Pakistan PII - Harvard Kennedy School PAE

Re c o m m en d ation s f oR t he
Pakistan Private Investment Initiative

Dustin Cathcart, Meredith Gloger, & Aaron Roesch John F. Kennedy School of Government Harvard University May 2012
a Policy analysis exercise submitted to Office of the Coordinator for Economic & Development Assistance U.S. Embassy, Islamabad, Pakistan U.S. Department of State
Pakistan Private investment initiative
Acknowledgements
Above all, we would like to thank our principal client, Vinay Chawla, Deputy Coordinator for Economic and Development Assistance at the U.S. Embassy in Islamabad. As our main point of contact for this project, we owe him a huge debt of gratitudeand we have sincerely enjoyed working 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.
HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE
We also want to thank Nadia Naviwala, who first introduced us to Vinay, and to many other essential contacts for this project. Thank you as well to Mark Karns, Vinays counterpart at USAID, who has been exceptionally helpful throughout this process. Thanks are due to our advisor, Professor Meghan OSullivan, as well as our Policy Area Concentration seminar leadersProfessors 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 Pakistanand, 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 Security Project Fellows, who were instrumental in helping 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 Initiativewe learned so much from, and truly enjoyed, discussing this project with so many inspiring people over the last few months.
Cover Photo: Clifton Beach, Karachi, Pakistan Credit: Benny Lin, January 25, 2010 Inset Photo: K2 , Gilgit-Baltistan, Pakistan Credit: Extreme Design Studio (http://www.extremestudio.ro)
contents
Background ....................................... 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 About the Authors ............................. 68
BAckground
Promoting Private sector development
in october 2009, President obama signed into law the enhanced Partnership for Pakistan act. the legislation, 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 development through trade and investment. Launching a U.s.-sponsored investment fund to support Pakistans private sector first garnered attention when secretary clinton, in partnership with the overseas 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 democracy (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 order to create jobs and counter militant extremism. in december 2011, congress chose not to authorize the $60mm allocation for establishing the Pakistaniamerican enterprise fund. despite this setback, however, the U.s. department of state, still committed to strengthening support for Pakistans 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.
Pakistani border post in november. the U.s.-Pakistan relationship, however, and american engagement in the country more broadly, remain crucial to ensuring Pakistan surmounts the immediate challenges it faceswhich are substantial. Vital U.s. interests and the economic integration of south asia require a stable Pakistanbut looming social, economic, and political upheaval could compromise any hope for long-term stability.
investing in stability
the 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 investment. 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 Pakistanespecially those outside the traditional political establishment. Pakistans private sector is essential to any strategy for long-term engagementbolstering it will increase economic stability, hamper terrorist recruitment, and draw in a wider array of political allies. The countrys 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 investment is the engine that drives economic growth; the middle class expansion that often accompanies such growth will play an important role in promoting economic 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 30is engulfing Pakistans urban areas, where a lack of jobs, education, clean water, and access to justice cultivate a breeding ground for radicalization. an investment fund can help grow businesses, which will create new jobs. Generating employment is essential for reducing 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 years arab spring uprisings. Building broader, stronger relationships throughout Pakistan is in the american interest, helping U.s. policymakers to better prepare for an unpredictable future. 5
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 tentative 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 worlds 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 statesin particular, the Raymond davis incident in January, the killing of osama bin Laden in may, and the accidental helicopter attack on a
executive summAry
the U.s. department of states coordinator for economic and development assistance in Pakistan has proposed the creation of a Pakistan Private investment initiative (Pii), to be implemented by Usaid, as an alternative to a legislated enterprise fund. this study surveys 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 already expressed a possible interest in partnering with the small enterprise assistance funds (seaf), as one component of the Piiour recommendations account for and accommodate this proposal. The Problem despite Pakistans vibrant banking sector, credit rationing is a major constraint on sme growth and investment. interest rate spreads on commercial loans compare unfavorably to the high-interest, risk-free securities sold by the Government of Pakistan. as a consequence, voracious government borrowing is sustaining an investment climate in which banks have little incentive to extend credit to the private sector. the burden of Pakistans underserving banks on SMEs is magnified by a void of private equity participation in the market. Alone, the financial constraint on smes is problematic, but coupled with a rapidly expanding population it becomes urgent. on average, Pakistans economy grows 3% annually; just to absorb annual workforce additions, Pakistan will need to grow 67% per yeari.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 undermines Pakistans ability to achieve the strong, sustained growth required to rise to this challenge. The Opportunity There is an opportunity today to respond to the unmet financing needs of Pakistans sme sector without crowding 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 fundin some formstate could, at a minimum, generate modest job growth within its portfolio of investment companies and showcase U.s. commitment to private sector development in Pakistan. these alone are valuable objectives and worth the use of limited U.s. resources. Beyond this, there is also an opportunity to draw in greater participation to Pakistans investment market by demonstrating the possibility of healthy even extraordinaryreturns. While, ultimately, a single fund cannot mend the underlying policy failures that 6 discourage investment in Pakistan, it can still have various, multiplicative positive effects. The Response In order to best serve the financial needs of Pakistans private sector, and to contribute to sustainable economic 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 Pakistans financing constraints and to energize private sector growth. moreover, given the resources allocated to this initiative and the capabilities of state and Usaid, sme investment is both a feasible and judicious intervention. We recommend designing the fund using the private equity model, to support new and growing smesi.e., form limited partnerships with professional fund managers to direct venture and growth capital to promising businesses. Private equitys 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 financing among smes and to foster broader developmental 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 Pakistans nascent private investment 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 Pakistans entrepreneurial ecosystem. Specifically, the program can work with Pakistani universities to establish and support startup incubators, and it can build linkages 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 equitycan target the full stream of the business lifecycle, which is crucial to scalable, sustainable success. The Way Forward Below, we provide eight core recommendations, following from our findings. Collectively, they address the financial needs of Pakistans private sector, mitigating risk, enhancing developmental impact, facilitating profitable investments, and improving U.s. engagement with Pakistans private sector.
maJoR findinGs
1. 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 Pakistanand in the short term, Pakistans energy shortage, interest rate spread, depreciating rupee, and image as a high-risk country all serve to limit access to finance. 3.
Recommendations
1. establish a vehicle to address Pakistans immediate financing needs, but acknowledge its limitationsultimately, governance failures constrain private investment and entrepreneurship. 2. invest 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 partnershipboth are important for Pii success and attracting new investment.
4.
5.
6.
3. Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with A deficit of useful firm- and sector-level information high potential for growth and multiplicative impact makes market analysis difficultthis presents a spein Pakistans economy. Prioritize further information cific private sector development challenge in itself. collection, collation, and dissemination to address over-prescribing the scope of a funds investments the deficit of good market data in Pakistan and attract inhibits flexibility and risks closing out opportunities for new private investment. financial and development return. 4. disaggregate the sme space and focus on small and smes are the most capital-constrained businesses medium firms, separately. Define these as firms in and disproportionately overlap with high-growth secthe $50k$1mm and $1mm$10mm revenue ranges, tors of the economy. respectively. focus on smes with the strongest exit prospectstarget investments in companies led by There is a need to better define the bounds of the SME promising entrepreneurs that have vision, but lack the segment and, in particular, to distinguish the differfinancial and institutional support to scale. ences between small and medium.
5. structure the Pii to include venture capital and growth 7. smes in both the venture and growth stages are conequity components. Plan for ticket sizes of $50k strained by a lack of access to long-term, risk-oriented $400k and $2mm$7mm, respectively. employ the capital and institutional support, and represent comlimited partnership structure common in private equity pelling investment opportunities. and adopted by the cdc and other major dfis, in line 8. high-quality, professional fund managers, who have with international industry standards. a local presence and the capacity to add strategic support to investee companiesoperating in private equitys limited partnership modelare key determinants of fund performance in emerging markets.
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 9. the more participation there is in Pakistans investexperience, local knowledge, capacity to add comment industry, the better will be the exit options and mercial value to portfolio companies, and skin in the prospects for scaling investment after donor funding game. Consider emerging or first-time fund managendsthe benefits of partnering with various other ers that align with the broader Pii mandate, in addition donors and investors to establish investment funds far to experienced teams with proven track records. exceed those of branding the Pii as a wholly american 7. structure Pii fund partnerships using one or more feainitiative. sible implementing mechanisms that allow for maxi10. there is also a tremendous needand substantial mum flexibility, commercial sustainability, and leveropportunityfor supporting the development of Pakiage of U.s. Government resources. Prioritize the Gda stans burgeoning entrepreneurial ecosystem. model but use more traditional contracts and grants 11. There is a positive relationship between healthy finanas required. seek substantial Pakistani private sector cial and economic returns in emerging market private involvement in sourcing and levering investments. equitybut the PII will also face financial and political 8. incorporate an explicit component to develop Pakirisks. these can be mitigated by a well-managed, stans entrepreneurial ecosystem. allocate between market-oriented investment approach that institution$10mm and $20mm for startup capital and other incualizes adaptability, learning, and transparencyand bator initiatives. Work through local entrepreneurship shows the patience to let investments mature. networks and universities. implement from the level of the Pii as an overarching component or through a partner as a smaller sub-fund.
summAry diAgrAm
Market Analysis
Economic Economic Challenges Challenges Development Development Approaches Approaches
Assistance Types Assistance Types Financing Vehicles Financing Vehicles
Operational Analysis
with h with h should wwe work? shouldld we work? shou we work? should e work? uu
Targeting Strategies Targeting Strategies Model & Strategy Model & Strategy
Investment Type Investment Type Target Size Target Size Segments Segments
Structure & & Structure Implementation Implementation

