research and know-how. * Presently, there are a few incubators housed in Pakistan—the na-tional University of science and technology (nUst) launched the technology incubator center (tic) in 2004 and the saif center for innovation, a technology incubator, was established in 2008—but the quality and productive output of these programs are unknown at the time of this report. our recommendation focuses on expanding and improving Pakistan’s incubator network by strengthening existing in-cubators and establishing new incubators in Pakistan’s universities, where appropriate. † While regulatory reform is important, it is not an objective directly tied to the activities of a business incubator. there is, however, an opportunity to integrate mentorship programs, university educational

5) Regulatory reform – entrepreneurship in Pakistan is impaired by government policy, legislation, and regulation. While State may lack the influence to directly engender policy change in Pakistan, it is in a position to collaborate with powerful constituen-cies, such as the U.s.-Pakistan Business council, in the United states, and the american Business council, in Pakistan, to advocate for a more pro-growth regulatory environment.

Going Forwardthe guidelines, below, constitute a set of concrete steps the Pii could take to help strengthen Pakistan’s entrepreneurial ecosystem. this list is informed by our field research, but it is not comprehensive, so we sug-gest further research to flesh out and refine these pre-scriptions:

Evaluate existing entrepreneurial programs and net-works in Pakistan – there is a budding network of en-trepreneurial groups, university business incubators, mentorship programs, business plan competitions, and business support organizations in Pakistan. As a first step, we recommend evaluating the focus, efficiency, management, and resources of these elements to iden-tify potential partners for a university-based business incubator program. the list we provide, at the end of appendix B, although not exhaustive, highlights the prominent actors and initiatives in Pakistan’s entrepre-neurial sector. it can be used as a starting point for this assessment.

Develop clear objectives and a framework for the incu-bator program – there are many incubator types and structures. Generally, universities develop incubators to commercialize the science, technology, and intellec-

opportunities and linkages to financing sources, as well as, other uni-versities and the private sector within the university-based business incubator model.

tual property resulting from university research.* there are, however, sub-stantial differences in the research strengths of Pakistan’s universities. for this reason, the focus and struc-ture of each incubator will likely differ to some degree. nevertheless, it is vital to establish a clear set of ob-jectives for each incubator, as well as for the larger network of incuba-tors. clear goals and a framework will guide critical decision points that arise during the planning process.

Decision PointsFocus Area: Business incubators can be designed to pro-mote specific industries or take a more generalist approach. Generally, incubators are aligned with the capabilities and resources of the host university, although a more general-focused incubator is appropriate for most institutions.

Level of Technology and Support: available resources and sector focus, if any, will drive the technology require-ments and the type of business support services of the in-cubator.

Location: Location will dictate whether or not the incuba-tor can leverage existing business clusters, influence which constituencies will have access, and shape the program manager’s capacity to coordinate services and supervise the program.

Cluster: first, existing business clusters in Pakistan, if any, should be identified and assessed on their ability to support and add value to the incubator.† next, a decision should be made to either tie the incubator into an existing cluster or to utilize the incubator program to jumpstart a new clus-ter. if jumpstarting a new cluster, a cluster strategy—geo-graphical, sector-based, horizontal, or vertical—should be selected.‡14

Select, improve, and integrate – University and affili-ate partner selection should align closely with the initial

* Private investors generally start incubators as a way to make profit by identifying, training, and investing in multiple companies and gov-ernments may start incubators to jump-start the economy, develop priority sectors, or create jobs. While the motivations for starting an incubator may differ among participating groups, the core objec-tives—business creation, technology transfer/innovation, job creation, and commercialization of university know-how—are generally shared. † The Framework for Economic Growth identifies several preexisting “pseudo-clusters”—the it cluster in Karachi, automotive manufactur-ing in Port Qasim, textile and leather in faisalabad, sports and surgi-cal equipment in sialkot, furniture in Gujranwala, light engineering in Gujrat, heavy industries in Wah, and light weapons manufacturing in Landikotal—but stresses the need to develop stronger clusters more proactively. See: http://www.pc.gov.pk/hot%20links/growth_docu-ment_english_version.pdf. ‡ highlights of the development cluster strategies listed above in-clude: 1) geographical: clustering is focused in one geographical area to aggregate a critical mass of resources and skills that results in a sustained competitive advantage for a particular industry (e.g., Silicon Valley, Hollywood); 2) sector-based: a group of businesses from within the same sector operate together to share knowledge and common resources; 3) horizontal: businesses share general re-sources, such as best practices; and 4) vertical: entire supply-chains work together to make the system—from production to sale—more competitive.

evaluation results and the objectives and framework of the program. moreover, universities selected for the program should demonstrate a long-term commitment to strengthening—or starting and strengthening—their business incubators, as well as the will and capacity to allocate physical space, professional support, and financing, if possible. The program’s overarching ob-jective should be to improve and integrate§ the incuba-tors. as a guideline, successful business incubators typically include:

• clear, well-communicated goals; • an incubator manager responsible for tenant selec-

tion, day-to-day operations, the setup and coordi-nation of business development services and out-reach, and for meeting the overall objectives of the incubator;

• Business services, such as management training, business plan development, access to financers, and industry-specific technical assistance;

• shared resources like developer software and com-puters, access to subscription market research, or programming assistance, plus secretarial support, high-speed internet, credit reports, etc.;

• Physical space for working and collaborating; • financing through corporate partnerships, grants,

permanent university funding, and, eventually, a working capital fund; and

• a tenant application process and evaluation crite-ria to ensure the incubator support the people and business ideas that fit its mission.15

Monitor, support, and develop – establishing and strengthening a university-based incubator program is, of course, a complex, time-consuming process that will require long-term vision and an implementation plan. deliberate steps—from the start—to judiciously select partners, engage key stakeholders throughout the design phase, and to build on promising entrepre-neurial programs already in place will best ensure suc-cess. the expectation that incubators will expeditiously

§ integration refers to building and institutionalizing best practice and knowledge-sharing processes, expanding mentorship opportunities, and cultivating an entrepreneurial community within and among par-ticipating universities. More specifically, recommendations for inte-gration will depend on other factors, such as the focus and location of each incubator.

ENTERPRISE!ENTREPRENUER! EMPLOYMENT !

BUSINESS INCUBATOR !

Cross-University Linkages!

InitialState Funding!

Management Training!

Knowledge Attainment and

Sharing!

Community Linkages!

Technical Assistance!

Funding Streams!Business Development Strategy !

GROWTH!

Fig. 29 Business Incubator Model!

Incubator! Level of Technology!

Location!

Urban!

Rural!

Focus Area !IT, Agro,

Manufacturing, Services, Generalist!

Hi-Tech Low Tech!

Cluster Non-Cluster!

Fig. 30 Incubator Program Decision Points!



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develop and launch successful businesses is short-sighted. Rather, the short-term value of an incubator program is its enabling and ‘catalytic’ effect.* in other words, the initial value of an incubator is the conditions and resources that it provides to make entrepreneur-ial pursuits possible. While there is noticeable interest and support for the incubator program, predicting how people will respond to the program is difficult. To miti-gate risk, the program should start small, be monitored closely, and adjust and scale as circumstances dictate.

Social Impact Bonds (SIBs)a social impact bond is a type of outcome-based con-tract in which public sector representatives commit to pay for significant improvement in social outcomes for a defined population.16 in other words, it is a type of security that investors can purchase, but which pays out based on development results—i.e., private-sector investors pay in, but siBs only pay back returns when programs are successful. in this way, they move risk from the public sector to the market, and they incentiv-

* the “enabling and catalytic effect” refers to the disruptive change and subsequent realignment of resources, interests, and priorities that occurs when a new opportunity—the business incubator—is established and discovered by students, entrepreneurs, and private companies in Pakistan. in other words, the very act of creating a space for people to develop and start companies will likely facilitate the exchange of ideas, new relationships, and the pursuit of new entrepreneurial ventures. add a selection process and incentives—business development services, financing, etc.—and the enabling and “catalytic’ effect will likely respond in equal measure.

ize the identification, evaluation, and replication of high-performing initiatives.

siBs are not bonds in the conventional sense—while they operate over a fixed period of time, they do not offer a fixed rate of return as conventional bonds do. Repayment to investors is instead contingent upon designated social outcomes being achieved. in this re-gard, siBs are more similar to an option contracts than conventional bonds.†

siBs are a relatively new type of instrument, and there are few precedents; they are currently being piloted in the United states and United Kingdom—for instance, to fund programs to reduce recidivism among released prisoners. new initiatives, such as instiglio, seek to extend the model to developing countries.‡ siB pro-grams have been successful in targeted social reform programs and could provide a unique opportunity to leverage private sector strengths to promote reform ini-tiatives in Pakistan. siBs are a particularly appealing way of attracting diaspora funding—i.e., ’patriotic capi-tal’—as expatriates can invest directly in programs at home with the promise of impact, but also hope to earn a financial return.

† More on this model is available at: http://www.socialfinance.org.uk/work/sibs‡ See: http://www.instiglio.org/.

Partial Credit Guarantees (PCGs)Partial credit guarantees, often called credit guarantee schemes (cGss) in Pakistan, are programs that ensure partial repayment of a delinquent loan to motivate lend-ers to lend to borrowers, which normally do not have access to credit from the formal sector. Within the last four years, the state Bank of Pakistan (sBP) has launched two CGSs: the Microfinance Credit Guaran-tee scheme in 2008, and the credit Guarantee scheme for small and Rural enterprises in 2010. each program was funded with a £10mm grant from the U.K.’s dfid and provides a 40% loan guarantee for partnering com-mercial banks.17 although the programs are ongoing, they have already increased commercial lending to Pakistan’s smes, and could offer state an alternative approach for financing SMEs.

if circumstances dictate, state should explore the pos-sibility of implementing a partial credit guarantee pro-gram as an alternative to the Pii. Usaid’s develop-ment credit authority is specialized in structuring and implementing partial credit guarantee programs and would be an ideal partner for establishing an sme loan program in Pakistan.*

Feed-in Tariff (FIT) for Renewable Energya feed-in tariff is a premium rate paid for electricity that is fed back into the electricity grid from a designated * More on this model is available at: http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/

renewable electricity generation source. a fit program is a mechanism designed to accelerate investments in renewable energy technologies. these programs incentivize renewable energy investment by offering long-term contracts to private renewable energy pro-ducers based on their cost of production. fit values differ among renewable energy subsectors to account for the varying costs of production.†

many fit programs include tariff reduction schedules, and, sometimes, staged application rounds. each mechanism is intended to incentivize efficiency im-provements:

• Under tariff reduction schedules, tariffs decline on predetermined dates over the lifespan of the con-tract in order to incentivize companies to cut costs and improve efficiency.

• a staged application mechanism increases tariffs over several rounds, but issues the funds on a first-come-first-served basis, thus incentivizing compa-nies to opt in earlier at lower rates.

energy shortages and rising fuel costs, coupled with the crippling effects of government monopolization, present tremendous challenges for Pakistan’s energy sector. several fit program proposals have been un-

† for example, solar power is relatively cheap to produce compared to tidal power, therefore, fits for solar power are typically less than tidal power fits.

http://www.socialfinance.org.uk/work/sibs

http://www.socialfinance.org.uk/work/sibs

http://www.instiglio.org/

http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/

http://www.usaid.gov/our_work/economic_growth_and_trade/development_credit/

44 45


successfully championed in Pakistan over the last few years. fortunately, this year, Pakistan introduced a fit to expand wind power in sindh province.18 a national fit program, or simply strengthening, monitoring, and expanding the sindh province wind fit program, could prove helpful in attracting much-needed private sector investment.* moreover, neighboring china’s preemi-nence in the renewable energy industry heightens the appeal of using a fit to develop affordable energy al-ternatives in Pakistan.

Trade Assistancetrade assistance includes any initiative or program that facilitates access to markets. extending Pakistan’s trade freedom by reducing trade barriers would facilitate an expansion of exports and imports and, as a result, in-crease domestic efficiency and generate new business opportunities for export-based businesses. this rec-ommendation is not new and has been put forth a num-ber of times, including in a study submitted to congress from the Center of Global Development (CGD): “As part of an overall plan to spur private investment and job creation in Pakistan, we urge congress and the admin-istration to work together to extend duty-free, quota-free access to U.s. markets for all Pakistani exports from all of Pakistan for at least the next five years.”19 We echo cGd’s call to continue removing barriers to trade * More on this model is available at: http://www.nrel.gov/docs/fy09o-sti/45549.pdf

in Pakistan, but recognize the limitations of such broad recommendations. although comprehensive trade re-form is a complicated, politically difficult issue, efforts should be made—where possible—to complement pri-vate sector development initiatives with targeted trade assistance.

additionally, Pakistan’s decision to grant india ‘most-favored nation’ status (mfn) in 2011 is a major step in reducing transaction costs between the two countries20 and presents an opportunity for the United states to advocate for a stronger Pakistan-india bilateral trade partnership.

