Equity funds show the way

With bank borrowing getting more expensive and restrictive, thanks to regulatory constraints and rise in Non-Performing Loan (NPL) ratio in local banks, growth of the country's private sector is facing multiple challenges. While prospects of foreign loans are narrowing due to high variable interest rates, short-term repayment schedules and restrictive conditions, other sources of finance including the local capital market, which is facing significant headwinds arising from macroeconomic instability, high inflation and weak investors' sentiment, the private sector is left with fewer funding options to fall back on. Add to that the lack of transparency and poor governance practice both in the government and the business houses in the private sector. Together, these factors along with regulatory bottlenecks pose a significant barrier to foreign investments in local business. The unfavourable conditions thus obtaining compel the private sector to look for alternative sources of finance for its survival and sustained growth.

Under the circumstances, access to private equity funds can be a way out of the crisis the private sector is now facing. But such types of fund require equity participation of the investors in the privately held companies. That prospect would open the door for local companies to learn modern management and other practices from their global partners. Understandably, equity funds do also assure long-term capital investment in the recipient companies concerned. Additionally, these sources of investment through equity participation have the added benefit of helping local companies to get connected with the global pool of private investment funds.

In this connection, the local businesses might well share, for instance, the experience of BMA, a pioneer of private equity investment firm in Bangladesh. As reported, the firm is learnt to have enabled major investment from a global investment leader like the Mitsui Corporation of Japan into a multifaceted industrial venture of Bangladesh, namely, ACI Motors. Needless to say, acquiring a substantial stake by Mitsui from the said local company, facilitated as it was by equity firm BMA, is definitely a significant development for Bangladesh's private sector industries. Actually, prospective international venture companies would generally follow their peers regarding their own investment decisions in a particular region or country. In that case, Mitsui Corporation's equity participation with a Bangladeshi business house is apt to send a positive signal to them (other global equity firms) about the potential of the country's private sector for hosting equity funds from other global investors. Also, the sector, in the present case, the agriculture sector of Bangladesh, has a yearly turnover of over US$40 billion. No wonder, the Japanese conglomerate in question has chosen to reach an equity participation deal with a Bangladeshi company, which is playing a leading role in mechanising Bangladesh's agriculture sector. Given that mechanisation of agriculture is still in its infancy in Bangladesh, the government might well extend necessary policy support to stimulate it (the sector) so other local companies might follow in ACI Motors' footsteps and draw equity investment from international giants like Mitsui Corporation.

Similarly, light engineering is another area in the private sector that has high growth potential so far as foreign private investment is concerned. Notably, China's phenomenal success in speedy industrialisation is basically driven by light engineering which was initially based on that country's agricultural surplus. So, Bangladesh can also learn from Chinese experience and establish its light engineering sector as a hub of private investment, particularly equity capital from abroad.  However, what would be critical for the local businesses seeking equity partnership of regional or global players is to have impressive company fundamentals including a healthy balance sheet, transparency and good governance.