No. of Partners No. of Partners Selection Process Selection Process
Complements & & Complements Alternatives Alternatives
Sectors Sectors
Low human Low human capital capital
Technical Technical assistance assistance (to(to banks) banks) Aid Aid (to(to State Bank, State Bank, SMEDA) SMEDA)
Commercial Commercial bank bank lending lending Domestic Domestic government government lending lending Foreign Foreign government government lending lending Nonprofit Nonprofit grants & & grants lending lending Financial Financial markets markets
Capitalize onon Capitalize core strengths core strengths
Micro Micro
Microfinance Microfinance
Angel Angel investment investment
1 partner, 1 partner, 1 fund 1 fund
Global Global Development Development Alliance Alliance
Entrepreneurial Entrepreneurial ecosystem ecosystem development development
NEED NEED OPPORTUNITY OPPORTUNITY
Poor Poor infrastructure infrastructure
Invest where Invest where theres pent-up theres pent-up demand demand Consolidate Consolidate fragmented fragmented markets markets
Small Small
FEASIBILITY FEASIBILITY IMPACT IMPACT
SME SME financing financing
Venture Venture capital capital
1 partner, 1 partner, fund of of funds fund funds
Request forfor Request proposals proposals
Social impact Social impact bonds bonds
Macroeconomic Macroeconomic government government failures failures Microeconomic Microeconomic government government failures failures Market Market information information failures failures Market Market coordination coordination failures failures Low savings & & Low savings bad international bad international finance finance Low Low competition competition
Trade Trade
Medium Medium
Large capital Large capital investment investment
Growth Growth equity equity
Multiple Multiple partners partners
Grant to to public Grant public international international organization organization
Partial credit Partial credit guarantees guarantees
Investment Investment
Promote export Promote export competitiveness competitiveness
Large Large
Buyout Buyout
Feed-in tariff Feed-in tariff forfor renewable renewable energy energy
Sector Sector agnosticism agnosticism
Trade Trade assistance assistance
Private Private equity equity
Focus onon Focus locuses of of locuses job creation job creation Tap key Tap key demographic demographic groups groups Look forfor Look multiplier multiplier effects effects
Risk & impact analysis
High risk High risk of of finance finance
Add U.S. Add U.S. value value
High cost High cost of of finance finance
Recommendations
& Key Features
RA
Research Goal With 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 provide specific recommendations to the U.S. Department of state for the design and implementation of the proposed Pakistan Private investment initiative. Methodology The 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, business 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 perspectives on the investment environment in Pakistan, and the optimal design for a U.s. fund. We also reviewed the existing literature on foreign assistance and private sector development, policy papers addressing the U.s.-Pakistan bilateral relationship, data and research on the Pakistani investment environment, and other relevant sources of information. direct references to published sources are cited in the endnotes. insights and observations gleaned from interviews are not cited explicitly in the document, but appendix c includes a complete list of individuals consulted throughout our research. Scope Our research examines the specific proposal for a Private investment initiative and its role in strengthening the U.s. approach to economic development in Pakistan, but it does not address other aspects of that endeavor 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 operational 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 Pakistans economic context and market opportunities informs our recommendations for an optimal fund model. We intentionally refrained, however, from recommending specific investment decisions or strategies. such decisions ought to be the responsibility of independent and professionally experienced fund managers with local knowledge and technical expertise. finally, although we consulted a diverse group of stakeholders in Pakistan to produce this study, our interviews were not exhaustive and our time in-country was limited. Further field research on Pakistans investment environ-
PA RE NC Y!
ment would make a valuable contribution to addressing the existing deficit of useful market data. Fund Objectives the 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 initiatives objectives as follows: 1. Promote job growth support the expansion of businesses, encourage entrepreneurship, and show positive demonstration effects that attract further private investment. 2. Foster goodwill establish a visible, long-term american commitment to supporting the development of Pakistans private sector. Guiding Principles We identify six overarching principles that underlie the design and implementation of an effective fund. first, the fund should optimize across three dimensionsaddressing pressing economic needs, capitalizing on market opportunities, and ensuring feasibility. from this foundation, the fund should enshrine the values of independence and transparency, and of adaptability and learning. finally, the funds driving motivation should be to have multiplicative impact. Analytical Framework our analytical framework aims to identify the optimal balance of the three foundational principlesaddressing need, capitalizing on opportunity, and ensuring feasibilityin two stages. first, we evaluate the overlaps between need and opportunity. 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 examining the market across two key dimensions: sectors and segments. second, we consider feasibility and impact. We conduct an operational analysis of the range of possible fund models, implementation structures, and alternative approaches to assess their viability and efficacy. We then 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 seven more specific design considerations. We also include two (of several potential) models for the funds structural design.
Guiding Principles
overview
IN IT ST UT E LIZ NA IO
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FEASIBILITY!
ENSURE!
AP AD
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B TA
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Private! Investment! Initiative!
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Pakistan
ILI
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RN IN
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NEED!
OPPORTUNITY!
CAPITALIZE ON!
SEEK MULTIPLICATIVE IMPACT!
Analytical Framework
MARKET ANALYSIS!
COUNTRY LEVEL
NE ED S& OP PO RT UN ITI ES ! AS FE L IBI ITY AC MP &I T!
ECONOMIC ! CHALLENGES!
FIRM LEVEL
DEVELOPMENT! APPROACHES! TARGET! SEGMENTS!
TARGET! SECTORS!
OPERATIONAL ANALYSIS!
MODEL &! STRATEGY! DESIGN &! IMPLEMENTATION!
COMPLEMENTS &! ALTERNATIVES!
RISK &! IMPACT! ANALYSIS!
RECOMMENDATIONS!
10
11
mArket AnAlysis
any development program in Pakistan must take into account the larger economic context in which it will operate. Be it for an enterprise fund or any alternative model, the needs of Pakistani businesses, the challenges 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. Understanding these nuances is essential for crafting the best possible policy intervention.
Fig. 1 Pakistan's 'Youth Bulge'!
Percentage of Population <14yrs!
45%! 44%! 43%! 42%! 41%! 40%! 39%! 38%! 37%! 36%! 35%! 1960! 1965! 1970! 1975! 1980! 1985! 1990! 1995! 2000! 2005! 2010!

creaserepresents both an opportunity and a tremendous challenge. Volatile Growth Pakistans ability to rise to this challenge depends on its capacity for strong, sustained growth. While the country 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 Pakistans external deficit in 2007 made it particularly vulnerable to the 2008 financial crisis. High inflation and low levels of domestic 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 Pakistans current account balance. Pakistans economy is currently at risk of overheating. That is, its non-accelerating inflation rate of unemployment (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 financial 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 experiencing stagflationi.e., high inflation coupled with low growth. although unemployment itself is not an immediate concern, it will become one, if economic growth does not keep pace as the workforce balloons. to achieve such growth, Pakistan needs more investment in its private sector.
economic challenges
Pakistan faces a unique set of economic challenges some caused by natural and demographic circumstances, others by poor policy choices. While substantial, 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 Pakistans broader political and security difficulties will hinge on how effectively the country navigates this turbulent economic period. Youth Bulge With 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 hausmann, Harvard Kennedy School. (PED-130 Final Assignment: Growth diagnosticPakistan, december 2011).
soon be the fourth-largest country in the worldits population has tripled in less than 50 years and is projected 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, Pakistans economy has to grow at an estimated 67% annually, for the foreseeable future, and it must add some 36 million new jobs in the next 10 years.3 this demographic dividendas the youth bulge ages and moves into the workforce, the proportion of productive workers will in-
Immediate Constraints on Capital in the short term, Pakistan faces a unique set of interwoven constraints on financing for investmentparticularly for smaller, growing businesses.
12
13