soURces1 “taxonomy of Private equity,” illinois Private equity association (accessed march 2012), 1. http://www.illinoisvc.org/filebin/PDFs/IV_Pri-vate%20equity%20taxonomy.pdf2 “how funds Work,” overseas Private invest-ment corporation (accessed may 2012). http://www.opic.gov/investment-funds/how-funds-work3 “Usaid and impact investors capitalize new equity fund for east african agribusinesses,” JPmorgan chase & co. (september 28, 2011). http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?releaseid=609172 4 Josh Lerner, “a note on Private equity in de-veloping countries,” harvard Business school, 2008. 5 dilip Ratha, sanket mohapatra, and ani silwal, Migration Remittances Factbook 2011, Wordl Bank migration and Remit-tances Unit (2011). http://siteresources.worldbank.org/INTPROSPECTS/Resourc-es/334934-1199807908806/Top10.pdf6 david Wilton (ifc), “characteristics of suc-cessful GPs in emerging markets,” emerging markets Private equity association (accessed may 2012) http://www.ifc.org/ifcext/cfn.nsf/At-tachmentsByTitle/Characteristics_of_Success-ful_GPs_in_EM_by_D_Wilton/$FILE/Characteristics+of+Successful+GPs+in+EM_D+Wilton_IFC_EMPEA+editorial.pdf. 7 Ibid. 8 heino meerkatt (BcG) and heinrich Liech-tenstein (IESE), “New Markets, New Rules: Will emerging markets Reshape Private equity?” (november 2010), 10. 9 “munter, clinton commend Pakistani entrepre-neurial spirit,” Pakistan Today (march 28, 2012)http://www.pakistantoday.com.pk/2012/03/28/news/profit/munter-clinton-commend-pakistani-entrepreneurial-spirit/10 Government of Pakistan, Planning commis-sion, Pakistan: Framework for Economic Growth (may 2011), 55. 11 Robert Looney, “entrepreneurship and the Process of Development: A Framework for Ap-plied expeditionary economics in Pakistan,” Kauffman foundation Research series (febru-ary 2012). http://www.kauffman.org/uploaded-files/pakistan_ee_framework.pdf12 daniel isenberg, “introducing the entrepre-neurship Ecosystem: Four Defining Characteris-tics,” Forbes Online Magazine (may 2011). http://www.forbes.com/sites/danisenberg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/13 Kazim Alam, “Funds diverted: USAID backs off from earlier commitment to provide iBa with $5 million,” The Express Tribune (december 19, 2011). http://tribune.com.pk/story/308404/funds-diverted-usaid-backs-off-from-earlier-commitment-to-provide-iba-with-5-million/14 m.n. shivram, “Promoting Business and technology incubation for improved compe-tiveness of small and medium-sized industries through application of modern and effective technologies in india,” United nations social and economic commission for asia and the Pa-cific (May 25, 2004). http://www.unescap.org/tid/publication/indpub2323_part2ivc.pdf 15 teresa Gillotti and Ryan Ziegelbaue, “seven components of a successful Business incu-bator,” Let’s Talk Business (July 2006). http://www.uwex.edu/ces/cced/downtowns/ltb/lets/LtB0706.pdf16 “A New Tool for Scaling Impact: How Social impact Bonds can mobilize Private capital to advance social Good,” social finance (febru-ary 2012). http://www.socialfinance.org.uk/sites/default/files/small.socialfinancewpsinglefinal.pdf17 “credit Guarantee schemes of sBP – imple-

mentation thereof,” state Bank of Pakistan, an-nual Performance Review of SBP BSC - FY11 (december 2011). http://www.sbp.org.pk/sbp_bsc/apr/Perf-10-11/Ch-07.pdf18 haris anwar, “Pakistan offers Renewable-energy incentives to tackle shortages,” Bloom-berg Online (august 25, 2011). http://www.bloomberg.com/news/2011-08-25/pakistan-offers-renewable-energy-incentives-to-tackle-shortages.html19 nancy Birdsall, Wren elhai, and molly Kinder, “Beyond Bullets and Bombs: Fixing the U.S. Ap-proach to Development In Pakistan: Report of the study Group on a U.s. development strategy in Pakistan,” center for Global development (June 2011). http://www.cgdev.org/files/1425136_file_cGd_Pakistan_finaL_web.pdf20 tara Beteille and Kalpana Kochhar, “Paki-stan’s Most Favored Nation Status to India: A Win-Win for the Region?” Ending Poverty in South Asia (World Bank Blog) (august 2012). http://blogs.worldbank.org/endpovertyinsoutha-sia/pakistan%E2%80%99s-most-favored-nation-status-india-win-win-region

Fig. 28 isenberg (2011).Fig. 31 social finance (2012).Fig. 33 christopher neidl, “how a feed-in-tariff Works,” World future council (accessed may 2012). http://www.area-net.org/fileadmin/user_upload/AREA/AREA_downloads/Policies_Grid/Wfc_how_fit_works.pdf

Recommendation 8incorporate an explicit component to de-velop Pakistan’s entrepreneurial ecosystem. allocate between $10mm and $20mm for startup capital and other incubator initia-tives. Work through local entrepreneurship networks and universities. implement from the level of the Pii as an overarching com-ponent or through a partner as a smaller sub-fund.

http://www.nrel.gov/docs/fy09osti/45549.pdf

http://www.nrel.gov/docs/fy09osti/45549.pdf

http://www.illinoisvc.org/filebin/PDFs/IV_Private%20Equity%20Taxonomy.pdf

http://www.illinoisvc.org/filebin/PDFs/IV_Private%20Equity%20Taxonomy.pdf

http://www.opic.gov/investment-funds/how-funds-work



http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?releaseid=609172

http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?releaseid=609172

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/Top10.pdf



http://www.ifc.org/ifcext/cfn.nsf/AttachmentsByTitle/Characteristics_of_Successful_GPs_in_EM_by_D_Wilton/$FILE/Characteristics+of+Successful+GPs+in+EM_D+Wilton_IFC_EMPEA+editorial.pdf





http://www.pakistantoday.com.pk/2012/03/28/news/profit/munter-clinton-commend-pakistani-entrepreneurial-spirit/



http://www.kauffman.org/uploadedfiles/pakistan_ee_framework.pdf

http://www.kauffman.org/uploadedfiles/pakistan_ee_framework.pdf

http://www.forbes.com/sites/danisenberg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/




http://tribune.com.pk/story/308404/funds-diverted-usaid-backs-off-from-earlier-commitment-to-provide-iba-with-5-million/



http://www.unescap.org/tid/publication/indpub2323_part2ivc.pdf

http://www.unescap.org/tid/publication/indpub2323_part2ivc.pdf

http://www.uwex.edu/ces/cced/downtowns/ltb/lets/LTB0706.pdf



http://www.socialfinance.org.uk/sites/default/files/small.socialfinancewpsinglefinal.pdf

http://www.socialfinance.org.uk/sites/default/files/small.socialfinancewpsinglefinal.pdf

http://www.sbp.org.pk/sbp_bsc/apr/Perf-10-11/Ch-07.pdf

http://www.sbp.org.pk/sbp_bsc/apr/Perf-10-11/Ch-07.pdf

http://www.bloomberg.com/news/2011-08-25/pakistan-offers-renewable-energy-incentives-to-tackle-shortages.html




http://www.cgdev.org/files/1425136_file_CGD_Pakistan_FINAL_web.pdf

http://www.cgdev.org/files/1425136_file_CGD_Pakistan_FINAL_web.pdf

http://blogs.worldbank.org/endpovertyinsouthasia/pakistan%E2%80%99s-most-favored-nation-status-india-win-win-region



http://www.area-net.org/fileadmin/user_upload/AREA/AREA_downloads/Policies_Grid/WFC_How_FiT_works.pdf



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risk & impAct AnAlysisThis program faces two principal types of risk: financial and political—though, of course, these are interrelated. it is important to acknowledge these risks—to the extent they can be mitigated, they should be. But some risk—systematic risk—is unavoidable, and this sets limita-tions on the Pii.

Financial Risksthe most pressing risk for the Pii—like with any invest-ment vehicle—is that it will not earn a return. historical-ly, Pakistan has been both economically and politically volatile—both chief reasons why investors have been wary—and a crisis of either kind could spawn a crisis of the other. there are also severe market distortions (e.g., monopolies, corruption, bureaucratic inefficien-cy), which could stymie the prospects of even promis-ing investments. furthermore, investment is inherently probabilistic; even the best bets on paper can pull up lame when the race is run.

it is intrinsically important that Pii funds earn a return—but it is even more important that they do so because of the implications for the larger private equity market. a key goal of the PII is to be a ‘first mover’ in order to cata-lyze further investment. the success of this strategy depends on the success of Pii funds themselves—if the program does not work well as an investment vehicle, no other positive externalities will follow.

But just because there might be a high probability of success, with a small portfolio of investments this far from guarantees actual success. this may seem an obvious point—but it is important to consider.

one way to think about this risk is with Bayesian anal-ysis.* each new investment in the Pakistani market provides outside observers—investors in waiting—a chance to update their ‘priors’ (i.e., their previous as-sessments of the probability of investing successfully in the Pakistani market). While we cannot know potential investors’ priors on Pakistan, we can make an educated guess.

To use an extremely simplified model, consider returns from the Kse 100 and s&P 500 over the last 50 years. in about 75% of years, the Kse earned positive returns, whereas in about 65% of years the s&P saw gains. in-deed, Kse stocks on average typically earns higher re-turns than do american stocks—but they are also much more volatile, and thus riskier.

to account for higher risk, investors seem to seek re-turns roughly twice what they would see in the United states. anecdotally, foreign investors seek minimum iRRs of 30–35%. this is 20–25% above returns earned on average in the U.s. market. so, to proxy this high hurdle rate, assume they estimate a one-third probabil-ity that investments in Pakistan actually do have a 75% success rate, and a two-thirds probability they are more like U.S. returns (i.e., 65%)—thus, 2:1 odds against. In other words, they assume there is only about a one-in-three chance that Pakistani businesses really earn high enough returns to justify their increased risk, and a two-in-three chance their returns are more modest and thus not worth this risk. (in actuality, there is also downside risk to equity investments—i.e., that investors will lose money. But to simplify, we assume they are merely judging the probabilities of success versus failure.)

We use Bayesian updating to model the continually up-dated probability of an investor, over 50 investments, given actual success rates of 65%, 75%, and 85%, us-ing a random variable. If iterated infinitely, the investor’s updated probability would converge to the true proba-bility. With a much more limited number of investments, like Pii funds are likely to see, however, there can be substantial variability. We use three trials (think: funds), with 50 iterations each (think: investments).

even when the probability of success is in fact 75%, given a limited set of investments and the randomness of the market, investors may be no more confident after

* Bayes’ Theorem states: . One can use this infer-ence to ‘update’ a prior probability, given new information—one’s new probability estimate (a) is conditioned on the experience (B).

50 trials than they were before. their experience is also highly sensitive to changes in the actual success prob-ability—if this moves to 85%, for instance, an investor’s assessment of whether the real probability is at least 75% becomes much more likely to be confident.

This analysis is simplified and inexact. But it does il-luminate a core problem for the Pii and the Pakistani market as a whole: There is little good evidence on in-vestment performance in Pakistan because there has been so little activity to date. moreover, the fund is limited in what it can accomplish—it can only make so many investments, for so much value. this will in the end contribute to the increasingly informative pool of evidence on the Pakistani market. that said, even if the prospects of success are quite good, the fund may not do much to reveal this, through no fault of the capabili-ties of its managers or the strategy of the initiative.

there are two important conclusions to the draw from this: First, it is worth acknowledging that this fund may well not see huge financial success, due merely to chance. But second, the more the fund is able to di-versify its portfolio, and to maximize the number of posi-tions it takes (without reducing the quality of those in-vestments), the greater the demonstration effect is likely to be, and the less randomness will play a pivotal role.

Political RisksPakistan, of course, also presents a difficult political cli-mate. as with any U.s. program in Pakistan, even the slightest mishap is in danger of ballooning into a cri-sis. Recent events—the Raymond davis incident, the Bin Laden raid, the border post confrontation—have strained the political relationship between Pakistan and the United states. the news media and the broader Pakistani public are primed to assume the worst about any U.s. intervention. While there is substantial appe-tite for a U.s. initiative that invests directly in Pakistan’s private sector, and significant enthusiasm for trying something new and innovative when it comes to eco-nomic development, this approach also poses certain political risks:

• financial returns are easier to measure than de-

velopment impacts. if the fund does not perform well, this will be much more visible than poor per-formance in a traditional development project. it will thus be more subject to criticism in the case of failure, or even performance below expectations

• Making investments in specific businesses risks the appearance of favoritism. if investment decisions are not transparent or well-justified, critics could in-dict state for picking winners and losers in the Paki-stani market.

• though no discussion during our research sug-gested this was a major concern, it is important to note that, by working directly with Pakistan’s private sector, state is explicitly not working with the gov-ernment. as such, there is risk that this initiative could be seen as diverting assistance away from the Pakistani government, and thus be perceived as a slight against the traditional recipients of amer-ican aid.

more than this, though, the Pii’s success also depends on investors’ forming close relationships with invest-ees. trust in Pakistan’s business world is already very weak—conspiracy theories associated with U.s. in-volvement could doom the Pii’s prospects for forming these essential partnerships. exactly how state brands the Pii, then, may in fact affect directly its prospects for success.

Mitigating Risks & Maximizing Impactthe uncertainties inherent even with high probabilities of success, as well as the challenges of the current po-litical context, reinforce the importance of taking every step to maximize the Pii’s likelihood of success. Ulti-mately, the Pii’s performance as a business, develop-ment, or diplomatic venture hinges, above all, on its functioning well as an investment vehicle.

Research shows that there is a positive relationship be-tween fund performance and development impact in emerging market private equity—state will best cata-lyze follow-on effects and foster improved engagement with actors in the Pakistani economy by adopting a well-managed, commercially viable investment approach that supports business growth and delivers strong re-turns.*

this starts with hiring the best fund managers avail-able—by looking widely and especially locally for top-quality private sector partners, and by paying them market rates. additionally, it includes giving manag-ers the broad flexibility to exercise their judgment and

* the experience of the ifc, for instance, shows that invest-ment returns and impact are highly correlated: http://www1.ifc.org/wps/wcm/connect/1c84b00049bdb98d95e6d7a8c6a8312a/Private%2Bequity%2BPioneer.pdf?mod=aJPeRes. see ifc Private equity and investment funds ‘news & Presentations’ for additional articles.

0!

0.1!

0.2!

0.3!

0.4!

0.5!

-1! -0.8! -0.6! -0.4! -0.2! 0! 0.2! 0.4! 0.6! 0.8! 1! 1.2! 1.4! 1.6! 1.8! 2!

Fig. 34 Densities of Annual Returns on Equity Indices!1961–2011!

KSE 100! S&P 500!

-100.00%!

-50.00%!

0.00%!

50.00%!

100.00%!

150.00%!

200.00%!

0.00%! 1.00%! 2.00%! 3.00%! 4.00%! 5.00%! 6.00%! 7.00%! 8.00%!

Fig. 35 Annual Volatility vs. Returns for KSE100 & S&P500!1961–2011!

KSE! S&P! KSE Avg.! S&P Avg.!

0.00!

0.10!

0.20!

0.30!

0.40!

0.50!

0.60!

0.70!

0.80!

0.90!

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0! 10! 20! 30! 40!

Fig. 36 Estimated Likelihood of 75% Success Rate—Given Three Trials at Actual Probabilities of .65, .75, & .85—over 50 Investments!

P(.75) #1!P(.75) #2!P(.75) #3!P(.65) #1!P(.65) #2!P(.65) #3!P(.85) #1!P(.85) #2!P(.85) #3!

€

P(A |B) =P(B | A)P(A)

P(B)

http://www1.ifc.org/wps/wcm/connect/1c84b00049bdb98d95e6d7a8c6a8312a/Private%2BEquity%2BPioneer.pdf?MOD=AJPERES



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expertise and not placing undue constraints on their decision-making authorities, while providing clear ob-jectives and effective oversight to ensure alignment of interests. it also includes creating the Pii itself as an adaptable program that values learning, innovation, and transparency, and strives for multiplicative impact. finally, it includes exhibiting patience from the outset to let investments mature.

Among the specific tools that State can leverage to minimize the financial and political risks facing the PII, and maximize the program’s prospects for impact are the following:

Incentive Compensationincentive compensation is essential to attract and retain talented fund managers and motivate performance. many impact investment funds have endorsed impact-based incentive structures that link at least a portion of GP compensation to social and environmental perfor-mance—rather than to the maximization of profits, as is common practice in traditional private equity funds.1 this type of structure could be an effective tool to align fund managers with U.s. Government interests and foster development impact. the approach could also, however, introduce unnecessary complexity and con-straints on fund managers, and prove unfeasible in the absence of sufficient interest among GPs and demand from other investors.

it is important to ensure that Pii investments are made and managed in a way that maximizes financial returns and generates benefits for the local economy—but it is not clear from existing research that penalizing or rewarding fund managers based on the non-financial impact of fund investments will help to achieve this. commercial structures—based on the standard 2&20 compensation model—are proven tools for incentivizing fund manager performance and should be incorporat-ed into the Pii design for optimal impact.