Circular Debt5 it more difficult to raise energy tariffsilluminating the Pakistans most pressing economic challenge is the acdebilitating circularity of this crisis. cumulation of circular debt in the energy sector, which has reverberating effects throughout the economy. in Interest Rate Spread 2008, the Pakistan electric Power company (PePco) in 2011, Pakistans overall public debt grew by 1.76b the public umbrella organization for power-generation rupees to Rs 11 trillion (about $121.6b)representing companies (Gencos) and power-distribution compa60.9% of GdP. today, interest payments themselves nies (discos), accounting for 90% of energy produceat up 32.8% of government revenue.7 there are many tion in Pakistanbegan facing rising energy production pernicious effects of such a large debt burdenmost costs, as worldwide oil prices rose, exaggerated by a immediately, though, it is not the size of the debt that depreciating rupee. at the same time, due to the govposes the biggest problem, but rather how the governernments high external debt amidst the global finanment finances it. The government has come to rely on cial crisis and the resultant credit crunch, public power Pakistani commercial banks to supply the majority of purchasers fell short on its debtby borrowing Fig. 3 Pakistan's Growing Interest Rate Spread payments. aggravatheavily from domestic ing the shortfall, high 16% lenders, the governrates of energy theft re- 14% ment thus crowds out mained unaddressed. 12% private-sector borrowers. in lieu of cracking down 10% on theft or raising tariffs 8% following the suspen(tariffs remained stagsion of the imfs stand6% nant from 2003 to 2007, by agreement (sBa), despite rising energy 4% there are fewer viable costs), PePco passed 2% sources of external on the growing receivdebt. as a result, in able to suppliersex- 0% 2011 the government 2004 2005 2006 2007 2008 2009 2010 tending the debt up the borrowed Rs 1.1 trillion Bond Yield Lending vs. Deposit Rate energy supply chain from domestic lenders (about $12.2b)local (GENCOs, refineries, sources now finance oil and gas exploration Fig. 4 Pakistani & Indian Rupee FX Rates vs. USD, 2007 2012! 91% of the deficit.8 companies, etc.).
95!

in 2011, for instance, while lending to the government increased by 74.5%, credit to the private sector grew only by 4%.9 Depreciating Rupee During the financial shock of 2008, the Pakistani rupee experienced a swift devaluationfrom march 2007 to october 2008, the rupee lost 27.31% of its value against the U.s. dollar. Because Pakistans 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 economyfor instance, a weaker rupee might strengthen Pakistans export sector. But volatility adds risk for investors outside Pakistan and businesses within. 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 firmsa loan in U.S. dollars, for instance, will require constantly accelerating growth to repay, as local earnings have to stretch ever further to reimburse foreign debts. Outside Perceptions of Risk during 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 mQmbacked political attacks in Karachi),10 saw a corresponding decrease in fdi; investment dropped each year from 1995 to 2001. then, in the early-2000s, Pakistan experienced an economic surgeGdP growth increased 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 2007falling to less than $1.5 billion in 20112012. Pakistans Binding Constraint Pakistan undoubtedly faces a host of economic challengesfrom the immediate debt, financing, exchange, and perception problems, described above, to longerterm infrastructure deficiencies in the energy and education sectors, current account imbalances, and market failures related to corruption, monopolization, rentseeking, 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 perspective, which constraint, if loosened, would unleash the most investment and growthi.e., what are their shadow prices and which has the highest one? Ricardo hausmann, dani Rodrik, and andrs Velasco12 introduced a modelcalled a growth diagnosticfor determining a countrys binding constraint on investment. this methodology uses a standardized, staged process for isolating the most constraining factor in an economy. in appendix a, we employ this approach to
this mounting debt reduces energy production, as upstream producersthe only ones with liquid cash reservesare forced to pay off their receivables rather than invest in expansion. additionally, since 2006, PePco has borrowed from commercial banks against government guarantees, as have independent power producers (iPPs) who supply PePco, since 2007.
85!
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heavy government borrowing disincentivizesand thus crowds outlending to the private sector in three ways: 1) the government offers high interest rates, raising the effective discount rate for banks, and raising the hurdle rate for investing in the private sector instead;
Fig. 5 Monthly Terrorism Deaths vs. Annual FDI (USD), 19942010!

450! $6b!
400! $5b! 350!
55!
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$4b!
35! 2007!
2008! USD/PKR!
2009! USD/INR!
2010! Linear(USD/PKR)!
2011! Linear(USD/INR)!
2012!
250! $3b! 200!
at the end of 2011, the government formally absorbed the accumulated debt from PePcoRs 391b (about $4.3b), equivalent to 1.8% of GdPinto 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, circular debt dampens energy investment; this exacerbates the electricity shortages that so constrain businesses; these then limit their capacity for growth; and this makes 14
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 borrowing. taken together, these three factors serve to push interest rates seen by private borrowers too high to often be viable, and to reduce banks inclination to seek opportunities for lending to the private sector in the first place.
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identify Pakistans binding constraint. We find that microeconomic risks posed by government failures most constrain investment. in other words, the governments over-involvement in the economye.g., by creating and enabling monopolies, paying untargeted subsidies, enforcing cumbersome and inefficient regulations, and engaging in direct corruption discourages investment at the firm level, by distorting companies incentives. these practices, more than anything, dampen Pakistans growth. this observation should serve to frame the Pii. Ultimately, 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 Pakistans 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 worthwhileit 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 insights into its design. a fund, for instance, could help coalesce a stronger private-sector lobby for policy reform, by connecting investees and wider networks of entrepreneurs. It could also find ways to support more forward-thinking policymaking, as initiated by the Planning commissions Framework for Economic Growth. state has a core set of tools at its disposal for any program of this sort: aid, trade, technical assistance, and investment. and there are several broad approaches whereby State could attempt to increase access to finance 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 firstloss capital to domestic lenders, thereby absorbing their risk and incentivizing private-sector lending. a third is to establish a fund to make such investmentsequity and debt, paired with strategic guidancedirectly.

congresss 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 Pakistans investment climate, however, private sector institutionsnamely, professional private equity and venture capital fund managersoffer 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 equityfrom other institutional or international investors, local investors, or the diasporathe 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-theground knowledge about investment opportunities in the Pakistani market than does the department of state, Usaid, or eithers 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 Pakistans complicated political climate, private investors will be a step removed, and thus more insulated, from any negative connotations of U.s. involvement. The enterprise funds were private, nonprofit corporations, capitalized by Usaid grants. they had independent, White house-appointed boards, which then hired in-house professional fund managers. each fund received notwithstanding authority, and thus was exempt from many standard rules and regulations, such as for procurement procedures or Buy american requirements. 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 Western 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 hungarian-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 enterprise fund. Overseas Private Investment Corporation (OPIC) congress founded oPic in 1971 as the U.s. dfi, in order to mobilize and facilitate the participation of United 17 the United Kingdoms cdcas potential models for the Pii. Enterprise Funds Under the 1989 seed act, followed by the freedom support act in 1992, congress established 10 enterprise funds covering 18 countries in eastern and central europe. the funds combined lending programs (debt), equity investments, and technical assistance for establishing local financial institutions. Over their lifespans, 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 significant technical assistance, including for the creation of 30 financial institutions (banks, venture capital firms, leasing companies, microfinance institutions, etc.).14
A fundproviding a new source of capitalcan fill the financing gap without fighting the interests or incentives of other actors.
Rationale for an Investment Approach Working through preexisting institutions in Pakistan whether public or privatehas proved difficult: The Pakistani government is ill-placed to finance business growth (especially when so many of Pakistans economic 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 commercial banks is misplaced, as it is simply not in their interest to provide capital to smes at present, given the governments reliance on banks to finance the public debt, risk-free and at high interest rates. Likewise, loan guarantees for these banks might require working through the state Banka government bodyand 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 privatesector lending and penalize debt financing). A fundproviding a new source of capitalcan fill the financing gap without fighting the interests or incentives of other actors. if successful, it can catalyze further investment (local and international) to address this need more sustainably. trade preferences for Pakistani exporters could also play a crucial role in spurring privatesector 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 statethough they could serve as an important complement to an investment vehicle.*
* 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 Unions recent decision to reduce tariffs on 75 Pakistani products, for instance, could produce $100300mm in new annual revenue. For more on this, see: http://blogs.cgdev.org/ globaldevelopment/2012/02/trading-up-pakistan-the-eu-and-tradeas-development.php; http://www.cgdev.org/content/publications/ detail/1425847/; and http://www.cgdev.org/content/publications/de-
Recommendation 1 establish a vehicle to address Pakistans immediate financing needs, but acknowledge its limitationsultimately, 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.
development approaches
some of Pakistans economic problemslike those related to the governments macroeconomic policies or micro-level market interventionsare beyond the scope of any direct U.s. initiative. among those that are within reach, Pakistans financing gap for small- and mediumsized 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 demonstration effects of successful investments can multiply well beyond the ambit of any single U.s. program. 16
Precedents the U.s. Government has engaged previously in a number of collaborations with the private sector to promote investment as a means to development. as well, a number of other development finance institutions (DFIs) exist, financed by sovereign governments and multilateral institutions. We highlight below two in particular the World Banks international finance corporation and
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states private capital and skills in the economic and social development of less developed countries. Under 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 managerstypically for 3065% of the funds total value.16 OPIC also provides loan financing directly to SMEs (revenues less than $250mm), and structured financing for large-scale capital projects to businesses with revenues greater than $250mm.17 to date, oPic has committed $3.6b to more than 50 private 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 tfBso places particular emphasis on operating with a business mindset. it hires employees out of the private 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 afghanistan, where it focuses on mining sector development, encouraging private investment in energy and it, industrial development in traditional activities (e.g., carpet-weaving, dried fruit production, and cashmere production), and increasing womens economic partici-

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 2010over the last five years, annual new investments have ranged from 257mm to 436mm. as of 2011, its active portfolio totaled to 1.933b. this is managed by 74 fund managers, and is invested in more than 1,000 businesses.32 CDC has been wholly self-sufficient for more than 15 yearsit 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 sovereign dfi with an explicit development focus. it has operated primarily as a fund of fundsi.e., investing in preexisting private equity fundsbut also makes direct investments through fund managers. cdc earns competitive market returns by working through the private sector, while maintaining clear government oversight under the direct auspices of dfid. The Role of Private Equity the term private equity (Pe) covers investments of a wide array of sizes, and for a variety of purposesbut they share some common features. first, private equity involves private placementsdistinguished from purchases 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 companies. the relationship among the general partner (GP) and its limited partners (LPs) is formalized in a fixedterm 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 profitsharing structure, known as two-and-twenty (2&20). fund managers are paid a set, annual management fee
Fig. 8 Count of PE Deals in MENASA by Ticket Size!
10,000!
equivalent to 2% of the funds 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 (socalled carried interest).35 in the United states and other developed markets, we typically think of PE firms as turnaround agentsinvestors who buy out firms, restructure them (often with severe cost-cutting), and then sell them for a profit. But in emerging markets like Pakistans, the model often looks quite different. Private equity in this context usually entails minority stakes (rather than buyouts); focuses on smaller, younger companies (rather than larger, distressed ones); and its goal is to provide firms capital and strategic guidance to help them grow, rather than to restructure them into profitable businesses.
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.
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 oPics 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 report that oPics presence has encouraged their entry into emerging markets, and has made it easier to then raise follow-on funds to sustain and grow private investment.21 oPic, by statute, cannot take equity positions, and instead focuses on the provision of debt and insurance. oPic is authorized, however, to pilot a program for making 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 technical assistance, and facilitating relationships between foreign investors and local businesses, to foster a more vibrant business environment and stronger global linkages. it works to form partnerships among iraqi and multinational firms, such as GE, Boeing, Microsoft, and Google.24 pation through skills training, literacy courses, the establishment of a center for womens economic development, and other initiatives.26 International Finance Corporation (IFC) the ifc, part of the World Bank Group, is the worlds largest dfi. founded in 1956, it is jointly owned by 182 member countries and works in more than 100 developing 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 investments and two-thirds of advisory services went to poor countries (i.e., aid recipients, as designated by the international 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, industry groups, and governments to improve the business environment; and acts as a fund manager for other investors, including sovereign funds, pension funds, and other dfis.29
Log Scale!
Private equity can carry negative connotationslayoffs, downsizing, etc. But in emerging markets, private equitys 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 Pakistan, in particular, is extremely thin because there has been very little activity to datewhich is why there is such a need. even in emerging markets generally, though, the evidence is little betterthere 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 investments in both developed and developing countries, found that industries in which Pe funds are active grow
Fig. 9 Density of EV/EBITDA Multiples in MENASA! (Excludes Top & Bottom Quartiles)!
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CDC Group the cdc was founded in 1948 and is wholly owned by the U.K.s department for international development (dfid). it is the worlds oldest dfi. cdcs core mission is to strengthen the private sector in and attract new investment to developing countries75% of its investments are made in countries with annual per capita Gni
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more quickly than other sectorsin terms of productivity, value addition, and employment. Private equity also either reduced or had no effect on sectors volatility. these results can be shown with lagged effects, indicating the direction of causality is from investment to growth (rather than PE funds having identified sectors already primed to grow).36 The report also finds that, when governments actively promote venture capital (Vc), whether through direct investment, via professional funds, or through tax breaks or subsidies to incentivize venture capitalists, enterprises benefitbusinesses with moderate government VC support outperform others.37 in particular, funds with only partial or indirect government involvement (i.e., those working through privatesector partners) were more successful than fully owned government ventures.38 in emerging markets, deal sizes tend to be smaller than in developed countriesthe entire investment spectrum 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 valuations. EV/EBITDA is a proxy for an investments potentialhigher 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 necessarily 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 marketsand the need for more onthe-ground, qualitative due diligence when assessing investment opportunities, as well as for concerted efforts to improve the breadth and rigor of quantitative data collection. Private equity in emerging markets also requires a longer investment horizontypically, at least five years. the cdc, for instance, holds equity positions in a company for 10 years, on average.39 some modelslike acumen funds patient capitalanticipate even longer time horizons.40 Pe portfolios also usually exhibit J-curve returnsi.e., negative returns in early years, followed by growing returns as the fund begins to exit investments. in general, emerging-market portfolios will tend to see longer upfront dips, but with the prospect for steeper subsequent returns. for example, the Polish-american enterprise fund, which began operations in 1989, only saw a positive net return in 1997but this was followed by consistently high returns until the fund phased out in 2008. 20

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 interests and rent-seeking behaviors underlying Pakistans economic problems, rather than fostering new growth. 4) it is dangerous to over-prescribe the funds strategytargeting 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 funds prospects. 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, Pakistan shifted toward a more service-based economy, with service sectors now accounting for 52% of GdP. industrial sectors share of the economy remained stagnant (~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 economythey hold an outsized share of GdP growth, relative to their share of overall GdP, and they have been, on average, by far the largest contributors 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 sectorsespecially electricity and gas distribution.43 High-performing Sectors over the last half-century, export growth has been driven by the textile, garment, leather-product, and agricultural sectors. these are Pakistans traditional areas of dominanceand for which products it is known globally. But these have not been the sectors seeing the highest growth, or that have been driving the recent growth in the services sector. the allWorld network has published lists the last two years of Pakistans fastestgrowing companies (the Pakistan 25 in 2011 and the Pakistan 100 in 2012). these lists give an indication for where Pakistans economy is accelerating most rapidly today. AllWorld ranks firms according to their revenue growth over three-year periods (20072009 for the Pakistan 25, and 20082010 for the Pakistan 100). these high-performing companies grew at an average of 200% overall (281% in the Pakistan 25 and 178% in the Pakistan
Fig. 12 AllWorld Avg. Growth Rates by Sector & Firm Size! (Small, Medium, Large)!
Transportation and Aviation! Health and HealthCare! Construction and Engineering! Import/Export Trade! High-Tech and Telecommunications! Consumer Goods! Professional, Scientic and Tech Services! Recruitment and Training! Professional and Consulting! Building Materials! Entertainment and Recreation! Agriculture and Mining! Software Services and Products! Automotive! Finance and Insurance! Travel and Tourism! E-commerce and Web services! Education! Manufacturing and Packaging! Textiles and Fashion! Medical Services and Supplies! Education and Training! Public Relations, Media and Publishing, Advertising! Professional and Consulting Services! Energy and Power, Water! Advertising and Marketing! Computer Networking and Software! Conventional Energy! Food Industries! Media, Publishing and Printing! Security Services! 10%! 463%! 444%! 290%! 284%! 237%! 212%! 174%! 170%! 165%! 161%! 122%! 121%! 113%! 104%! 103%! 101%! 97%! 82%! 76%! 68%! 64%! 56%! 49%! 47%! 44%! 42%! 36%! 903%!
Recommendation 2 invest 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 partnershipboth are important for Pii success and for attracting new investment.
It is important to note that there is a dearth of good firmor sector-level data on emerging marketsespecially for Pakistan. this makes effective market analysis difficult. The lack of information adds another reason not to over-constrain the strategy ex antemarket opportunities may be overlooked or overhyped, because the information is imperfect. this also points to the substantial need for collecting better informationwhich, itself, should be a prime objective of the fund.
targeting investment
What is the best way to address Pakistans economic needs while capitalizing on its market opportunities? and what investments will best fuel the engines of growthparticularly job growth? in order to achieve optimal impact, the fund must be targeted, to best exploit this overlap between need and opportunity. Disaggregating the Economy to assess targeting strategies, we try to disaggregate Pakistans market. there are two basic ways to distinguish businesses: by sectors (i.e., industry), or by segments (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 businessesdefined 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 fundthese 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 focusinstead of betting on one, it is better to take a more open approach.
Market Sectors
Performance 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 returns fluctuated across sectors, and that sector selection can make a significant difference for fund performance.41 that said, there are myriad and often contradictory reasons for choosing one sector or another ex ante. Lack of good market data and competing objectives can make selecting sectors of focus difficult. Pakistans Structural Transformation the structure of Pakistans economy has evolved significantly over the past four decades. In broad strokes,
Fig. 11 Sector Contributions to Real GDP Growth!
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100).44 about 27% of the companies in the two lists were technology-related, and a large majority were in service sectors.45 Prospects for Growth Particularly 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 country makes today determine which products it will be most likely to make tomorrowtechnology and physical and human capital expand first and most easily to products of like kind. so, the products in which a country is competitive today that is, where it is competitive in the export marketcan signal where it is most likely to become competitive in the future, by mapping products based on their relative similarities. Products closest to similar, exportcompetitive products are good bets; clusters of export-competitive products indicate entire industries that have good prospects. been relatively insulated from the challenges faced by the rest of the economy.