Investment Policy & Oversight Mechanismit is important that Pii fund managers have principal dis-cretion over investment decisions. state, however, can play an important role in overseeing and, where neces-sary, influencing the policies and management systems used to arrive at these choices to ensure investments are accountable to U.s. objectives and consistent with market best practices. a Pii investment Policy—de-veloped by state and adopted by fund managers up-front—can serve as a tool for encouraging sound in-vestments aligned with the broader goals of job creation and private sector development, and managing risks at both the GP and portfolio company levels. the policy should define a clear PII mandate and set forth guide-lines for incorporating U.s. Government requirements and environmental, social, and corporate governance (esG) standards into fund investment processes.

one of the core advantages of the private equity model

in emerging markets is its focus on helping underlying portfolio companies to grow, both by providing capital and by improving business practices—the role of fund managers in helping to raise esG standards is an inte-gral part of this process. there is a growing recognition in the Pe industry that integrating esG standards—into both investment decision-making and management ac-tivities—helps to better align the interests of LPs, GPs, and portfolio companies, and ultimately generates both superior returns for investors and more sustainable lo-cal markets.*2 cdc, for instance, makes a strong busi-ness case for fund managers to factor in analysis of ESG risks and opportunities, alongside financial per-formance considerations, when valuing and managing investments. in particular, sound esG management has been found to improve portfolio company financial performance—through cost savings, risk reduction, productivity improvements, brand enhancement, and greater market and capital access, for instance—and to add significant value to investments over time.3

oPic, the ifc, and cdc offer useful models for struc-turing an appropriate investment policy, which specifies necessary requirements and exclusions and defines the bounds—in broad terms—of permissible invest-ment practices, without placing overly burdensome constraints on fund managers.† the Un Principles for Responsible investment (UnPRi) also provide an es-sential underlying framework for addressing esG inte-gration.‡

a critical role for the Pii advisory Board should be to monitor implementation of the policy and, as necessary, provide guidance to support GP and portfolio company adherence to esG standards and other requirements during each stage of the investment process.§

state can also explore the feasibility of fund managers’ incorporating economic cost-benefit analysis into the investment decision-making process, alongside esG factors and more traditional financial appraisal tech-niques. the millennium challenge corporation (mcc), for instance, uses economic rate of return (eRR) esti-mates and sensitivity analysis during the pre-invest-ment stage to forecast the sustainability and likely eco-nomic impact of proposed projects.¶4 While the mcc * the emerging markets Private equity association (emPea), UnPRi, and CDC all offer a wealth of resources describing the benefits of esG integration to fund performance. † OPIC Office of Investment Policy documents, CDC’s Investment code, and the ifc’s Policy and Performance standards on social and environmental sustainability are available online for more information. ‡ the UnPRi is an investor initiative carried out in partnership with UneP finance initiative and the Un Global compact. more than 900 organizations are signatories, including at least 100 private equity firms. The U.S. Private Equity Growth Capital Council also issued a set of Guidelines for Responsible investment in 2009, which builds on the UnPRi standards. PeGcc members include many of the most well-known private equity firms. § the cdc ‘toolkit on esG for fund managers’ is a useful resource that provides step-by-step guidance for fund managers to apply esG analysis and management at every stage of the investment process. ¶ in mcc’s analysis, an eRR is a comparison of the costs of a pro-

takes into account several factors to decide whether or not to undertake an investment, eRRs form an integral part of that process, as well as the basis for subsequent monitoring and evaluation.* cdc, according to the in-stitution’s 2011–2015 business plan, is also establish-ing a methodology to assess the development impact of each investment during the appraisal stage.

the terms of the partnership agreements between state and fund managers should also clearly define the rights and responsibilities of the advisory Board, particularly regarding sensitive questions such as member voting rights, veto power, and resolution of conflicts of interest. it is important for state to retain the legal authority to change course and, possibly, to veto transactions, if it is determined necessary to maintain the overall develop-ment and financial effectiveness of the PII.

Information Collection & LearningPii funds will require access to useful market informa-tion and performance data to adapt to an evolving investment environment. state should incorporate in-formation collection and performance monitoring and evaluation as core functions of the Pii to institutionalize learning and drive fund performance. Using metrics such as eRR will help promote the accountability of fund managers to the broader Pii objectives and allow state to capture a more comprehensive picture of the impact of investments.

the evaluation methodologies used by the small en-terprise assistance fund (seaf), dfis such as the ifc and cdc, and the emerging markets Private equity association’s (emPea) ‘Library of development indica-tors for Private equity funds’ are useful resources for identifying and measuring the broader performance of fund investments. seaf uses the eRR—which quanti-fies the overall development impact of an investment by combining the financial rate of return with net social returns—as well as a measure of the multiplier effect of each investment.†‡ similarly, the ifc and cdc evalu-ate the overall development outcome of each fund in-vestment by merging indicators that measure progress

posed investment (e.g., financial expenses) and the potential ben-efits of those costs (e.g., expected increases in household income or value added of firms). To calculate ERR, MCC compares the ex-pected outcome with the project investment against a counterfactual scenario. an eRR represents the interest rate at which the discounted net benefits of a proposed investment equal the discounted costs—the higher the eRR, the larger the expected economic impact. to account for uncertainty, mcc also conducts sensitivity analysis on its eRRs to project a range of possible outcomes. * for more details on how mcc uses eRR analysis to make invest-ment decisions, see: http://www.mcc.gov/pages/activities/activity/economic-rates-of-return. † seaf calculates the multiplier effect as the net dollars generated in the local economy for each dollar invested. SEAF estimates that, on average, each dollar invested generates an additional $13 in the local economy.‡ for a more detailed analysis of how to use the eRR metric to as-sess an investment’s overall development impact, see “an economic framework for assessing development impact” (Benjamin esty, car-rie ferman, frank Lysy, harvard Business school, 2002).

along four key parameters, including: financial perfor-mance, economic performance, environmental and so-cial performance, and broader private sector develop-ment effects.§

Transparency & Brandingtransparency is critical to insulate the U.s. against po-litical risks, as well as to communicate the impact of Pii investments and attract new and sustainable sources of commercial investment in Pakistan. Requirements that fund managers regularly disclose information on Pii in-vestments and performance, and the development of systems to disseminate this information to external au-diences and make it publicly accessible, are both key elements.

Visibility should be a core component of the program, but the manner in which this is sought is important. more so than other initiatives, it is imperative that the branding and publicity associated with the Pii be subtle. heavy-handed branding or publicity that ties the Pii too closely to american foreign policy, rather than broader business and development relationships, could under-mine the intended diplomatic objectives.

the Pii will face systematic risk that cannot be con-trolled for—it is important to recognize this underlying uncertainty and calibrate expectations around it. a well-functioning investment vehicle that institutionalizes adaptability, learning, and transparency, however, can help to mitigate financial and political risks and increase any investment’s prospects for success. high-quality fund management, effective oversight, information col-lection and evaluation, and transparency, in particular, are essential features for driving fund performance. Ul-timately, unless a fund can exit its investments, it can-not earn a return. state can best improve the possibil-ity of profitable exits and broader economic impact by allowing investments the time to see success and by drawing in new investors—either as equity partners, or merely as conscious observers of the Pakistani market, with an eye toward future investment.

soURces1 “Impact-Based Incentive Structures: Aligning Fund Manager compensation with social and environmental Performance,” Global impact investing network (december 2011). 2 “How Virtue Creates Value for Business and Society: Investigating the Value of esG activities,” Boston college center for corporate citizenship and mcKinsey & company (2009).3 “CDC Toolkit on ESG for fund managers: Adding value through ef-fective environmental, social and governance (esG) management,” cdc Group (2010). 4 “Fact Sheet: Economic Rates of Return on the Web,” Millennium challenge corporation (april 2008). Fig. 34 Gfdatabase, Global financial data (march 2012). https://www.globalfinancialdata.comFig. 35 Ibid.

§ see cdc ‘evaluation methodology’ for a complete description of the framework and indicators.

http://www.mcc.gov/pages/activities/activity/economic-rates-of-return

http://www.mcc.gov/pages/activities/activity/economic-rates-of-return

https://www.globalfinancialdata.com

https://www.globalfinancialdata.com

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recommendAtionsInordertobestservethefinancialneedsofPakistan’sprivatesector,aswellascapitalizeonopportunitiesforinvestment and improved American engagement, we provide a set of eight core recommendations to structure the PII. These recommendations take into account and accommodate the already proposed partnership with SEAF, as one component of the larger investment initiative.

Recommendation 1Establish a vehicle to address Pakistan’s immediate financing needs, but acknowledge its limitations—ultimately, governance failures constrain private investment and entrepreneurship. design the Pii to invest in relatively unconstrained market areas and to act as a catalyst for reforms to improve the business environment.

Recommendation 2invest U.s. Government resources using the private equity fund model. Work with private sector partners. the private equity model is proven in emerging economies, and private sector partners bring critical experience to the partnership—both are important for Pii success and attracting new investment.

Recommendation 3Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with high potential for growth and multiplicative impact in Pakistan’s economy. Prioritize further information collection, collation, and dissemination to address the deficit of good market data in Pakistan and attract new private investment.

Recommendation 4Disaggregate the ‘SME’ space and focus on small- and medium-sized firms, separately. Define these as firms in the $50k–$1mm and $1mm–$10mm revenue ranges, respectively. focus on smes with the strongest exit prospects—target investments in companies led by promising entrepreneurs who have vision but lack the financial and institutional support to scale.

Recommendation 5structure the Pii to include venture capital and growth equity components. Plan for ticket sizes of $50k–$400k and $2mm–$7mm, respectively. employ the limited partnership structure common in private equity and adopted by the cdc and other major dfis, in line with international industry standards.

Recommendation 6Work through multiple implementing partners, as a means to create several smaller Pii funds with more targeted investment strategies. Select and invest with professional fund management firms with relevant experience, local knowledge, capacity to add commercial value to portfolio companies, and ‘skin in the game.’ consider emerging or first-time fund managers that align with the broader PII mandate, in addition to experienced teams with a proven track record.

Recommendation 7structure Pii fund partnerships using one or more feasible implementing mechanisms that allow for maximum flexibility, commercial sustainability, and leverage of U.S. Government resources—prioritize the GDA model but use more traditional contracts and grants as required. seek substantial Pakistani private sector involvement in sourcing and levering investments.

Recommendation 8incorporate an explicit component to develop Pakistan’s entrepreneurial ecosystem. allocate between $10mm and $20mm for startup capital and other incubator initiatives. Work through local entrepreneurship networks and universities. implement from the level of the Pii as an overarching component or through a partner as a smaller sub-fund.

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Key considerations We also offer a set of complementary considerations and more specific action steps. We highlight thesepoints to guide the design and implementation of the PII, with the objective of mitigating risk and maximizing impact. In order of priority, we recommend that State:

• develop a plan to address the full stream of invest-ment—from startup to growth capital.

• specify key Pii features and terms in alignment with private equity standards.

• structure an investment policy and oversight mech-anism.

• create a framework for measuring impact. • Define U.S. added value. • formulate transparency and branding guidelines. • determine how to leverage the Pii to support lon-

ger-term policy reform.

Address the ‘full stream’ structure the Pii to implement all three proposed com-ponents—entrepreneurial ecosystem support, venture capital, and growth equity—simultaneously, as part of an overarching and flexible strategy to promote entre-preneurship and business growth. ensure the three ele-ments are interlinked, rather than compartmentalized in vertical silos, to best address deficiencies in the Paki-stani market and achieve optimal impact.

• develop a strategy to roll out and integrate the three components, including definition of the number of fund managers and appropriate implementing mechanisms. two possible Pii structures—of sev-eral options—are shown, at right.

• consider leveraging the partnership with seaf for entrepreneurship support and startup investments, given the organization’s track record investing in early-stage businesses and managing business accelerator programs through its center for entre-preneurship and executive development (ceed). Partner with two or more additional private invest-ment firms to establish the growth equity and ven-ture capital components.

Define key PII features and terms Determine specific fund features and partnership terms, in accordance with private equity best practices and principles, at the start. establish a clear vision for Pii funds and build market-oriented principles into fund de-sign to attract and retain top talent, and align interests and expectations among all Pii stakeholders. among the key issues that require definition:

• Criteria for success – Define what constitutes a suc-cess—e.g., breaking even or some combination of returns and development impact. additionally, de-cide on trigger points that warrant a suspension or termination of the U.s. resource commitment.

• Performance incentives – determine a feasible compensation model, management fee structure, and general partner commitment level—adopt the standard 2&20 carried interest model and require fund managers to make significant equity contribu-tions to Pii funds to best align GP-LP interests.

• Policy for handling investment proceeds – deter-mine, for instance, whether financial returns will be reinvested in Pakistan’s economy or go back to the U.s. Government.

Create a framework for evaluating results incorporate rigorous performance monitoring and eval-uation into the fund’s design.

• Define a set of core performance indicators to iden-tify and measure the financial and development ef-fects of the fund.

• consider using measures of ‘economic rate of re-turn,’ as used by the ifc, millennium challenge corporation, and acumen fund, to gain a broader perspective on the impact of investments.

Define and measure U.S. added valueLeverage america’s greatest resources—its business and academic communities—to multiply the Pii’s im-pact. in addition to serving as a source of capital, act-ing as a catalyst for third-party investment, and sup-porting fund performance through an advisory Board, state should use the Pii as a platform from which to engage a broader audience and assist more directly the development of a vibrant entrepreneurial culture.

• Define an explicit role for the PII in deploying Ameri-can knowledge, networks, and market access con-nections in support of Pakistani entrepreneurs—for example, by creating linkages between U.s. and Pakistani businesses, assisting local firms in regis-tering and filing patents, establishing university-to-university connections, and using programs such as fulbright to foster stronger connections with mentors and investors in the Pakistani diaspora.

• consider including metrics of direct value added by the United states in the Pii m&e framework to evaluate the amount of entrepreneurial activity, in-novation, and new private investment triggered as a result of this assistance.

Structure an oversight mechanismdevelop an oversight mechanism to ensure fund man-agers operate in alignment with U.s. requirements and esG standards, as well as to collect information and pro-vide guidance. Use partnership agreements to clearly define the U.S. role—including questions regarding the authorities of state to veto transactions, suspend fund-ing, and change fund terms in the face of violations or poor results. otherwise, safeguard the discretion

Two Potential Models for the PII

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of GPs to make and manage investments, and rely on market-based incentive structures to effectively align stakeholder interests and motivate fund performance.

• devise an overarching Pii investment Policy to pro-vide parameters for responsible fund investments and define exclusions, drawing from the UNPRI and dfi best practices.

• form a Pii advisory Board with split Pakistani-amer-ican membership—and explicitly define member rights and responsibilities in Pii partnership agree-ments. include experienced private equity and venture capital investors from the United states, as well as dynamic Pakistani business leaders with extensive knowledge and connections, but also an eagerness to mentor younger entrepreneurs.

Formulate transparency and branding guidelinesensure that information on Pii funds is as visible as pos-sible, to demonstrate the broader value of private equity to Pakistan’s economy and attract new commercial in-vestment. Require fund managers to disclose detailed information—financial, operational, portfolio, risk man-agement, etc.—regarding fund investments, while ob-serving commercial confidentiality requirements.