targeted sectors might include agribusiness and foods, logistics and transportation, retail and consumer products, and technology and communications. Invest in Sectors with Pent-up Domestic Demand inadequate investment in a number of key, domestically focused sectors has resulted in severe service delivery shortfalls and capacity constraints. these structural supply problems, combined with a rapidly growing 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 models 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., alternative energy). Consolidate Fragmented Markets many industries in Pakistan lack competitiveness because, at home, they see high competition and structural impediments, while their competitors overseas benefit from maturing markets and new technologies. Pakistan loses out in economies of scale in sectors where consolidation is an advantage, but legal and other impediments prevent it. Particular opportunities exist in sectors in need of consolidation and strategic repositioning, where SMEs occupy significant or dominant market positions. targeted sectors might include light manufacturing (e.g., surgical instruments and sports goods). Promote Export-competitive Industries Pakistans lack of export competitiveness makes it vulnerable. Pakistans export base has failed to diversify, remaining concentrated in the textile manufacturing industry. the share of Pakistans services exports has been minimal, but it has the potential to grow. this presents an opportunity to facilitate the identification of new export activities and diversify into high value-added products, as well as increase the productivity of existing export industries through knowledge and regional relationships. investors could 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 outsourcing, it, consultancy services (e.g., accounting, legal, financial), medical tourism, architecture, and construction.48 Targeting for Development Impact dfis and other impact investors might as well consider targeting strategies, geared less toward profit maximization, than toward have the greatest development effect. Focus on Loci of Job Creation ishrat husain, former state Bank chairman and current dean of the institute of Business administration in Karachi, conducted a comparative sector analysis, identifying 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 distribution 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 Groups capitalize on opportunities that draw on parts of the population that suffer disproportionately from unemployment, 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 technology.
Government Constraints Most of the top-100 firms listed on the Karachi Stock ExScroll to zoom in/out change are in sectors Click and drag to pan Fig. 13 Pakistan's 'Atlas of Economic Complexity,' 2009 characterized by substantial government protection or involvementsuch as textiles, 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 contributions to economic growth and public tradabilityi.e., firms in the highest-performing sectors tend not to be publicly traded. ProFig. 14 Avg. vs. 10yr Risk-adjusted Growth per Sector tected sectors, despite 20012011! the rents their firms 9.94! receive, have not perFinance & Insurance! 0.6! 7.75! formed exceptionally Social & Community Services! 5.3! 7.31! Small Scale Manufacturing! well. for instance, only 9.0! 6.75! Large Scale Manufacturing! three out of more than 0.8! 6.05! Construction! 200 textile companies 0.4! 5.59! Public Admin. & Defense! 1.4! have made it to the 5.22! Mining & Quarrying! 1.1! Kse 100.47 this mis4.54! Livestock! 1.1! match, combined with 4.49! Wholesale & Retail Trade! 1.1! Pakistans low market 4.47! Fishing! 0.5! capitalization to GdP, 4.25! Electricity & Gas Distribution! 0.1! indicates substantial 3.32! Ownership of Dwellings! 6.2! untapped investment 3.26! Transport, Storage & Comm.! 2.8! opportunity in Paki2.27! Major Crops! 0.3! stans private sector. 0.98! Minor Crops! 0.2!
-4.92! Forestry! -0.4! Avg. Growth! Risk-adjusted Growth!
Risk-adjusted Performance46 Returns only paint half the picturethe canvas investors look at is also colored by risk. it is the risk-return tradeoffs that are most salient from an investment perspective. 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 sustained relatively stable, positive growth rates over the last 10 years. other sectors that recorded strong average annual growth from 2002 to 2011including finance and insurance, large-scale manufacturing, and constructionshowed significant volatility over the same period and, consequently, a less favorable riskadjusted performance. These findings suggest that small-scale manufacturing and some services have 22
Sector Targeting there are a number of viable, persuasive sector-targeting strategies. each is attractive for different reasonsand, given very particular 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 Pakistans core strengths Pakistans core strengthsparticularly its rich demographic profilewill 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 basenamely, those with labor- and knowledge-intensive industries that provide opportunity for Pakistans youth and tap the talent of a growing middle class, and those generating products sought by this same demographic.
23

Invest where there are multiplier effects Look for sectors with strong backward and forward linkages, and high potential to have multiplicative impact in Pakistans broader economy. education or it, for instance, can add human capital or develop new technologies that will have reverberating effects throughout the economy. Invest where there is U.S. added value a U.s. fund, in particular, can leverage american complementary resources than another fund could not. the United states is especially strong in the it and highereducation sectors, for exampleit has the most innovative technology companies and the best universities in 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 construction firm that started as a medium-sized firm (revenue range of $510mm). 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 smes19% with revenues less than $1mm, 38% with revenues of $15mm, and 13% with revenues of $510mm.
Market Segments
Fig. 17 Firm Density, by Revenue (PKR)!

0.6!
in Pakistan, the broad category of smeincluding microenterprisesaccounts for roughly 99% of all business in the country. according to Pakistans 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 vastand 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 middleincome.52 Unlike large firms, who have business relationships with commercial and investment banks and access to international sources of capital, small and medium enterprises often face significant financing constraintswhich is an impediment to growth. if Pakistan is to achieve sustained growthand, especially, if it is to find productive employment for its burgeoning labor forceit 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 SMEs the severely underserved sme banking market in Pakistan is characterized by firms whose financial requirements are too large for microfinance but too small to be
0.5!
0.4!
0.3!
0.2!
0.1!
0.0! <Rs 10mm!
Rs 200mm!
Rs 400mm!
Rs 600mm!
Rs 800mm!
>Rs 1b!
Overall, 70% of AllWorlds top-ranked companies would be classified as SMEs.

the world. creating strong linkages between such institutions and promising Pakistani businesses or entrepreneurs could be invaluableas valuable as financing itself. SMEs by Sector small-scale manufacturing and social, community, and personal servicesall of which have a dominant or significant SME presencehave 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 corporations or those that benefit from substantial government protection. SME Presence Correlates with Growth smes contribute approximately 40% to Pakistans overall GdP and are spread across the economy with varying density.50 according to Pakistans 2005 economic census, smes operate disproportionately in the larger services sectorparticularly 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 allWorlds lists, a few large transport and healthcare firms saw exceptionally high growthbut among the
Fig. 15 Sector Distribution of SMEs!
1.6%! 1.6%! 1.7%! 19.7%!
1,000%!
SME Focus, Sector Agnosticism Research has shown that over-prescribing a funds sector focus produces lower returns in emerging markets.51 Funds need to be adaptable and able to find highgrowth, high-impact opportunities across the economy. there is a clear need to focus on smes (explored further, below), to best address financing needs, capitalize on market opportunities, and contribute to private sector development, rather than reinforce entrenched interests and rent-seeking behaviors. there is little reason to constrain the fund beyond this thoughit should remain sector-agnostic. specifying certain sectors for investment might close out important opportunities for both financial return and development impact.
business owners from where they received their financing. A large majority of all firms financing came from internal sourcesbut 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 Manufacturing & Export SMEs with Access to Formal Credit financing did, Age of Firm (yrs) respectively.53 Likewise, in response to a question about severity of Source: SME Development in Pakistan: Analyzing the Constraints the to Growth, Asian Development Bank, 2005 constraints they faced, large portions of both small and medium enterprises listed access to finance as an obstacle to some degree36% of medium-sized firms, and 56% of small firms.
Headcount 010 1149 5099 100+ Total 05 0% 0% 100% 100% 50% 610 1120 0% 0% 35% 0% 67% 75% 75% 75% 67% 64% 21+ Total 0% 0% 0% 29% 15% 50% 83% 80% 50% 59%
20072010 Revenue Growth Rate!
Recommendation 3 Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with high potential for growth and multiplicative impact in Pakistans economy. Prioritize further information collection, collation, and dissemination to address the deficit of good market data in Pakistan and attract new private investment.
Fig. 18 20072010 Revenue Growth, by Firm Size (# of employees)!

1000%!
800%!
600%!
400%!
200%!
0%! $100!
$1,000!
$10,000!
$100,000! 2007 Revenue (Log. Scale) in 1,000s! Micro! Small! Medium! Large!
$1,000,000!
$10,000,000!
$100,000,000!
Fig. 16 AllWorld Avg. Growth by Avg. Revenue, per Sector!
-200%!
Log. Scale!
Wholesale & Retail Trade, Restaurants, & Hotels! Social & Community Services! Manufacturing! 53.1%! Transport, Storage, & Communication! Agriculture, Forestry, & Fishing! Financing, Insurance, & Business Services!
100%!
effectively served by commercial banks. there is, of course, a financing gap across firms of all sizes in Pakistanbut it is especially deep for this middle segment of the economy. in its 2010 enterprise survey,* the World Bank asked
22.3%!
10%! $0mm!
$10mm!
$20mm!
$30mm!
$40mm!
$50mm!
$60mm!
Bubble Size Indicate # of Firms per Sector!
* it is important to note that the World Banks enterprise surveys do not use random selection and are not representative. While firms of all sizes (micro, small, medium, and large) are represented in
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 constraint for about 2.9% of small firms and 3.3% of medium-sized firms.
comparable numbers, the sample is thus heavily biased toward the larger end of the spectrum in terms of proportional representation.
24
25

Fig. 19 Financing Sources, by Firm Size!
Large (100+)!

Defining SMEs While a continual refrain in our research has been this need to target smes, the notion of what, exactly, constitutes an SME is nebulousby some definitions, as much as 99.5% of Pakistans businesses count as smes. to better define SME in the Pakistani context, and to decompose the termin particular, to distinguish between S and Mwe 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 institutions operating in Pakistan, and, as a result, statistics 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.
Organization State Bank SMEDA SME Bank Fed. Bureau of Statistics
Medium (2099)!
Small (119)!
absolute and market share terms) over time. Revenue is also a metric commonly used by investment professionals to assess a firms value or performance. (Often, in valuations, potential investors use it as part of a multiple, such as EV/EBITDAenterprise value over earnings before interest, tax, depreciation, and amortization.) This metric can prove difficult in a global context, as firms revenues may vary widely from one country to the next, even within one industrybut within a singlecountry context, like Pakistans, this is less problematic. By any metric, it is clear that Pakistans 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 SME54 While smes are often distinguished from larger companies, many group microenterprises with small- and medium-sized businesses. But, in practiceespecially in Pakistanfirms 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.
es that earn, on average, less than $50k in annual revenue, 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 attraction of new investmenta narrower, functional disambiguation is useful. Large Enterprises Large 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 significant personal contacts at high levels of government and in the financial sectorthey are thus better-placed to gain government rents or negotiate favorable financing packages. consequently, they are more likely to be complicit inand benefit fromgovernment corruption. Large firms also tend to have professionalized management (rather than being managed by owners), to be less centralized, and to have stronger delegation authority and departmentalization. they rely less on unskilled or
Micro (05)!
0%! Internal!
10%!
20%!
30%!
40%!
50%!
60%!
70%!
80%!
90%!
100%!
Banks!
Owner/New Equity!
Supplier/Customer Credit!
Non-bank FIs!
Other!
Fig. 20 Severity of Financing Constraint, by Firm Size!

Micro (0-5)!
Small (619)!
Ofcial Denitions of SMEs in Pakistan

Headcount 250 (manufacturing) 50 (trade/services) 25 N/A < 10
Medium (2099)!
Large (100+)!
0%!
10%! Severe!
20%! Major!
30%! Moderate!
40%! Minor!
50%! None!
60%!
70%!
80%! N/A!
90%!
100%!
Doesn't Know!
Assets (PKR) Revenue (PKR) 100mm (manufacturing) 300mm 50mm (trade/services) 25mm 250mm Small: 20mm N/A Medium: 100mm N/A N/A
Source: SMEDA website, http://www.smeda.org.pk/main.php?id=2
Fig. 21 Proportion of Pakistani Businesses by Employment !

>1000! 500999! 200499! 100199! 5099! 2049! 1019! 59! 14! 0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 0.001%! 0.002%! 0.005%! 0.012%! 0.037%! 0.240%! 0.840%! 4.410%! 94.453%! 100%!
each measure returns different results, and each has benefits and drawbacks in practice and for use in policymaking. Headcount headcount is often the easiest metric to measure but can prove problematic, as it does not account for varying 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 differences between more labor-intensive and more capital-intensive sectors. there are further problems when accounting for workers who are not formally employed (e.g., in firms relying heavily on subcontractors or outsourcing, or who use informal hiring practices, which are common in Pakistan). Assets Using total assets is problematic for many of the same reasons that using headcount is. Whereas headcount ignores differing labor requirements across sectors, asset value cannot account for different capital requirements. 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. Revenue annual turnover or revenue better approximates business sizeit is easily quantifiable, assesses a firms contribution to the economy, and captures growth (in
Not only are large firms less finance-constrained, but supporting them potentially enables and encourages the governments intrusion into the market that crowds out more widespread participation and stymies business growth in the first place.
Microenterprises Most SME definitions have no lower bound. Microenterprises, howevertypically consisting of five or fewer employeesare vastly different from small firms in terms of sector participation, management sophistication, formalization, and revenue size. microenterprises tend to be informali.e., unregistered and tax-evasive. they less frequently provide employee 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 uninvestible. Js Private equity, for instance, estimates that close to 99% of such small firms do not maintain adequate business practices (e.g., they keep two sets of books) for being viable investments from its perspective. classifying enterprises with either the state Bank or smedas sme revenue metric results in an sme market segment that incorporates roughly 97% of the economy. But this includes a vast number of such microenterprisuntrained workers, and are generally less dependent on personal relationships between managers and employees, 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 changes 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 division 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, rentseeking behavior, or outright corruption. from an investment perspective, there may be attractive opportunities on the larger end of the spectrum, and often at less riskbut a primary reason one can earn relatively high returns at relatively low risk with such investments 27
Fig. 22 Proportion of Pakistani Businesses by Revenue !

>$5.03mm! $4.19mm$5.03mm! $3.36mm$4.19mm! $2.52mm$3.36mm! $1.68mm$2.52mm! $838.9k$1.68mm! $167.8k$838.9k! $83.9k$167.8k! $33.6k$83.9k! $16.8k$33.6k! $8.4k$16.8k! <$8.4k! 0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 0.007%! 0.001%! 0.003%! 0.004%! 0.011%! 0.040%! 0.325%! 0.572%! 1.908%! 3.876%! 9.179%! 84.074%! 90%!
26

is precisely because of this government cooptation. investing 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 governments intrusion into the market that crowds out more widespread participation and stymies business growth in the first place. best heuristic available.57 A Functional Definition of SEs & MEs We thus suggest a workable revenue-based classification for SMEs in Pakistan: Small enterprise: a business earning between $50k and $1mm in annual pre-tax revenue.
HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE soURces