• determine reporting requirements for fund manag-ers and create mechanisms for collecting and dis-seminating information on Pii fund investments—in-cluding a consolidated, state-of-the-art database that is publicly accessible.

• Prioritize transparency but avoid the temptation to oversell america’s contribution and the value of the Pii prematurely—the initiative inherently entails a long-term investment horizon and recent expe-rience highlights the dangers of raising false ex-pectations among the Pakistani public. develop a subtle branding strategy and allow funds the time to ‘work’ and demonstrate returns before publicizing.

Leverage the PII to support policy reform the Planning commission’s Framework for Economic Growth is a forward-thinking document—but it faces an uphill battle. Use the Pii as a platform to engage with public- and private-sector actors in the ongoing dia-logue about how to improve Pakistan’s business envi-ronment and relax the underlying constraints on growth.

• incorporate in the Pii’s design a function to collect and disseminate information on Pakistan’s invest-ment opportunities and problematic aspects of the business environment that stifle entrepreneurship or limit existing firms’ productivity.

• Leverage this information and the Pii’s network of partners to inform the Pakistani government about obstacles and propose policy solutions to incentiv-ize new investment and business activity.

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Conclusion | common Ground

Throughout the course of this study, our core objective has been to offer informed, objective analysis. As best we could, we have aimed to provide evidence-based recommendations that will both engender positive change in Pakistan’s private sector and ensure the responsible stewardship of U.S. dollars. We understand that results matter, and we believe that our analytical approach and recommendationsreflectthatunderstanding,buttodiscountthehumanelementofourresearchwould be shortsighted.

The negative press that is emblematic of a strained U.S.-Pakistan relationship belies our experiences in Pakistan. We do not refute that this bilateral relationship is fragile, but for this particular initiative, support from both sides is overwhelmingly positive. We believe that establishing the Pakistan Private Investment Initiative presents a unique opportunity both to promote meaningful economic development and to strengthen incrementally the U.S.-Pakistan relationship—in particular, by forming new bonds with Pakistan’s dynamic private sector leaders and entrepreneurs. Private

InvestmentInitiativeTH

EPa

kista

n

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Low Demand for vs. Low Supply of Financing*

The cost of finance does not appear to be the bind-ing constraint on growth in Pakistan. in short, loanable funds are available and lending is relatively affordable, but demand for investment is subdued. investment is instead held up due to uncertainty about any given firm’s ability to reliably capture the future profits of in-vestments made today.

A country’s savings is a good indicator of access to fi-nance—lower savings indicates a greater need for other sources of financing. Pakistan’s gross national savings rate was 22.3% of GdP in 2010 and has consistently been below those of regional peers in south asia. Paki-stan’s savings rate ranks 107th of 142 globally.1

Real lending interest rates, however, have also re-mained low—even dropping below zero in the last 10 years.† since 2000, Pakistan has had by far the lowest average real interest rate in south asia.‡

Pakistan’s low real interest rate would suggest that there is high bank liquidity and that lenders chase borrow-ers, offering incentives for borrowing. But, compared to other countries in south asia, Pakistan has the lowest investment rate as a share of GdP.§ domestic credit to the private sector in Pakistan has been low and declin-ing in recent years.¶

despite the availability and affordability of capital, there is weak demand for Pakistan’s limited savings, sug-gesting that there must be other factors constraining investment. for instance, investment has been relative-ly unresponsive to changes in the interest rate. in the latter part of the last decade, when real interest rates dropped below zero, investment declined.

Likewise, there is a weak relationship between savings and investment. from 2000 to 2004, as savings in-creased, the investment rate remained relatively stable. since 2008, as the savings rate increased further, the investment rate experienced a decline. so the invest-ment rate appears to be insensitive to movements in the savings rate.

as well, while fdi has been declining in recent years,2 Pakistan’s lessening levels of external debt and improv-

* this growth diagnostic is a shortened version of one written by dustin cathcart, andrew fitzpatrick, and meredith Gloger for Ped-130, “Why are so many countries Poor, Volatile, and Unequal?” with Prof. Ricardo hausmann, harvard Kennedy school. (“Ped-130 final Assignment: Growth Diagnostic—Pakistan,” December 2011). † From 2000 to 2010, real interest rates fluctuated from -4.5% to 3.8% (World Bank, World development indicators). ‡ Pakistan has a relatively high deposit rate (~8%), but high inflation renders real return to depositors low.§ Pakistan’s private investment rate was 16.58% in 2010, compared to 32.46% in India (WB/WDI).¶ Pakistan has the lowest credit-to-GdP ratio among emerging econo-mies (Planning commission, Framework for Economic Growth).

ing current account indicate little pressure to mobilize foreign savings. Pakistan’s foreign debt is high com-pared to neighbors in south asia and has been climbing since 2006—but the current debt is still a remarkable improvement from the 1990s and early 2000s.** While the current account deteriorated from 2003 to 2008, the balance has been improving over the last two years and registered a deficit of only 0.85% in 2010.††

moreover, if Pakistan’s economy were constrained by low aggregate savings, then an increase in foreign sav-ings would result in increased investment and growth. But in Pakistan’s case, rising foreign assistance and remittance rates have not translated into productive in-vestments or sustained growth. increases in foreign aid and remittances in 2008 and 2009 corresponded with a decline in the investment rate.‡‡ despite these record-high remittances and increasing total reserves, Paki-stan is actually experiencing astonishing capital flight.

Access to finance is consistently mentioned as a top concern for doing business in Pakistan§§—Pakistan is one of the world’s least banked nations.¶¶ as noted above, the financial sector has been prospering on a high spread between lending and deposit rates,*** indi-cating a profitable Pakistani banking industry. Commer-cial banks are highly liquid and capable of increasing fi-nancial intermediation. the problem is that banks have been reluctant to enter the sme, agricultural credit, and housing finance markets in the face of perceived high risks and opportunity costs. Government securities make up the dominant share of banks’ portfolios. the risk-averse banking system has no incentive to diver-sify its portfolios and innovate, while it continues to gain ‘monopoly rents’ from high spreads elsewhere.†††

So, while evidence supports the argument that financial intermediation is weak in Pakistan, there is no indication this is the binding constraint. Inefficiencies in the finan-cial sector point to deeper governance-related prob-lems that hamper competition and innovation.

Low Social Returns vs. Low AppropriabilityReturns to physical and human capital are low in Paki-stan, but these also do not seem to be constraining in-

** External debt fell from 46% of GNI in 2002 to 31% in 2009 (WB/WDI).†† The current account deficit was 9.55% of GDP in 2008 (WB/WDI). ‡‡ Foreign inflows have produced sharp increases in growth at certain points, but because these were not put into productive capital forma-tion, growth has never been sustained.

§§ Access to finance is ranked the sixth-most problematic factor for do-ing business in Pakistan (World economic forum, Global competitive-ness index).¶¶ Only 4–15% of Pakistan’s total population has access to basic finan-cial services (auerswald et al.).*** the interest rate spread was 7.58% in march 2011 (ministry of fi-nance, Pakistan economic survey).††† Corporate profitability is concentrated in a few large companies in the energy, telecom, and banking sectors, even though smes make up more than 99% of the market, by some definitions (MOF/PES).

Appendix A: ABridged growth diAgnostic vestment.

Pakistan suffers from longstanding shortcom-ings in its physical and educational infrastruc-ture; the World economic forum’s Global competi-tiveness Index (WEF/GCI) mentions inadequate supply of infrastructure as the fourth-most prob-lematic factor for do-ing business. electricity shortages, in particular, impose a huge burden on the economy.*

measured by other in-dicators, however, Paki-stan’s infrastructure is comparable to its neigh-bors in south asia. as well, recent policies focused on the development of large public sector infrastructure projects have not suc-cessfully improved investment or growth.

Pakistan also has among the lowest levels of primary, secondary, and tertiary school enrollment in the world, and only 50% of the population is literate.† an inade-quately educated workforce is among the top concerns when it comes to doing business in Pakistan. But re-turns even for those who receive a good education are not high—highly educated Pakistanis leave the country in large numbers to seek employment abroad.

Problems in the energy and education sectors pose serious challenges, but they seem neither incapacitat-ing nor fundamental. they are instead symptoms of the same, underlying problems that constrain growth more generally.

Government Failures vs. Market FailuresGovernment policies are a major impediment to foster-ing risk-taking and innovation in Pakistan, which is criti-cal to accelerating growth in most sectors. indicative of this, industries that do not depend on the government for advantages, such as the mobile phone industry, are the few that are thriving and competitive.3

Pakistan ranks 118th out of 142 countries in overall com-petitiveness.4 Four of the five-most problematic factors for doing business in Pakistan are related to govern-ment failures.‡ similarly, the World Bank’s Worldwide

* Pakistan has one of the world’s worst rankings for quality of electricity supply (World Bank, Doing Business Report; WEF/GCI).† Pakistan is ranked 136, 126, and 119 out of 142 countries on primary, secondary, and tertiary school enrollment, respectively (WEF/GCI). ‡ These are: 1) government instability/coups, 2) corruption, 3) policy instability, and 5) inefficient government bureaucracy (WEF/GCI).

Governance Indicators (WB/WGI) show Pakistan per-forming poorly across all six governance dimensions.§

In the WEF/GCI, Pakistan has one of the worst rank-ings worldwide for its macroeconomic environment (138/142). Uncertainty due to Pakistan’s macroeco-nomic risks has likely increased investor concerns about the possibility of policy shifts that could lead to unpredictable movements in private returns. Pakistan’s poor country credit rating may also have weakened investment as a result of expected losses associated with a debt crisis.¶ similarly, the government’s negative budget balance can increase fears of future inflation and taxation to service the debt, further discouraging investment.

Pakistan, however, has enjoyed sustained real ex-change rate stability since 2008.5 moreover, past im-provements in the macroeconomic environment have not resulted subsequently in increased investment. the fiscal deficit has been improving since 2008, but the investment rate has been declining. While the deficit and inflation are undoubtedly serious problems, there is no evidence to suggest that concerns over macroeco-nomic stability represent the main constraint on invest-ment and growth.

A number of sector- and firm-specific risks resulting from a weak institutional environment also weaken the appropriability of returns, however—and the govern-ment’s role in the economy poses a number of micro-economic risks that particularly discourage investment.

§ These are: 1) voice & accountability, 2) political stability & lack of violence/terrorism, 3) government effectiveness, 4) regulatory quality, 5) rule of law, and 6) control of corruption.¶ Pakistan has a credit rating of 26.4 out of 100, and a ranking of 123/142 (WEF/GCI).

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on one side, excessive government engagement in and regulation of the economy impedes the development of efficient and competitive markets. The government ac-tively intervenes in every sector of the economy and rep-resents more than 50% of national income, presenting significant barriers to private sector entry and expan-sion.6 While privatizations in the early-2000s decreased public participation in sectors like telecommunications, banking, and finance, the government has since ex-panded its role in other industries, like agriculture, con-struction, and transport. Pakistan’s longstanding policy approach of picking priority sectors to be protected and subsidized has resulted in severe economic distortions. in particular, government industrial licensing policies, price-fixing, and other restrictive regulations have led to the prevalence of monopolies.

The World Bank’s “Doing Business” report (WB/DB) sup-ports the view that Pakistan’s regulatory environment is not conducive to innovation, entrepreneurship, or in-vestment.* tax rates and tax regulations rank among the most problematic factors for doing business in Paki-stan. the tax environment is one of the most burden-some on domestic firms—medium-sized firms spend twice the time preparing, filing, and paying taxes com-pared to their counterparts elsewhere in south asia.7 tax policy also favors vested interests, and poor public administration weakens collection and enforcement.8 as a result of exemptions and rampant evasion, Paki-stan has one of the world’s lowest tax-to-GdP ratios.9

Government policies foster monopolized markets that stifle competition and crowd out private investment through regulations that impose a high cost of doing business. By allowing for monopoly rents and regu-lating entry, the government encourages ubiquitous rent-seeking in the private sector—many firms vie for licenses, subsidies, tax exemptions, or tariff protection for short-term gains, rather than investing in long-term growth. moreover, unsustainable public sector enter-prises generate annual losses of 1.5% of GdP. Untar-geted subsidies also place an enormous strain on the fiscal deficit.10

Inefficient public sector management also adds to the cost of doing business by threatening the security of life, contract, transaction, and property—thereby weak-ening claims to private returns. Beyond the increasing cost of business due to terrorism and violence, Paki-stan’s weak institutional environment—particularly in the judicial system—places a host of informal taxes on investors. According to the WB/DB and WEF/GCI, Paki-stan has among the worst rankings worldwide in terms of property rights protection and contract enforcement. Pakistani entrepreneurs also confront high transaction costs in the form of corruption and lack of transparency in government policymaking.†

* Pakistan ranks 105/183, nine places lower than last year’s rank.† Business surveys identify corruption as a top concern for doing business in Pakistan. e.g., transparency international’s corruption

Ultimately, if government failures that disincentivize investment are the most binding constraint on Paki-stan’s private sector, then an investment fund—which increases the supply of financing—is not the ideal solu-tion to this problem. that said, there is more than one constraint on the Pakistani economy—and, in the short term, Pakistan’s circular debt, interest rate spread, de-valued rupee, and image as risky all serve to severely limit access to finance for businesses. Moreover, the United states must focus on the problems it can rea-sonably address—and the financing gap is the one it is best-placed to fill.

Also—importantly—there is stratification in the Pakistani economy: while, overall, access to capital may not be the paramount problem, for certain segments of the economy—namely, small- and medium-sized business-es—it is often the biggest obstacle. and, importantly, it is these businesses precisely who will be the engines of job growth in Pakistan. Without capital, they will be unlikely to grow.

an investment fund can also have important, second-ary effects. it demonstrates a long-term commitment to Pakistan, one not beholden to the whims of public opinion or short-term strategic considerations. as well, by strengthening the private sector, it can foster a stron-ger bloc to lobby for those policy reforms so essential to improving the business environment in Pakistan.

it is important to understand the limitations of such an intervention, of course—by itself, it will not address the core problems in the Pakistani economy. nevertheless, the Pii presents a pragmatic solution to a substantial problem, and could well have follow-on effects that help address the more entrenched deficiencies.

soURces1 Klaus schwab (ed.), “Global competitiveness Report 2011–2012,” World Economic Forum (2011). http://www3.weforum.org/docs/WEF_GcR_Report_2011-12.pdf 2 World Bank, World development indicators (march 2012). http://data.worldbank.org/indicator3 Philip auerswald, elmira Bayrasli, and sara shroff, “creating a Place for the Future: Toward a New Development Approach for the Islamic Republic of Pakistan,” competitiveness support fund (december 2010), 26. 4 schwab (2011).5 “Pakistan economic survey 2010–2011,” ministry of finance (2011).6 Pakistan: Framework for Economic Growth, Planning commis-sion, Government of Pakistan (may 2011), 12. http://www.pc.gov.pk/hot%20links/growth_document_english_version.pdf7 “Doing Business 2012: Doing Business in a More Transparent World,” international finance corporation, World Bank (october 2011). http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-FullReport.pdf8 “doing Business 2012,” (2011), 63.9 WB/WDI (2012).10 Framework for Economic Growth (2011).Diagram Ricardo hausmann, Bailey Klinger, and Rodrigo Wagner, “Doing Growth Diagnostics in Practice: A ‘Mindbook,’” CID Working Paper no. 177, center for international development, harvard Univer-sity (september 2008), 22.

Perception index gives Pakistan a poor ranking of 134 out of 183 countries in terms of perceived levels of public sector corruption.

Appendix B: potentiAl pArtners

Company Name Investment Type Company Type Business Description Main Office Contact

AKD Securities Ltd. (AKDS)

Private Equity Investing

Financial Service Investment Arm

AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. The AKDS Investment Banking team looks after the company's equity advisory and arrangement activities, and private equity deals. AKDS is presently working on major private equity transactions including raising private equity for one of the largest integrated steel making facilities envisaged to be set up in Pakistan. AKDS is involved in IPO, private equity and placement transactions that are unique in size and structure, and works in diversified sectors including investment banking, gases manufacturing, electronic media, steel, electrical equipment, real estate, cement, power and a host of other sectors.

Karachi, Pakistan www.akdsecurities.net

Arif Habib Group - Pakistan Private Equity Management Ltd.

Venture Capital Investing; Private Equity Investing


Arif Habib Corporation Limited (AHCL) is the holding company of the Arif Habib Group. The Company has a diversified portfolio across sectors including Chemical and Fertilizers, Financial Services, Construction Materials, Industrial Metals, Dairy Farming and others. Pakistan Private Equity Management Limited was incorporated in Pakistan on 6th September 2006 under the Companies Ordinance, 1984 as a public limited company (Un-Quoted). The Company is a Fund Management Company (FMC) registered, under the Non-Banking Finance Companies, with the Securities and Exchange Commission of Pakistan and licensed to carry out Private Equity and Venture Capital Fund Management Services.

Karachi, Pakistan www.arifhabib.com.pk

BMA Capital, Investment Arm



BMA is amongst the leading financial groups in Pakistan. BMA Capital's core areas of business include Equity Markets, Treasury Markets, Corporate Finance & Advisory, Research, and Retail Brokerage. BMA Capital, Investment Arm is a private equity firm specializing in industry consolidation investments.

Karachi, Pakistan www.bmacapital.com

Cyan LimitedVenture Capital Investing; Private Equity Investing

Private Investment Firm

Established in 2011 by the Dawood Group, Cyan Limited (formerly known as Central Insurance Company Limited) is a public listed company focused on making equity investments in high potential companies. As a growth equity investor seeking meaningful minority ownership, Cyan aims to invest alongside high quality management teams with a track record of success, a desire to achieve scale and a commitment to observe ethical business practices. Cyan manages a portfolio of listed securities comprising of government debt and equity instruments of listed companies as well as investments in mutual funds. Cyanʼs Growth Equity portfolio will provide investors with an opportunity to participate in attractive sectors of the Pakistanʼs economy that are not readily accessible via public markets. Primary investment criterion is partnering with high potential management teams that are well positioned to capitalize on Pakistanʼs core strengths.

Karachi, Pakistan www.cyanlimited.com

Indus Basin Holding Ltd. Venture Capital Investing; Private Equity Investing


Indus Basin Holding Ltd (“IBH”) develops and operates a portfolio of modern agribusiness projects, based in the Indus Basin region, the geographical area drained by the Indus River and its tributaries. IBH aims to develop agribusiness projects which have a lasting and meaningful impact on small-hold farming communities. Indus Basin Holding Ltd is incorporated in Mauritius, and licensed by the Mauritius Financial Services Commission (FSC). The company is privately owned with offices in Pakistan.

Mauritius www.indusbasin.com

JS Private EquityVenture Capital Investing; Private Equity Investing


JS Private Equity is a private equity and venture capital arm of Jahangir Siddiqui & Company, Ltd. investing through its fund, JS Private Equity Fund I. The firm specializes in investments in expansion capital, growth capital, and buyout investment opportunities. It invests in privately held companies and makes PIPE investments. The firm makes Greenfield investments. The firm seeks to invest in export-related industries, such as textiles, leather and medical supplies, and domestic-demand related industries, such as consumer goods, media and advertising. It also invests in infrastructure, transportation and logistics, as well as agriculture and horticulture. The firm invests in companies based in Pakistan. It takes minority stakes in its portfolio companies. JS Private Equity was formed in 2006 and is based in Karachi, Pakistan.

Karachi, Pakistan www.js.com/investment-opportunity.asp

Pakistan Kuwait Investment Co., Investment Arm

Venture Capital Investing

Financial Service Investment Arm Pakistan Kuwait Investment Co., Investment Arm specializes in seed stage investments. Karachi, Pakistan www.pkic.com

TMT Ventures Limited Venture Capital Investing


TMT Ventures Limited is a venture capital firm specializing in startup investments. The firm prefers to invest in telecom, media, and technology sectors. It typically invests in companies based in Pakistan. TMT Ventures Limited is based in Karachi, Pakistan.

Karachi, Pakistan www.tmtventures.net

United Bank Limited (UBL)

Private Equity Investing Commercial Bank

United Bank Limited is one of the oldest and largest commercial banks in Pakistan. UBL has assets of over Rs. 747 billion and a solid track record of over fifty years - in addition, the bank operates 1200 branches all over Pakistan including 7 Islamic banking branches, and 1 branch in Karachi export processing zone and 17 branches outside Pakistan. UBL is the only commercial bank in Pakistan actively providing private equity financing to start-up companies. In a short period of 2 years, UBL has completed seven private equity/start-up transactions. Current portfolio comprises companies in the information technology, alternate energy and entertainment sector. As part of private equity, we focus on start-up companies which are in the development stage or in the earliest stage of commercialization with an investment horizon of 5 to 7 years. Financing for second stage expansion of recently established firms is also included. Such companies may have set up operations but need large infusions of capital to accelerate their growth or secure a stable market share. Private companies with turnaround potential may also be included in UBL's private equity portfolio

Karachi, Pakistan www.ubl.com.pk

POTENTIAL PII INVESTMENT FUND MANAGERS & LOCAL PARTNERS(Sources: Capital IQ, interviews in Pakistan)

PAKISTANI FIRMS


Abraaj Capital Venture Capital Investing; Private Equity Investing; Mezzanine Investing


Abraaj Capital is a private equity and venture capital firm specializing in early venture, seed, growth capital, industry consolidation, mezzanine/subdebt, PIPES, buyouts, and buy and build in mature companies. It seeks to invest in small and medium sized enterprises in emerging markets. The firm typically invests in oil, gas and consumable fuels, metals and mining, agricultural machinery and equipment, agricultural services, auto parts and equipment, leisure facilities, pharmaceuticals, services outsourcing, water utilities, real estate, health care, manufacturing, food products, telecommunications, education, information technologies, logistics, agribusiness, energy, and food industries. It invests in companies based in the Middle East, North Africa, and South Asia with a focus on Egypt, Lebanon, Jordan, Algeria, Pakistan, Turkey, the Palestinian territories and the six Gulf Arab nations that make up the Gulf Cooperation Council. The firm prefers to invest between $100 million and $300 million in its portfolio companies. It acquires controlling or significant interest and seeks board representation in its portfolio companies. The firm typically exits its investments within a period of three years to five years through structured exits to strategic and trade buyers or onto public markets in the region. It seeks minority position in public enterprises. Abraaj Capital was founded in 2002 and is headquartered in Dubai, United Arab Emirates with eight additional offices across Asia.

Dubai, UAE www.abraaj.com

Abu Dhabi Commercial Bank, Investment Arm



Abu Dhabi Commercial Bank, Investment Arm is an investment arm of Abu Dhabi Commercial Bank. Abu Dhabi, UAE www.adcb.com

Abu Dhabi Group, Venture Capital Arm


Corporate Investment Arm

Abu Dhabi Group, Venture Capital Arm is a venture capital arm of Abu Dhabi Group specializing in investments in Pakistan, Bangladesh, Iran, Uganda, Republic of Congo, and the Middle East. The firm is based in Abu Dhabi, United Arab Emirates.

Abu Dhabi, UAE www.adcb.com

Abu Dhabi Investment Company, Investment Arm



Abu Dhabi Investment Company, Investment Arm is the private equity and venture capital firm specializing in direct and fund of fund investments in specializes in buyouts, growth capital, mid to late stage, and expansion capital. The firm seeks to invest in acquisitions. It also invests proprietary and client capital in private equity funds. It does not invest in real estate. The firm typically invests in healthcare; education; media; technology; telecom; consumer goods; infrastructure projects like greenfield assets, transport networks, power, water, and health and education facilities; logistics; and distribution sectors. It seeks to invest in the MENA region Egypt, Saudi Arabia, Pakistan, North Africa, the United Arab Emirates, and Turkey. The firm to make equity investments between $25 million and $200 million in companies with enterprise values between $50 million and $500 million. The firm prefers to acquire majority control or significant minority control in its portfolio companies along with board representation. Abu Dhabi Investment Company, Investment Arm was founded in 1994 and is based at Abu Dhabi, United Arab Emirates.

Abu Dhabi, UAE www.investad.ae/en/OurBusinesses/PrivateEquity.aspx

Actis Capital, LLPVenture Capital Investing; Private Equity Investing; Mezzanine Investing


Actis Capital, LLP is a private equity and venture capital firm specializing in expansion capital, PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going private transactions, property development finance, and mezzanine finance investments in emerging and growing companies. The firm primarily seeks to invest in business services, consumer services, healthcare, financial services, industrials, infrastructure, logistics, and real estate. The firm typically invests in Emerging Markets including Africa, Egypt, China, Latin America, Asia, South Asia, and South East Asia. In infrastructure sector, it invests in all stages, from development or expansion capital to acquiring mature operational assets and focuses investment on power, roads, ports, and airports in Africa, Latin America, South Asia, and South East Asia. In South Asia, Actis specializes in expansion capital, management buyouts, privatizations, and PIPEs. It focuses on pharmaceuticals and biotech, consumer products, outsourcing (tech based), financial institutions, knowledge-based services, manufacturing, and oil and gas. The firm typically invests in the range of $8 million and $35 million in this region. The firm seeks controlling or minority stake in the portfolio companies. It seeks to invest for a period of three to six years. Actis Capital, LLP was founded in July 2004 and is headquartered in London, with additional offices in Africa, Latin America, South Asia, and South East Asia.

London, UK www.act.is

Acumen Fund Venture Capital Investing


Acumen Fund is a venture capital firm specializing in growth, direct equity investments, debt, guarantees, quasi-equity, and lab investments. The firm seeks to invest in critical and affordable goods and services. It primarily invests in water, healthcare, energy, agro, cleantech, and housing. It prefers to invest in India; East Africa with a focus on Kenya, South Africa, and West Africa with a focus on Ghana and Nigeria; and Pakistan. The firm typically invests between $0.3 million and $2 million in equity or debt with exit period ranging from five to seven years. The firm seeks to invest between $2 million and $4 million in Kenyan healthcare businesses and manufacturers of health consumables in 2011. It seeks to invest in business models that can be effective in reaching the billions of poor without access to clean water, reliable health services, or formal housing options. The firm primarily invests in non-profit organizations, small and medium for-profit companies in need of capital, and larger companies that are starting specific business units to serve the poor. The firm typically holds minority stakes in equity investments and prefers a board seat in its portfolio companies. Acumen Fund was founded on April 1, 2001 and is based in New York, New York with additional offices in Maharashtra, India; Nairobi, Kenya; and Karachi, Pakistan.

New York, NY, United States www.acumenfund.org

Aga Khan Fund for Economic Development



Aga Khan Fund for Economic Development is a venture capital arm of The Aga Khan Development Network specializing in equity investments in seed capital to launch projects. It seeks to invest in tourism, aviation services, and financial services sectors. The firm primarily invests in South and Central Asia and sub-Saharan Africa and in Africa for investments in aviation services. Aga Khan Fund for Economic Development is based in Geneva, Switzerland.

Geneva, Switzerland www.akdn.org/agency/akfed.html

FOREIGN FIRMS





http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-FullReport.pdf

http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB12-FullReport.pdf

62 63



Abraaj Capital Venture Capital Investing; Private Equity Investing; Mezzanine Investing


Abraaj Capital is a private equity and venture capital firm specializing in early venture, seed, growth capital, industry consolidation, mezzanine/subdebt, PIPES, buyouts, and buy and build in mature companies. It seeks to invest in small and medium sized enterprises in emerging markets. The firm typically invests in oil, gas and consumable fuels, metals and mining, agricultural machinery and equipment, agricultural services, auto parts and equipment, leisure facilities, pharmaceuticals, services outsourcing, water utilities, real estate, health care, manufacturing, food products, telecommunications, education, information technologies, logistics, agribusiness, energy, and food industries. It invests in companies based in the Middle East, North Africa, and South Asia with a focus on Egypt, Lebanon, Jordan, Algeria, Pakistan, Turkey, the Palestinian territories and the six Gulf Arab nations that make up the Gulf Cooperation Council. The firm prefers to invest between $100 million and $300 million in its portfolio companies. It acquires controlling or significant interest and seeks board representation in its portfolio companies. The firm typically exits its investments within a period of three years to five years through structured exits to strategic and trade buyers or onto public markets in the region. It seeks minority position in public enterprises. Abraaj Capital was founded in 2002 and is headquartered in Dubai, United Arab Emirates with eight additional offices across Asia.

Dubai, UAE www.abraaj.com

Abu Dhabi Commercial Bank, Investment Arm



Abu Dhabi Commercial Bank, Investment Arm is an investment arm of Abu Dhabi Commercial Bank. Abu Dhabi, UAE www.adcb.com

Abu Dhabi Group, Venture Capital Arm



Abu Dhabi Group, Venture Capital Arm is a venture capital arm of Abu Dhabi Group specializing in investments in Pakistan, Bangladesh, Iran, Uganda, Republic of Congo, and the Middle East. The firm is based in Abu Dhabi, United Arab Emirates.

Abu Dhabi, UAE www.adcb.com

Abu Dhabi Investment Company, Investment Arm



Abu Dhabi Investment Company, Investment Arm is the private equity and venture capital firm specializing in direct and fund of fund investments in specializes in buyouts, growth capital, mid to late stage, and expansion capital. The firm seeks to invest in acquisitions. It also invests proprietary and client capital in private equity funds. It does not invest in real estate. The firm typically invests in healthcare; education; media; technology; telecom; consumer goods; infrastructure projects like greenfield assets, transport networks, power, water, and health and education facilities; logistics; and distribution sectors. It seeks to invest in the MENA region Egypt, Saudi Arabia, Pakistan, North Africa, the United Arab Emirates, and Turkey. The firm to make equity investments between $25 million and $200 million in companies with enterprise values between $50 million and $500 million. The firm prefers to acquire majority control or significant minority control in its portfolio companies along with board representation. Abu Dhabi Investment Company, Investment Arm was founded in 1994 and is based at Abu Dhabi, United Arab Emirates.