1 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), 2324. 2 Pakistan: Framework for Economic Growth, Planning commission, Government of Pakistan (may 2011), 11. http://www.pc.gov.pk/hot%20links/ growth_document_english_version.pdf 3 auerswald et al. (2010), 2324. 4 Khalid Zaman, muhammad Khan, mehboob Ahmad,and Waseem Ikram, Inflation, Unemployment, and the naiRU in Pakistan (1975-2009), International 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), 6174. 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.html 11 World Bank, World development indicators (march 2012). http://data.worldbank.org/indicator 12 Ricardo hausmann, dani Rodrik, and andrs Velasco, Growth diagnostics, John f. Kennedy school of Government, harvard University (march 2005). http://www.hks.harvard.edu/fs/drodrik/Research%20papers/barcelonafinalmarch2005.pdf 13 John d. donahue and Richard Zeckhauser, Public-Private collaboration, Oxford Handbook of Public Policy, eds. Robert Goodin, michael moran, and Martin Rein, (UK: Oxford University Press, 2006), 496525. http://www.hks.harvard.edu/fs/ rzeckhau/oxford_paper.pdf 14 Richard Johnson and steve c. eastham, UsAID Enterprise Funds Europe & Eurasia: Funding, Liquidation, & Legacy, Usaid (July 2011). 15 Ibid. 16 carol Lancaster, Kwaku nuamah, matthew Lieber, and todd Johnson, foreign aid and Private sector development, Watson institute for international studies (2006), 64. 17 financing, overseas Private investment corporations (accessed march 2012). http://www. opic.gov/financing 18 investment funds overview, overseas Private investment corporation (accessed march 2012). http://www.opic.gov/investment-funds 19 2010 annual Report, overseas Private investment 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. 87195), sec. 234 (2008), in Legislation on foreign Relations through 2008, U.s. senate committee on foreign Relations & U.s. house of Representatives 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 Business & 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 Business & stability operations, U.s. department of defense (January 2012). http://tfbso.defense.gov/ www/attachments/TFBSO%20Afghanistan%20 fact%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_content/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 corporation, 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/uploads/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 forum (december 2009), viii. http://www3.weforum. org/docs/WEF_IV_PrivateEquity_Report_2010.pdf 37 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/whatis-patient-capital.html 41 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/9c197b80 49bdb99b960cd6a8c6a8312a/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, allWorld 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.pdf 45 Ibid. 46 Pakistan economic survey (2011), 13; state Bank of Pakistan Annual Report 2010-2011: Aggregate supply, state Bank of Pakistan (december 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 Investment, state Bank of Pakistan (2010), 34-35. http://www.sbp.org.pk/departments/stats/PakEconomy_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.smeda.org/downloads/TradeinServices-Pakistan.pdf 49 ishrat husain, education, employment, and economic development in Pakistan, inaugural address, conference on education, Woodrow Wilson center (april 15, 2005), 15. http://ishrathusain.iba.edu. pk/speeches/humanDevelopment/Edu_Emp_Dev_Apr_15.pdf 50 shahab Khawaja, Unleashing the potential of the sme sector with a focus on productivity improvements, small and medium enterprise development authority (may 2006), 1. http:// siteresources.worldbank.org/PAKISTANEXTN/Resources/293051-1147261112833/Session-3-2.pdf 51 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 segmentation, Grant thornton PowerPoint presentation to ifc (2010). http://www.sbp.org.pk/departments/ ihfd/Final%20framework%20and%20work%20 plan%20for%20market%20survey.pdf 54 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), 1012. http://www.brookings. edu/~/media/Files/rc/papers/2008/09_development_gibson/09_development_gibson.pdf 55 Ibid. 56 Ibid. 57 Ibid. Fig. 1 World Bank, World development indicators (march 2012). http://data.worldbank.org/indicator Fig. 2 Ibid. Fig. 3 Ibid. & trading economics, Pakistan Government Bond 10Y (March 2012). http://www.tradingeconomics.com/pakistan/government-bond-yield Fig. 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/gtd Fig. 8 Private Placement transactions from menasa, capital iQ, inc., a division of standard & Poors (2012). http://www.capitaliq.com Fig. 9 Ibid. Fig. 10 Paef annual Reports (19902008), the enterprise funds association (accessed may 2012). http://www.seedact.com/paef-1990-poland/annual-reports-1990-2008 Fig. 11 Pakistan Economic Survey 20102011: Growth and investment, ministry of finance, Government of Pakistan (June 2011), 10. http://www. finance.gov.pk/survey/chapter_11/01-Growth%20 and%20investment.pdf Fig. 12 Pakistan fast Growth 100, allWorld network (2012). http://www.allworldlive.com/asia-500/ winners/2012-pakistan-100 Fig. 13 alexander simoes, the observatory of economic complexity (2012). http://atlas.media.mit. edu/explore/product_space/export/pak/all/show/2010/ Fig. 14 allWorld Fig. 15 trade in services (2007), 144. Fig. 16 allWorld Fig. 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 employment size, status of enterprise, area, and Province, 2005 Pakistan economic census, appendix 17 (2005). http://www.pbs.gov.pk/content/economic-census-2005 Fig. 22 number of establishments by major industry division and sale Revenue Groups, area, and Province, 2005 Pakistan economic census, appendix 15 (2005). http://www.pbs.gov.pk/content/economic-census-2005 Fig 23. Ibid.
Distinguishing Small from Medium Medium-sized enterprise: a business earning beWhile small and medium firms are more similar than diftween $1mm and $10mm in annual pre-tax revenue. ferent when compared to their micro and large counterparts, there are also some important distinctions beThese classifications account for the composition of tween these two groups. although most organizations Pakistans businesses by revenue using 2005 census in Pakistan refer to small and medium separately, data, as well as qualitative feedback received during this distinction is rarely clear, and seldom manifests in our field research. policies targeting Fig. 23 SME Market Segments, Disaggregated! smes. more importantly, we believe these Annual Revenue Range smeda and the classifications strike state Banks smean optimal balance support programs between specificity Less than $10k Microenterprises suggest that any and sensitivity. that constitute nearly 84.07%! distinction beis, a lower bound Between $1020k 85% of the entire tween small and of $50k excludes Investment! market.! Between $2050k medium is rarely the vast majority of Strategy! used as a disposiinformal microenLower Bound: $50k! Between $50100k tive criterion for terprises without rejecting high-poeligibility. in fact, Between $100k1mm 9.12%! Target ! tential businesses almost all sme Market ! with low revenue programs in PakiSegment! Between $12mm 3.88%! stan effectively streams; a middle 1.91%! division of $1mm lump small- and Between $23mm 0.90%! separates the bulk medium-sized en0.04%! Between $34mm of young firms terprises together 0.01%! as a monolithic in need of seed, 0.009%! Greater than $4mm 0.007%! startup, or venture business class. capital, from someYet, while smallwhat larger firms in and medium-sized need of growth eqbusinesses tend uity; and an upper to be functionally bound of $10mm similar, almost alincludes the high Upper Bound: $10mm! ways eligible for end of the range the same benefits, of medium-sized and academic studies seldom distinguish between the businesses, but effectively excludes large corporations. two, they do have different financing needsboth in terms of investment size and purpose. smaller busiRecommendation 4 nesses tend to be younger and less experiencedthey disaggregate the sme space and focus often seek startup capital and know-how for breaking on small and medium firms, separately. into markets. medium-sized businesses, on the other Define these as firms in the $50k$1mm hand, tend to be more established and mature. they and $1mm$10mm revenue ranges, reoften seek larger investments for achieving scale. Revenue is an imperfect metric for segregating businesses of these two types. except through case-bycase evaluation, however, it is difficult to draw any clearer linebut revenue boundaries between micro, small, medium, and large will inevitably be arbitrary. Yet absent more thorough market information, this is the 28
spectively. focus on smes with the strongest exit prospectstarget investments in companies led by promising entrepreneurs that have vision, but lack the financial and institutional support to scale.
small!
medium!
29
operAtionAl AnAlysis
model & strategy
taxonomies of private equity tend to focus on the stage of investmentearly, middle, or late. early-stage investments include angel investing, seed funding, and other support for startups, and then traditional venture capital at a slightly later stage. middle-stage investments can include growth and expansion capital, and bridge financing for companies headed toward public offerings (iPos). Late-stage investments include acquisitions and leveraged buyouts, sometimes of distressed 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 companyranging 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.
separating these components of the larger strategy, therefore, will help ensure each prong is pursued productively. Based on discussions with investors active in the Pakistani 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 ticket sizes of investments to range from $50k$400k for the venture fund and $2mm$7mm for the growth fund.
Recommendation 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.
Fig. 24 Proposed PII Investment Approach!

STRATEGY! TARGET SIZE!
Angel Investment! Micronance!
Venture Capital!
Growth Equity!
Buyout! Large Capital Investment!
SME Financing!
Our analysis, above, finds that sector-specific investment 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 another. Instead, though, we find that there is both particular need and substantial opportunity to focus the fund on SMEsi.e., small and medium-sized firms, distinguished from both microenterprises and larger, more established corporations. it then follows that the stage of investments will be venture capitalfor smaller, younger companiesand growth equityfor the more established, scaling firms. it is important, though, that these two strategies be pursued in parallel, but separatelye.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 different between the venture and growth stages. cleanly 30
as we note, above, the private equity market commonly operates through limited partnerships. oPic-supported funds, for instance, are established by investment professionals and are typically structured as limited partnerships or limited liability companies.2 fund managers raise equity capital from outside investors and make, manage, and exit investments in portfolio companies with attractive return prospects. LPs commit equity capital and may provide counsel to the Board of directors, but are not directly involved in the management 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 management team that uses local knowledge and technical 31
design & implementation

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 states resources through complementary investment from other donors, multilaterals, sovereign funds, private investors, and the fund managers themselves. an independent Board of directors overseeing the fund manager and ensuring proper governance and accountability. number of representatives and be split equally between americans and Pakistanis. important considerations for membership include: 1) relevant investment or private 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 conflict of interest may pose challenges, we believe that local participation on the advisory Board is both essential and, based on our consultations in the country,