Abu Dhabi, UAE www.investad.ae/en/OurBusinesses/PrivateEquity.aspx

Actis Capital, LLPVenture Capital Investing; Private Equity Investing; Mezzanine Investing


Actis Capital, LLP is a private equity and venture capital firm specializing in expansion capital, PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going private transactions, property development finance, and mezzanine finance investments in emerging and growing companies. The firm primarily seeks to invest in business services, consumer services, healthcare, financial services, industrials, infrastructure, logistics, and real estate. The firm typically invests in Emerging Markets including Africa, Egypt, China, Latin America, Asia, South Asia, and South East Asia. In infrastructure sector, it invests in all stages, from development or expansion capital to acquiring mature operational assets and focuses investment on power, roads, ports, and airports in Africa, Latin America, South Asia, and South East Asia. In South Asia, Actis specializes in expansion capital, management buyouts, privatizations, and PIPEs. It focuses on pharmaceuticals and biotech, consumer products, outsourcing (tech based), financial institutions, knowledge-based services, manufacturing, and oil and gas. The firm typically invests in the range of $8 million and $35 million in this region. The firm seeks controlling or minority stake in the portfolio companies. It seeks to invest for a period of three to six years. Actis Capital, LLP was founded in July 2004 and is headquartered in London, with additional offices in Africa, Latin America, South Asia, and South East Asia.

London, UK www.act.is

Acumen Fund Venture Capital Investing


Acumen Fund is a venture capital firm specializing in growth, direct equity investments, debt, guarantees, quasi-equity, and lab investments. The firm seeks to invest in critical and affordable goods and services. It primarily invests in water, healthcare, energy, agro, cleantech, and housing. It prefers to invest in India; East Africa with a focus on Kenya, South Africa, and West Africa with a focus on Ghana and Nigeria; and Pakistan. The firm typically invests between $0.3 million and $2 million in equity or debt with exit period ranging from five to seven years. The firm seeks to invest between $2 million and $4 million in Kenyan healthcare businesses and manufacturers of health consumables in 2011. It seeks to invest in business models that can be effective in reaching the billions of poor without access to clean water, reliable health services, or formal housing options. The firm primarily invests in non-profit organizations, small and medium for-profit companies in need of capital, and larger companies that are starting specific business units to serve the poor. The firm typically holds minority stakes in equity investments and prefers a board seat in its portfolio companies. Acumen Fund was founded on April 1, 2001 and is based in New York, New York with additional offices in Maharashtra, India; Nairobi, Kenya; and Karachi, Pakistan.

New York, NY, United States www.acumenfund.org

Aga Khan Fund for Economic Development



Aga Khan Fund for Economic Development is a venture capital arm of The Aga Khan Development Network specializing in equity investments in seed capital to launch projects. It seeks to invest in tourism, aviation services, and financial services sectors. The firm primarily invests in South and Central Asia and sub-Saharan Africa and in Africa for investments in aviation services. Aga Khan Fund for Economic Development is based in Geneva, Switzerland.

Geneva, Switzerland www.akdn.org/agency/akfed.html

FOREIGN FIRMS

AIDEC Management Co. Pte. Ltd.



AIDEC Management Co. Ltd. is a venture capital firm, which provides start-up/early stage financing and growth capital to small and medium sized companies operating in the consumer related, computer related, electronic related, communication, energy, transportation and construction industries. The firm's investments are focused in the South East Asia, Indian Sub-Continent, and Far East Asia. The firm's minimum investment is 20% of capital (negotiable). AIDEC also provides financing for private sector infrastructure projects (i.e., electricity, gas, airports, ports, roads, water and sewage) through debt financing, loans and equity-linked investments.

Singapore, Singapore NA

Asian Finance and Investment Corporation Ltd.

Venture Capital Investing; Private Equity Investing; Mezzanine Investing


Asian Finance and Investment Corporation Ltd. (AFIC) was formed in August 1989 in Singapore as a merchant bank. The company offers direct loans and equity participation, underwriting, syndication and guaranteeing corporate obligation to the private sector enterprise in the Asia Pacific region. the company provides from $1 to $10 million equity or equity and loans, in exchange for a minor stake in the portfolio company and a seat on the Board of Directors. AFIC specializes in mezzanine or bridge financing, turnaround and restructuring and later stage transactions. It operates in the Asia Pacific region and in a wide spectrum of industries. Asian Finance and Investment Corporation has offices in Manila, Philippines.

Singapore, Singapore www.aficltd.com

Asian Infrastructure Fund Advisers Ltd.



Asian Infrastructure Fund Advisers Ltd. is a principal investment firm specializing in start up, development, and turnaround / restructuring stage businesses. It seeks to invest in Asia. It targets investing between $10 and $75 million. It seeks board representation in its investee company. The firm seeks to acquire minority stakes in its portfolio companies. Asian Infrastructure Fund Advisers Ltd. Was founded in 1994 and is based in Central, Hong Kong.

Hong Kong NA

Augustus Ltd. Venture Capital Investing; Private Equity Investing


Augustus is the private investment and holding company of Baron Lorne Thyssen-Bornemisza. Based in Monaco, Augustus has a global investment portfolio, which includes public and private equities, commercial real estate and art. He is also a substantial shareholder of the NYSE-listed IHS Inc, an information services company with a market cap in excess of $5billion . The Thyssen-Bornemisza family is one of Europeʼs oldest and most distinguished industrial families.

Monaco NA

Capital Advisors Partners Asia Pte Ltd.



Capital Advisors Partners Asia Pte Ltd. is the private equity arm of CIMB Group Sdn Bhd. The firm seeks to invest in infrastructure sector. It typically invests in in South-East Asia and Central Asia. Capital Advisors Partners Asia Pte Ltd was founded in 2006 and is based in Singapore with additional offices in Kuala Lumpur, Malaysia; Jakarta, Indonesia; and Bangkok, Thailand.

Singapore, Singapore www.cap-asia.net

Catalyst Microfinance Investment Company



Catalyst Microfinance Investment Company is a venture capital firm specializing in start-up and growth capital investments. The firm seeks to invest through its fund. It primarily seeks to invest in emerging micro finance institutions with a focus on banks, non-bank financial institutions, co-operatives, and NGOs which are willing and able to transform into a commercial for-profit institution. The firm invests in companies based in Asia and Africa. It also considers investments through equity, equity-linked securities, debt, and convertible debt instruments. The firm prefers to invest in newly issued equity of greenfield institutions, recently established institutions and/or in existing institutions. It typically holds its investments for a period of five to seven years. Catalyst Microfinance Investment Company was founded in 2005 and is based in Utrecht, Netherlands with an additional office in Dhaka, Bangledesh and Andhra Pradesh, India.

Mauritius www.catalyst-microfinance.com

Catalyst Private Equity Private Equity Investing


Catalyst Private Equity is a private equity firm specializing in investments in small and medium-sized enterprises. The firm seeks to invest in water and energy sectors, and in industrial product and technology companies and environmentally-friendly technologies including water treatment and alternative energy technologies. It prefers to invest in Jordan, Lebanon, Egypt, West Bank, and certain OPIC-eligible countries in the MENA region. The firm also invests in Pakistan and Afghanistan. Catalyst Private Equity was founded in 2005 and is based in Amman, Jordan.

Amman, Jordan www.catalystpe.com

DIB Capital, Investment Arm



DIB Capital, Investment Arm specializes in expansion capital, turnarounds, early and late stage seed financing, management buy-outs and buy-ins, family-owned enterprises, privatizations, and greenfield. It invests in Shariah-compliant transactions. The firm prefers to invest in the financial services, energy, telecom, transportation & logistics, healthcare, retail, hospitality, and real estate sectors. It prefers to invest in companies based in Middle East and North Africa region, Turkey, and South Asia including GCC, Egypt, Jordan, Lebanon, Tunisia, and Morocco. The firm may also invest in companies located in China, India, and Pakistan. DIB Capital, Investment Arm is based in Dubai, United Arab Emirates.

Dubai, UAE www.dibcapital.com/PrivateEquity.aspx

Draper Fisher Jurvetson (DFJ)


DFJ backs extraordinary entrepreneurs everywhere who set out to change the world. DFJ achieves its mission through its DFJ Global Network of Partner Funds with operations in the US, China, India, Korea, Vietnam, Russia, Europe, Israel, Brazil, and Japan. Over the past 25 years, DFJ and its partners have backed over 600 companies, and have pioneered the way in emerging technology markets including the Internet, mobile communications, clean energy and health care. DFJ has been proud to back industry changing successes including Baidu, Skype, Overture, Hotmail, Parametric Technologies, Focus Media, AdMob, Mobile365, EnerNOC, Tesla, SolarCity, Brightsource Energy, Athenahealth, Epocrates, SpaceX and Synthetic Genomics.

Menlo Park, CA, United States www.dfj.com

EMP Daiwa Capital Asia Limited



EMP Daiwa Capital Asia Limited is a private equity firm and venture capital firm specializing in middle market, growth capital, and buyouts. It prefers to invest in telecoms, transportation, power, and natural resources. The firm primarily invests in companies based in Greater China, India, South Korea, Southeast Asia, and Japan. For Japan, it also acquires and provides growth capital to Asian subsidiaries of Japanese companies and partners with Japanese companies in their regional expansion in Asia. The firm was founded in 2007 and is based in Central, Hong Kong. EMP Daiwa Capital Asia Limited operates as a joint venture of EMP Global and Daiwa Securities Group Inc.

Hong Kong www.asia.empglobal.com

EMP GlobalVenture Capital Investing; Private Equity Investing; Mezzanine Investing


EMP Global is a private equity firm specializing in investments in later stage, expansion stage, mature companies with restructuring opportunities, and leveraged buyouts. It does not make investments in start-ups. The firm seek to make equity and quasi-equity investments in infrastructure; fixed and wireless telecommunications; cable television; power generation and transmission; transportation; oil and gas; other industrial sectors like petrochemicals, cement, and glass; agribusiness sectors; and restaurant sector. It primarily invests in emerging market economies and some developed markets, which include Japan and Hong Kong and the new member countries of the European Union. The firm seeks to invest from $10 million to $100 million. The firm prefers to invest in control position as a sole investor or in partnership with other financial investors and can consider minority positions in companies controlled by either a reputable local sponsor or an international strategic investor. The firm seeks to structure its investments as hybrid debt and equity securities. It considers investing in "greenfield" projects either in association with a strategic corporate partner experienced in developing and operating projects or in certain regulated industries in which development risk is reduced through licenses, off–take agreements, etc. EMP Global was founded in 1992 and is based in Washington, D.C. with additional offices in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a subsidiary of BMB Group.

Washington, D.C., United States www.empglobal.com

ePlanet CapitalVenture Capital Investing; Private Equity Investing


Established in 1999, ePlanet Capital (then known as ePlanet Ventures) pioneered the development of a truly global venture and growth capital business model. It was the first venture capital firm to utilize a global model with offices in Asia, Europe and the United States. ePlanet consists of a team of more than 30 professionals across the globe in our offices located in Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and

San Jose, CA, United States www.eplanetventures.com/

Euro Asia Capital & Equity Pte Ltd.



Euro Asia Capital & Equity Pte Ltd. is an independent venture capital firm that focuses on technology, internet, telecommunications, manufacturing, utilities and environmental products in Asia Pacific. The company invests in start-ups, early stages, later stages, turnaround, restructuring, privatization, bridge loan, and public market purchase. It will provide only equity or equity and loans, from $250,000 to $20 million, and active management and financial advice in exchange for a major stake in the company and a seat on the Board of Directors.


Global Capital Management Ltd.



Global Capital Management Ltd. is a private equity and venture capital arm of Global Investment House K.S.C.C., specializing in investments in mid venture, late venture, growth capital, middle market, mature, PIPEs, and buyouts. It offers both conventional and Shariah-compliant products. The firm prefers to invest in oil and gas, consumer durables and apparel, education services, hotels, restaurants and leisure, energy, manufacturing, real estate, healthcare and healthcare equipment, pharmaceuticals, laboratories, hospital construction services, transportation and logistics, retail, infrastructure, telecommunications, utilities, education, and financial services sectors. It seeks investments in the MENA region with focus on Bahrain; Egypt; Jordan; Kuwait; Morocco; Lebanon; Oman; Qatar; Saudi Arabia; Turkey; and United Arab Emirates and in Asia Pacific region with a focus on Hongkong, India, Pakistan, and China. Global Capital Management Ltd. was established in 1998 and is based in Safat, Kuwait with additional offices in Cairo, Egypt; Dubai, UAE; Istanbul, Turkey; Saudi Arabia; and Safat, Kuwait.

Safat, Kuwait www.globalinv.net/contentdisp.asp?pageid=553

Global Environment FundVenture Capital Investing; Private Equity Investing


Global Environment Fund is a private equity and venture capital firm specializing in investments in growth equity. It seeks to invest in independent power, gas distribution, consumer products, clean technology and energy, sustainable forestry, timberland, and emerging markets in businesses that provide cost-effective solutions to environmental and energy challenges. Within growth equity it seeks to invest in products or services in the renewable energy, energy efficiency and environmental infrastructure industries that are helping to meet growing commercial demand in key sectors of the core economy such as energy generation, transportation and manufacturing to be more clean and efficient. In emerging markets it seeks to invest in clean energy, integrated waste management, water and wastewater treatment, clean industrial technology, and healthcare services. The firm primarily focuses on China, India, Brazil, Turkey, Mexico, South Africa, Southeast Asia, and Eastern Europe for emerging markets. The firm seeks to invest between $15 million and $30 million in companies with sales value between $10 million and $30 million. It seeks a board seat on its portfolio companies. The firm typically holds its investment for five years or more and seeks to exit its investments through listing on a major stock exchange or sale to a strategic buyer. Global Environment Fund was founded in 1990 and is based in Chevy Chase, Maryland with additional offices in Johannesburg, South Africa; Sao Paulo, Brazil; and Mumbai, India.

Maryland, United States www.globalenvironmentfund.com

Global MENA Financial Assets Limited

Private Equity Investing Public Fund

Global MENA Financial Assets Limited specializes in middle market investments in turnaround and PIPE transactions. It seeks to invest in the financial services sector. The fund prefers to invest in Middle East, North Africa, India, China, Pakistan, and Hong Kong.

Grand Cayman, Cayman Islands www.gmfa.com

EMP GlobalVenture Capital Investing; Private Equity Investing; Mezzanine Investing


EMP Global is a private equity firm specializing in investments in later stage, expansion stage, mature companies with restructuring opportunities, and leveraged buyouts. It does not make investments in start-ups. The firm seek to make equity and quasi-equity investments in infrastructure; fixed and wireless telecommunications; cable television; power generation and transmission; transportation; oil and gas; other industrial sectors like petrochemicals, cement, and glass; agribusiness sectors; and restaurant sector. It primarily invests in emerging market economies and some developed markets, which include Japan and Hong Kong and the new member countries of the European Union. The firm seeks to invest from $10 million to $100 million. The firm prefers to invest in control position as a sole investor or in partnership with other financial investors and can consider minority positions in companies controlled by either a reputable local sponsor or an international strategic investor. The firm seeks to structure its investments as hybrid debt and equity securities. It considers investing in "greenfield" projects either in association with a strategic corporate partner experienced in developing and operating projects or in certain regulated industries in which development risk is reduced through licenses, off–take agreements, etc. EMP Global was founded in 1992 and is based in Washington, D.C. with additional offices in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a subsidiary of BMB Group.

Washington, D.C., United States www.empglobal.com

ePlanet CapitalVenture Capital Investing; Private Equity Investing


Established in 1999, ePlanet Capital (then known as ePlanet Ventures) pioneered the development of a truly global venture and growth capital business model. It was the first venture capital firm to utilize a global model with offices in Asia, Europe and the United States. ePlanet consists of a team of more than 30 professionals across the globe in our offices located in Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and

San Jose, CA, United States www.eplanetventures.com/

Euro Asia Capital & Equity Pte Ltd.



Euro Asia Capital & Equity Pte Ltd. is an independent venture capital firm that focuses on technology, internet, telecommunications, manufacturing, utilities and environmental products in Asia Pacific. The company invests in start-ups, early stages, later stages, turnaround, restructuring, privatization, bridge loan, and public market purchase. It will provide only equity or equity and loans, from $250,000 to $20 million, and active management and financial advice in exchange for a major stake in the company and a seat on the Board of Directors.


Global Capital Management Ltd.



Global Capital Management Ltd. is a private equity and venture capital arm of Global Investment House K.S.C.C., specializing in investments in mid venture, late venture, growth capital, middle market, mature, PIPEs, and buyouts. It offers both conventional and Shariah-compliant products. The firm prefers to invest in oil and gas, consumer durables and apparel, education services, hotels, restaurants and leisure, energy, manufacturing, real estate, healthcare and healthcare equipment, pharmaceuticals, laboratories, hospital construction services, transportation and logistics, retail, infrastructure, telecommunications, utilities, education, and financial services sectors. It seeks investments in the MENA region with focus on Bahrain; Egypt; Jordan; Kuwait; Morocco; Lebanon; Oman; Qatar; Saudi Arabia; Turkey; and United Arab Emirates and in Asia Pacific region with a focus on Hongkong, India, Pakistan, and China. Global Capital Management Ltd. was established in 1998 and is based in Safat, Kuwait with additional offices in Cairo, Egypt; Dubai, UAE; Istanbul, Turkey; Saudi Arabia; and Safat, Kuwait.

Safat, Kuwait www.globalinv.net/contentdisp.asp?pageid=553

Global Environment FundVenture Capital Investing; Private Equity Investing


Global Environment Fund is a private equity and venture capital firm specializing in investments in growth equity. It seeks to invest in independent power, gas distribution, consumer products, clean technology and energy, sustainable forestry, timberland, and emerging markets in businesses that provide cost-effective solutions to environmental and energy challenges. Within growth equity it seeks to invest in products or services in the renewable energy, energy efficiency and environmental infrastructure industries that are helping to meet growing commercial demand in key sectors of the core economy such as energy generation, transportation and manufacturing to be more clean and efficient. In emerging markets it seeks to invest in clean energy, integrated waste management, water and wastewater treatment, clean industrial technology, and healthcare services. The firm primarily focuses on China, India, Brazil, Turkey, Mexico, South Africa, Southeast Asia, and Eastern Europe for emerging markets. The firm seeks to invest between $15 million and $30 million in companies with sales value between $10 million and $30 million. It seeks a board seat on its portfolio companies. The firm typically holds its investment for five years or more and seeks to exit its investments through listing on a major stock exchange or sale to a strategic buyer. Global Environment Fund was founded in 1990 and is based in Chevy Chase, Maryland with additional offices in Johannesburg, South Africa; Sao Paulo, Brazil; and Mumbai, India.

Maryland, United States www.globalenvironmentfund.com

Global MENA Financial Assets Limited

Private Equity Investing Public Fund

Global MENA Financial Assets Limited specializes in middle market investments in turnaround and PIPE transactions. It seeks to invest in the financial services sector. The fund prefers to invest in Middle East, North Africa, India, China, Pakistan, and Hong Kong.

Grand Cayman, Cayman Islands www.gmfa.com

IFU Venture Capital Investing


IFU is a venture capital firm specializing in financing private-sector projects in the developing countries. The firm can only invest in countries whose 2008 GNI capita income is below $3,084, with an exemption granted to South Africa, Botswana, and Namibia. Also the host countries of investments must be on the OECDʼs DAC list of development aid recipients. It finances both small and large projects, including pilot projects, green-field projects, expansion of existing projects, and privatization of state-owned enterprises. The firm seeks to finance projects in collaboration with the Danish trade and industry. It seeks to participate as a partner in the joint ventures through committing equity capital and granting loans. The firm seeks to co-invest with Danish businesses in projects based in developing countries, but only if such projects have a lasting positive effect on development. It prefers to take a board membership. The firm also offers special assistance to Small and Medium-sized Enterprises which employs less than 300 employees, with an annual revenue of up to DKK 300 million ($53.16 million), and has a positive result in two out of three latest financial years. It also provides advisory services to business investments in developing countries. The firm prefers to exit its investments within five to seven years. IFU was founded in 1967 and is based in Copenhagen, Denmark with additional offices in Beijing, China; New Delhi, India; Nairobi, Kenya; Accra, Ghana; and Johannesburg, South Africa.

Copenhagen, Denmark www.ifu.dk

JAFCO Investment (Asia Pacific) Ltd.



JAFCO Investment (Asia Pacific) Ltd is a venture capital firm specializing in investments in technology and technology related companies. The firm typically invests in companies based in Asia Pacific region with a focus on Northern China, Southern and Eastern China including Yangtze and Pearl River Delta regions, Taiwan, Korea, South Asia and Australia, India, and Hong Kong. It prefers to have board representation in its portfolio companies. The firm seeks to exit its investments through an IPO or a trade sale. JAFCO Investment (Asia Pacific) Ltd was founded in 1990 and is based in Singapore with additional offices in Taipei, Taiwan; Seoul, South Korea; Shanghai, China; London, United Kingdom; Central, Hong Kong; and Beijing, China. JAFCO Investment (Asia Pacific) Ltd. operates as a subsidiary of JAFCO Co., Ltd.

Singapore, Singapore www.jafcoasia.com

Kellett & Singleton Investments Ltd.



Kellett & Singleton Investments Ltd. is a principal investment firm specializing in investments in seed stage and early stage companies. The firm generally provides expansion capital and growth capital to the portfolio companies. It seeks to invest in shipping services including ship operations and chartering, aviation, logistics, advertising and marketing, floriculture, tea, information technology, consulting, asset management, commodities, hospitality FF&E, and marine sectors. The firm prefers to invest in companies based in the Middle East and South Asia. It also forms strategic partnerships and joint ventures in the Middle East markets. Kellett & Singleton Investments Ltd. was founded in January 2000 and is based in Dubai, UAE.

Dubai, UAE www.kellettsingleton.com

Kuwait Finance & Investment Company, Investment Arm



Kuwait Finance & Investment Company, Investment Arm is the private equity arm of Kuwait Finance & Investment Company. The firm invests through its fund KFIC Private Equity Fund. It seeks to make investments in telecommunications, banks, investments, insurance, real estate, and media sectors. It also invests in GCC countries including; Lebanon, Pakistan, Yemen, and Jordan. Kuwait Finance & Investment Company, Investment Arm was established in 2000 and is based in Safat, Kuwait.

Safat, Kuwait www.kfic-kw.com/sub.php

Leopard Capital LPVenture Capital Investing; Private Equity Investing


Leopard Capital LP is a private equity and a venture capital firm specializing in investments in early stage venture, emerging growth, growth capital, buy-out, and mid-market companies. The firm invests in financial services, retailing, infrastructure, construction materials, agribusiness, tourism, health care, natural resources, and property development sectors. It seeks to make investments in South East Asia with a focus on Cambodia, Laos, Vietnam, Philippines, Burma, India, Bangladesh, Sri Lanka, Maldives, Nepal, Bhutan, Pakistan, Kazakhstan, Kyrgyzstan, Uzbekistan, Azerbaijan, Tajikistan, Mongolia, and North Korea. It prefers to invest in an average of $3 million per transaction. The firm may make a controlling or minority investments. The firm prefers to exit through listing on Cambodia's upcoming stock exchange or on other Asian exchanges, and/or private sales to strategic investors, co-investors, and other funds. Leopard Capital LP was founded in 2007 and is based in Phnom Penh, Cambodia with additional offices in Central, Hong Kong; Grand Cayman, Cayman Islands; and Colombo, Sri Lanka.

Phnom Penh, Cambodia www.leopardasia.com

Maybank Meacp Pte. Ltd, Investment Arm

Venture Capital Investing; Mezzanine Investing


A 50/50 joint venture between Mayban Ventures Sdn Berhad ("Mayban Ventures"), a subsidiary of Malayan Banking Berhad ("Maybank") and Mumtaz Khan, founder of Middle East & Asia Capital Partners Pte. Ltd. ("MEACP").

Singapore, Singapore www.maybankmeacp.com

Middle East & Asia Capital Partners Pte., Ltd



Middle East & Asia Capital Partners Pte., Ltd is a private equity firm. Founded by Mumtaz Khan, a leading private equity infrastructure professional in the Middle East and Asia, is focused on infrastructure investment opportunities in emerging markets. It is based in Singapore.

Singapore, Singapore www.meacp.com

Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, Investment Arm



Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, Investment Arm specializes in direct and fund of fund investments. The firm invests in seed capital, mezzanine financing, small, mid sized enterprises, and regional private equity funds. The firm seeks to invest in agriculture and fisheries, mining, agribusiness, manufacturing industry, service sector, and banking and insurance industry. It primarily invests in the in the housing, finance, energy, trade industry, and infrastructure sectors. It seeks to invest in developing companies and emerging markets with a focus on South Africa, India, China, Poland, Russia, Turkey, Mexico and Brazil. The firm takes minority equity stakes between 10% and 35% in private companies and invests between €3 million ($4.28 million) and €5 million ($7.14 million) per company. The firm makes seed capital investments of minimum €1 million ($1.43 million) per company or fund.

Netherlands www.fmo.nl

New Silk RouteVenture Capital Investing; Private Equity Investing


New Silk Route is a private equity and venture capital firm specializing in growth capital and buyout investments. It prefers to invest in the consumer services, education, infrastructure, telecoms, manufacturing, IT, engineering, medical devices, restaurant chains, and financial services sector. The firm prefers to invest in India, South Asia, Middle East, and other emerging Asian economies. New Silk Route was founded in 2006 and is based in New York, New York with additional offices in Bengaluru, India; Dubai, United Arab Emirates; and Mumbai, India.

New York, United States www.nsrpartners.com

64 65


PAKISTANFeb. 18–26, 2012

Karachi

Adnan Afridi, advisor to shaukat tarin, silkbank Ltd.

Fawad Anwar, owner, al-Karam textile mills

Jehan Ara, President, P@sha

Humayun Bashir, country General manager, iBm

Nasim Beg, ceo, arif habib investments Ltd.

Abid Butt, ceo, e2e supply chain management (Pvt) Ltd.

Shahjahan Chaudhary, ceo, team ants

Samad Dawood, ceo, cyan Limited and dawood corporation

Nadeem Elahai, managing director and country head, the Resource Group

Shahid Ghaffar, ceo, hBL asset management Ltd.

Fahd Haroon, cnBc Pakistan

Zaid Haroon, assistant Vice President, marketing and corporate communications, Js Bank Ltd.

Syed Samar Hasnai, director, sme finance, state Bank of Pakistan/SMEs

Dr. Ishrat Husain, dean and director, institute of Business administration

Shakir Husain, ceo, creative chaos

Nadeem Hussain, President and ceo, tameer Microfinance Bank

Ali Jameel, ceo, tPL holdings

Irtiza Kazmi, sVP and corporate head – south, national Bank of Pakistan

Dr. M. Mehdi Kazmi, ceo, asia care health & Life insurance

Ghias Khan, ceo, inbox Business technologies (Pvt) Ltd.

Saad Amanullah Khan, President, american Business council of Pakistan

Sabeen Mahmud, director, Peaceniche

William Martin, U.s. consul General, Karachi

Asif Misbah, managing director, macter international (Pvt) Ltd.

Jay Munir, Political and economic chief, U.s. consulate, Karachi

Mohsin Nathani, ceo, standard chartered Bank (Pakistan) Ltd.

Aun Rahman, Pakistan country director, acumen fund

Mir Ibrahim Rahman, ceo, Geo tV network

Kalim ur Rahman, President and ceo, Js Bank Ltd.

Muslim Raza, Provincial chief, smeda

Isfandiyar Shaheen, head of Growth equity investments, cyan Ltd.

Imran Shaikh, Vice President—head of marketing, Js Bank Ltd.

Rehan Shaikh, coo, hBL asset management Limited

Aasim Siddiqui, director, Pakistan international container terminal Ltd.

Sohail Wajahat Siddiqui, chairman, Pakistan state oil

Shaukat Tarin, chairman, silk Bank Ltd.

Lahore

Pir Saad Ahsanuddin, entrepreneur and investor

Zehra Ali, Lahore University of management sciences

Asim Fayaz, curator, tedxLahore

Jamil Goheer, co-founder and ceo, Kualitatem (Pvt) Ltd.

Saba Gul, co-founder and executive director, BLiss

Monis Rahman, chairman and ceo, naseeb networks, inc.

Jazib Zahir, adjunct Professor, Lahore University of management sciences

islamabad

Vinay Chawla, deputy coordinator for economic & development assistance, U.s. embassy, islamabad

Robert Ewing, economic counselor, U.s. embassy, islamabad

Bilal Gilani, executive director, Gallup Pakistan

Ahmad Jalal, Riyada enterprise developmet, abraaj capital

Ayla Majid, islamabad stock exchange

Nadia Naviwala, country Representative, U.s. institute of Peace

Jonathan Peccia, deputy economic counselor, U.s. embassy, islamabad

Appendix c: interviewsPROPARCO SA



PROPARCO SA is a private equity and venture capital arm of Agence Francaise de Developpement specializing in direct and fund of fund investments. Within direct investmenst the firm makes equity and loan investments in expansions and leveraged buyouts. It also invests in small and medium enterprises and investment firms. The firm also provides mezzanine loans. The firm seeks to invest between €500,000 ($708,660) to €20 million ($28.34 million) per transaction in private equity and €2 million ($2.83 million) to €100 million ($141.73 million) per transaction in senior loans, junior loans, mezzanine debt, and subordinated loans. The firm also provides guarantees including bond guarantee; bank loan guarantee; local currency loan guarantee; and liquidity guarantee of mutual funds, investment funds, and local savings mobilization funds. It seeks to acquire minority stakes and exits an investment within a period of six years via sale to shareholders or in the financial market. The firm seeks to co-invest. PROPARCO SA was founded in 1977 and is based in Paris, France with an additional offices in Brazil, China, Egypt, Kenya, Nigeria, Morocco, South Africa, Thailand, and Tunisia.

Paris, France www.proparco.fr

RHT Partners Private Investment Firm

RHT Partners is an independent investment management firm based in the UAE that works with, and on behalf of, a group of discrete prominent family and institutional investors to make direct private equity investments in the Middle East and internationally. Through its network of exclusive relationships in the Middle East and beyond, RHT sources quality, proprieatary investments with a post investment focus on generating industry-leading returns on the capital it deploys. RHT's team consist of high calibre investment professionals with backgrounds in private equity, venture capital, banking, industry consulting, business development, restructuring and operational management. RHT's core team values are grounded in high ethics and thoughtful, considered judgement in investment decision making.

Dubai, UAE www.rhtpartners.com

SEDCO Dubai Private Equity Investing


SEDCO Dubai is a Shariah-compliant private equity firm specializing in growth capital investments for expansion, acquisitions, scaling up of operations, and management buyouts. The firm seeks to make investments across the Middle East and North Africa (MENA) region, including Turkey, and selected countries in South and South East Asia, including India, Pakistan, Malaysia, Indonesia, Singapore, Thailand, and Vietnam. The firm seeks to make investments ranging from 10 percent to 49 percent with investments typically ranging from $20 million to $40 million. It seeks to invest in medium sized private companies with annual sales of between $100 million and $400 million. The firm usually takes a significant minority stake in an investee company and representation on the board of each of its investee companies. SEDCO Dubai is headquartered in Dubai, United Arab Emirates.

Dubai, UAE sedco.com/business-groups/subsidiaries/sedco-dubai/

Small Enterprise Assistance Fund (SEAF)


Private Investment Firm (Non-Profit)

SEAF is an investment management group that provides growth capital and business assistance to small and medium enterprises (SMEs) in emerging and transition markets underserved by traditional sources of capital. Through its network of offices around the world, SEAF invests in entrepreneurs to build successful businesses, realizing both attractive returns for our investors and a measurable development impact in local communities.

Washington, D.C., United States www.seaf.com

Swicorp, Investment ArmPrivate Equity Investing; Mezzanine Investing


Swicorp, Investment Arm is the private equity arm of Swicorp specializing in investments in buy and build, buyouts, and growth capital. It invests in energy, petrochemicals and energy-intensive industries, industrial goods, consumer goods and retail, communications and the financial services sectors. The arm focuses geographically on the Middle East and North Africa region. It prefers to invest between $15 million and $150 million in its portfolio companies. Swicorp, Investment Arm was founded in 2004 and is based in Dubai, UAE with additional offices in Riyadh, Saudi Arabia, Jeddah, Saudi Arabia, Tunis, Tunisia and Algiers, Algeria.

Dubai, UAE www.swicorp.com/?section=pe

Temasek Holdings (Pte) Ltd.



Temasek Holdings (Pte), Ltd. is a sovereign wealth fund of the Government of Singapore specializing in growth capital, restructuring, and divestiture transactions. The firm also invests in private equity and debt funds, such as buyout and growth capital funds, mezzanine funds, debt funds, technology venture capital funds, and life sciences venture capital funds. It prefers to make investments in companies engaged in the telecommunications and media, banking, real estate, financial services, property, industrial, life sciences, transportation and logistics, consumer and lifestyle, education, energy and resources, infrastructure, engineering and technology, and healthcare, pharmaceuticals and biosciences sectors. The firm generally invests in the Americas, Asia, Singapore, Africa, Middle East, and OECD economies. Within Asia, it invests in companies based in India, Pakistan, South Asia, China, North Asia, Vietnam, and ASEAN Countries. Temasek Holdings (Pte), Ltd. was founded in 1974 and is based in Singapore with additional offices in India; China; Hong Kong; Shanghai, Brazil; Mexico; and Vietnam.

Singapore, Singapore www.temasekholdings.com.sg

The Carlyle Group LPVenture Capital Investing; Private Equity Investing; Mezzanine Investing


The Carlyle Group is an investment firm specializing in direct and fund of fund investments. Within direct investments, it specializes in management-led buyouts, divestitures, strategic minority equity investments, equity private placements, consolidations and buildups, leveraged finance, and venture and growth capital financings. The firm typically invests in agriculture, aerospace, defense, automotive, consumer, retail, industrial, infrastructure, energy, power, healthcare, software, technology, real estate, financial services, transportation, business services, telecommunications, and media sectors. It seeks to invest in companies based in Sub-Saharan Africa, Asia, Australia, Europe, Middle East, North America, and South America. The firm typically invests between $5 million and $50 million for venture investments and between $50 million and $1 billion for buyouts. It typically holds its investments for three to five years. The Carlyle Group was founded in 1987 and is based in Washington, D.C. with additional offices across North America, Latin America, Asia, Africa, and Europe.

Washington, D.C., United States www.carlyle.com

The National Investor Private Equity



The National Investor Private Equity is a private equity and venture capital arm of The National Investor specializing in leveraged buyouts, growth capital, and late stage pre-IPO investments. The firm seeks to invest in companies throughout the Levant and Middle East, North Africa, and South Asia regions including Egypt, Pakistan, India, Jordan and countries in the Gulf Cooperation Council. It focuses its investments in consumer and retail, oil and gas, contracting and real estate, financial and business services, telecom and media among others. It acquires both controlling and minority stakes in its portfolio companies. The firm invests through TNI prop book investments. It seeks a board seat in its portfolio companies. The National Investor Private Equity was founded in 1994 and is based in Dubai, United Arab Emirates.

Dubai, UAE www.tni.ae/private_equity.php

TLG CapitalPrivate Equity Investing; Mezzanine Investing


TLG Capital is a private equity investment firm specializing in growth capital investments and special situations investments. The firm prefers to invest in the frontier markets. It invests in companies based in the emerging markets and Sub Saharan African region. The firm typically invests in larger as well as smaller deals of $15 million or less. TLG Capital was founded in 2009 and is based in London, United Kingdom.

London, UK www.tlgcapital.com

YES Bank, Investment Arm


Financial Service Investment Arm YES Bank, Investment Arm is a private equity arm of YES Bank. Mumbai, India www.yesbank.in

Lahore University of Management Sciences (LUMS) National University of Sciences and Technology (NUST) Institute of Business Administration (IBA) National University of Computer and Emerging Sciences (FAST) The Indus Entrepreneurs (TiE) Pakistan Software Houses Association for IT and ITES (P@SHA)The Organization of Pakistani Entrepreneurs (OPEN) PeaceNiche

Business Support Organizations Small and Medium-Size Enterprise Development Authority (SMEDA) SME Business Support Fund (BSF) Massachusetts Institute of Technology (MIT) University of Pennsylvania – Wharton Business School Babson College Harvard University Kauffman Foundation Invest2Innovate American Pakistan Foundation Center for International Private Enterprise (CIPE) The Unreasonable Institute TechnoServe

Potential PII Entrepreneurship Support Partners

Local

Universities

Associations & Networks Social, Entrepreneurship, and Equity Development (SEED) Ventures

Global

Universities with Presence or Experience in Pakistan Organizations with Presence or Experience in Pakistan Organizations without Presence or Experience in Pakistan Small Enterprise Assistance Fundsʼ (SEAF) Center for Entrepreneurial and Executive Development

66 67


WASHINGTON, D.CDec. 7–10, 2011; Jan. 18–20, 2012; Mar. 22, 2012

Philip Auerswald, associate Professor at the George mason University school of Public Policy, senior fellow at the Kauffman foundation

Jeffrey Bakken, Director, Office of Pakistan Affairs, U.S. agency for international development

Shamila Chaudhary, analyst, eurasia Group; senior fellow, new america foundation;

Jeremy Chen, Pakistan Desk Officer, U.S. Department of state

Daniel Cutherell, Policy analyst, center for Global development

Robert Deutsch, senior advisor for Pakistan to the special Representative for afghanistan and Pakistan, U.s. department of state

Robert Drumheller, Vice President of structured finance, overseas Private investment corporation

Ziad Haider, White house fellow

Mark Karns, Multi-Sector Advisor, Office of Afghanistan and Pakistan affairs, U.s. agency for international development

David Kassebaum, sr. international attorney, millennium challenge corporation

Rebecca Lawlor, economic advisor, U.s. department of treasury

Senator Richard G. Lugar, U.s. senate

Damian Murphy, senior Policy advisor for foreign Policy, national security and homeland security, senator Bob casey

David Nobles, Pakistan Desk Officer, U.S. Department of state

Michael Phelan, senior Professional staff member, U.s. senate committee on foreign Relations

Ambassador Robin Raphel, senior advisor for Pakistan to the special Representative for afghanistan and Pakistan, U.s. department of state

Sara Shroff, director, Buxton initiative

Milan Vaishnav, Visiting fellow, center for Global development

CAMBRIDGE, MASS.Nov., 2011–Mar., 2012

Juan Pablo Chauvin, doctoral fellow, Growth Lab, center for international development, harvard Kennedy school of Government

Ricardo Hausmann, Professor of the Practice of economic development, harvard Kennedy school of Government

Vally Khamisani, mid-career master in Public administration, harvard Kennedy school of Government

Asim Khwaja, Professor of international finance and development, harvard Kennedy school of Government

Jake Liebschutz, master in Public Policy, harvard Kennedy school of Government

Ambassador Cameron Munter, U.s. ambassador to Pakistan

PHONE INTERVIEWSNov., 2011–Mar., 2012

Garrett Johnson, co-founder, sendhub; former Professional staff, U.s. senate committee on foreign Relations

Richard Johnson, U.s. agency for international development (Retired)

Kalsoom Lakhani, founder and ceo, invest2innovate

Josh Lerner, Jacob h. schiff Professor of investment Banking, harvard Business school

Ali Siddiqui, Principal, Js Group

Stephen Smith, Partner and director of international operations, Js Private equity

ADVISORMeghan L. O’Sullivan, Jeane Kirkpatrick Professor of the Practice of international affairs, harvard Kennedy school of Government

POLICy AREA CONCENTRATION SEMINAR LEADERSStephen Kosack, assistant Professor of Public Policy, harvard Kennedy school of Government

Monica D. Toft, associate Professor of Public Policy, harvard Kennedy school of Government

Thisappendixincludesalistofacronyms,withtheirdefi-nitions, used throughout this study, in alphabetical order.2&20 – two-and-twenty incentive structurecaGR – compound annual growth ratecdc – formerly commonwealth development corpora-tion, now simply cdc Group (United Kingdom)ceed – center for entrepreneurship & executive de-velopmentcGs – credit guarantee schemecnG – compressed natural gasdB – doing Business report (World Bank)dca – development credit authority (United states agency for international development)DFI – Development finance institutiondfid – department for international development (Unit-ed Kingdom) disco – Power distribution companydod – department of defense (United states)dos – department of state (United states)eBitda – earnings before interest, tax, depreciation, & amortizationemPea – emerging markets Private equity associationeRR – economic rate of returnesG – environmental, soclal, & corporate governance standardseV – enterprise valuefdi – foreign direct investmentfit – feed-in tarifffof – fund of fundsFY – Fiscal yearGci – Global competitiveness index (World economic forum)Gda – Global development alliance (United states agency for international development)GdP – Gross domestic productGe – General electricGenco – Power generation companyGni – Gross national incomeGoP – Government of PakistanGP – General partneriBa – institute of Business administration (Karachi)iBh – indus Basin holdingsict – information & communications technologyifc – international finance corporation (World Bank)imf – international monetary fundiPo – initial public offeringiPP – independent power produceriRR – internal rate of returnit – information technologyKLB – Kerry-Lugar-Berman Bill (aka enhanced Partner-ship for Pakistan act)Kse – Karachi stock exchange

Ldi – Long distance & internationalLP – Limited partnerLUms – Lahore University of management sciencesm&e – monitoring & evaluationmcc – millennium challenge corporationmit – massachusetts institute of technologymof – ministry of finance (Pakistan) mQm – muttahida Quomi mahazNAIRU – Non-accelerating inflation rate of unemploy-mentnis – new independent states (Western nis enterprise fund)nUst – national University of science & technologyoPen – organization of Pakistani entrepreneursoPic – overseas Private investment corporation (Unit-ed states)PcG – Partial credit guaranteePe – Private equityPeGcc – Private equity Growth capital councilPePco – Pakistan electric Power companyPes – Pakistan economic surveyPii – Pakistan investment initiativePio – Public international organizationR&d – Research & developments&P – standard & Poor’ssBa – standby agreementsBP – state Bank of Pakistansci – saif center of innovationseaf – small enterprise assistance fundsseed – support for east european democracy actsiB – social impact bondsmeda – small & medium enterprise development au-thority (Pakistan) smes – small & medium-sized enterprisessPV – special-purpose vehicletfBso – task force for Business & stability operations (United states) tic – technology incubator centertie – the indus entrepreneursU.K. – United KingdomUn – United nationsUnPRi – Un Principles for Responsible investmentU.s. – United statesUsaid – United states agency for international devel-opmentUsd – United states dollarUsG – United states GovernmentVc – Venture capitalWB – World BankWdi – World development indicatorWef – World economic forum

Appendix d: Acronyms

Harvard Kennedy ScHool | May 2012

Dustin Cathcart received a Master’s in Public Policy from Harvard University’s John F. Kennedy School of Government in 2012, with a concentration in Political and Economic Development, and is a Master in Business Administration can-didate at Dartmouth’s Tuck School of Business. In the summer of 2011, he worked with the Inter-American Develop-ment Bank’s Private Sector Development Group in Port-au-Prince, Haiti. Earlier, Dustinservedfiveyearsasaninfantryof-ficerintheUnitedStatesArmy,includinga 15-month deployment to Iraq. He is a Truman National Security Fellow, Harvard Kennedy School Public Service Fellow, and a Pat Tillman Military Scholar. Dustin graduated from Norwich University in 2004 and is originally from Indianapolis, Indiana.

Meredith Gloger received a Master’s in Public Policy from Harvard University’s John F. Kennedy School of Government in 2012, with a concentration in Interna-tional and Global Affairs. In the summer of 2011, she worked with the Pakistan Poverty Alleviation Fund in Islamabad. Earlier, Meredith served as Acting Resi-dent Country Director for the Interna-tional Republican Institute in Bogota, Colombia, and has more than six years of experience working on U.S. Govern-ment-funded political and economic de-velopment projects in Latin America and South Asia. Meredith is a recipient of a 2012 Boren Fellowship for Urdu study in India. She expects to begin work with the U.S. Department of State’s Bureau of SouthandCentralAsianAffairs,OfficeofPress and Public Diplomacy, in the fall of 2012, as a Presidential Management Fellow. Meredith graduated from the University of Pennsylvania in 2004 and is originally from Marin County, California.

Aaron Roesch received a Master’s in Public Policy from Harvard University’s John F. Kennedy School of Government in 2012, with a concentration in Interna-tional and Global Affairs. In the summer of 2011, he worked with the Aid Policy Unit of the Government of Pakistan’s Economic Affairs Division in Islamabad. Earlier, he spent more than three years with the International Rescue Committee, in Uganda, Kenya, and the United King-dom, working on project management, budgeting, financial management, andrisk analysis. He is a Harvard Kennedy School Public Service Fellow and ex-pectstobeginworkwithUSAID’sOfficeof Policy in the Bureau for Policy, Plan-ning, and Learning in the fall of 2012, as a Presidential Management Fellow. Aar-on graduated from Stanford University in 2006 and is originally from New York, New York.

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