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 Worlds 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 individuals who offer a combination of american business acumen 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 equity, 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 important role in the emerging market LP community and have extensive experience engaging with fund managers on esG-related mattersrepresentatives 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 members. Potential Challenges it is important to note that, historically, Usaid support for Pe fundsfor instance, in the equity fund for east african agribusiness3has generally consisted of either 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 indication 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 possibilities and parameters of states becoming an LP. there are, however, alternative Pe fund structures, accounting for differing investor needs (e.g., tax, regulatory, or other legal considerations), which may provide options even if the standard LP model proves difficult. these include master-feeder funds, parallel or co-investment funds, consortia, and special-purpose vehicles (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 provide 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/mainmenu-category/about/advisory-council.aspx), the Global impact investing network investors council (http://www.thegiin.org/cgi-bin/ iowa/council/member/index.html), and the ewing marion Kauffman foundations 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. Leverage flexibility to leverage U.s. capital investment through engagement and strategic partnership with other donors and investors is essential. the fund managers role in contributing its own equity and raising additional investment from other LPs provides the most established and easiest way to multiply the funds 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 additional capital. the combined credibility of state oversight and a strong fund management team can help attract private investors who might not otherwise have been willing to take on such exposure. minimizing ex ante constraints on the funds strategy or the GPs 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 transparency. 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 Pakistans market, and offers the best prospect for substantially increasing job creation.
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 supporting aspiring entrepreneurs and fostering longer-term policy reform.
Advisory Board additionally, an overarching Pii advisory Board, established by state to provide general oversight and guidance to fund managers and board members, would be an important component, given the nature of this public-private collaboration. advisory committees are one of several standard channels used to facilitate communication and manage conflicts of interest between GPs and LPs in the private equity industry. Unlike LP advisory committees, which are common to many private equity funds, however, the Pii advisory Board would be most effectiveand be perceived as most credibleif 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, coinvestors, 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 investments are made and managed responsibly. Provide fund managers with knowledge and resources to support value creation at the portfolio company level. collect and evaluate information on Pii investments and performance. feasible. state should seek out a diverse group of Pakistani private sector leaders with strong networks and expertise, but also a commitment to supporting aspiring entrepreneurs and fostering longer-term policy reform. 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 leaders who have navigated among business, government, 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 Pakistans 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 businesses in fast-growing sectors of Pakistans economy in particular, entrepreneurs who have secured the backing of global venture capital investors. examples include: Monis Rahman, Chairman and CEO of naseeb networks, President of the indus entrepreneurs (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 Pakistans entrepreneurial ecosystem and strong local and international networks. Examples include: Umar Saif, Professor at LUms, founder of the saif center of innova-
Potential sources of leverage include: OPIC The fund could benefit from OPIC involvement in multiple ways. oPic can provide both additional debt financing and loan guarantees to encourage equity investors. oPic can also capitalize on existing relationships in Pakistan to bring in investors. Other DFIs The knowledge, resources, and shared objectives of other, more established dfislike the ifc and cdcincluding extensive experience in Pakistan, would help ensure the funds 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 capitalsuch as foundations, impact investors, sovereign wealth funds, and pension 33
the advisory Board would best include a manageable 32

fundswho likewise seek returns but with a dual development objective, are potential co-investors. examples include the Bill & melinda Gates foundation, the Rockefeller foundation, and the Gatsby charitable foundation.* Usaids 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 backthe 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. according 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 organizations have existing networks for mobilizing diaspora resources, including abraaj capitals Riyada enterprise 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 programe.g., advisory board memberscan help mobilize financing from domestic sources.
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 oversight of investments is potentially the quickest to set up Provides the selected GP the largest potential return 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 establishes 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 generally they aim to diversify a portfolio across a variety of investment managers, investment strategies, and markets. advantages Takes a flexible and decentralized approach Reduces risk through diversification allows specialized sub-fund managers to target different 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
While each approach seems practicable in Pakistan, option 3selecting multiple GPs to manage several smaller, specialized fundshas the greatest potential for engagement and impact, without introducing a Byzantine organizational structure. Potential Partners Research 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 GPnot 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 interested candidates. clearly, an experienced fund management firm with a proven track record of positive investment returns and successful exits would be the best candidate for a GP. the nascent nature of Pakistans private equity industry, however, could pose challenges 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 emerging fund managers and nontraditional players with missions that align with this broader Pii mandatebringing higher risk, but potentially greater rewards. The IFC provides insight on specific criteria that may prove useful for selecting fund managers in an emerging 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 performanceboth in terms of financial returns and overall development impact.7 strong local knowledge and presence is especially im35
drawbacks Has questionable feasibilityfinding an implementing partner that can operate as an fof may be challenging can raise overall administrative costsfees are typically higher because they add part of the fees charged by the underlying funds adds a layer of complexity, and so may make monitoring and oversight more difficult Option 3: Multiple Partners, Multiple Funds Approach: 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 effects from investing with two or more firms incentivizes high performance through competition 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 providing 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 itself and at what level to seek leverage (at the larger Pii level, or alongside each GP)
Implementation Mechanisms Number of Partners in contrast to an enterprise fund, the Pii does not need to be a monolithic institution with a single fund manager. there is scope forand potential value insupporting multiple investment platforms, with distinct implementing partners (i.e., GPs), under a broader Pii umbrella. a key question, then, is whether it is preferable to establish a single investment vehicleone large fund for investing in a wider range of smesor to divide the pool of resources to invest in multiple, smaller, more targeted funds? this choice presents three broad options. each employs the general limited partnership model, and each allows the fund to be levered through outside investmentbut they differ in the degree to which authority is dispersed and in how many partners are involved. Option 1: One Partner, One Fund Approach: USAID selects and then invests with one GP. the GP then establishes, raises, and manages the entire 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
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portant for successful fund performance. a local management 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 presencegenerating, 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 operationsfrom gaining market access and conducting due diligence to acquiring talent and raising capitalwill be highly local. While a fully local operation with qualified Pakistani GPs would be ideal, the options may be limited given Pakistans underdeveloped Pe industry. that said, there are a handful of seasoned Pakistani Pe fund managers such as Js Groupand the industry is beginning to draw new entrants with attractive investment approaches and strong value-addition strategies. cyan Limited and indus Basin holding Limited (iBh), for instance, are both recently established PE firms focused on highgrowth 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 firmsthat 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 firmssuch as Abraaj Capital and RHT Partners, for instancethat can bring local investment experience to the table. another alternative would be to seek foreign fund managers 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 experience in emerging markets that may be less adverse to the perceived risk of investing in Pakistan. Partnerships with these firmssuch as the Washington, D.C.based emP Global (run by former Prime minister moeen
* See the Cyan and IBH websites for more detail on the firms investment strategies, management teams, and partnerships: http://www. cyanlimited.com and http://www.indusbasin.com.

Qureshi) or san francisco-based draper fisher Jurvetson (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 entrepreneurship and supporting the growth of startups in the country. in appendix B, we provide a list of potential Pii investment 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 Pakistan, 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. 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-traditional private sector actors to advance mutual business and development objectives,* while leveraging resources 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 responsibility 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 interests and objectives. Using a Gda to structure Pii funds may require a very lengthy process of identifying and negotiating with partners, and attracting sufficient 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 process State selects one or multiple firms to create and manage 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 partners 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 forand non-profit non-governmental entities. Resource partners are organizations that contribute resourcescash and/or in-kindto a Gda, including technical expertise, goods and services, market access, 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 organizations (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/attachments/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 private equity firms in the past, but further inquiry into the legal requirements may be required to know if the execution of a limited partnership model is feasible. Option 3: Support public international organization state 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 manage 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 Pios 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 advantagespartnering with a reputable Pio would add expertise, credibility, and accountability for financial resources. It would also facilitate significant leverage of U.S. fundsPIOs are well-positioned to catalyze additional donor and private investment, as well as longer-term policy reforms on the ground in Pakistan, in a way that a bilateral institution 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 builtin 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 benefits 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 proceeds from fund liquidation would no longer be viable. moreover, most of the key advantages of granting funding to a PIO can be achieved through either of the first two optionsparticularly a Gda that leverages the expertise 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 Guidance Private equity investing entails more than mere capital transferoften, knowledge transfer is as important a component. smes in Pakistan need capital to grow, but
As one example, USAID signed a five-year contract with The Bancroft Group, L.P. in 1995: http://www.bancroftgroup.com/en/history/ index_history.shtml
Recommendation 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 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.
Selection of Partners there 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 feasible solutions: Option 1: Global Development Alliance State identifies prospective partners and negotiates a Global development alliance (Gda), partnering with anywhere from one firm to a consortium of resource partners. after negotiations, state directly obligates funding 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
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someparticularly those toward the smaller end of the spectrumarguably 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 competitiveness, 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 particular, could provide invaluable guidance to investee firms, fund managers, and USAID staff managing the larger program.
Fig. 28 Constellation of Elements in the Entrepreneurial Ecosystem!

Domain Category
Elements of the Entrepreneurial Ecosystem
Government!
Leadership !
Early Customers!
Policy!
Networks!
Markets!
Finance! Entrepreneurship!
Financial Capital !
Educational Institutions !
Recommendation 7 structure Pii fund partnerships using one or more feasible implementing mechanisms that allow for maximum flexibility, commercial sustainability, and leverage of U.s. Government resourcesprioritize the Gda model but use more traditional contracts and grants as required. seek substantial Pakistani private sector involvement in sourcing and levering investments.
Human ! Capital !
Labor!
Culture! Supports!
Success Stories!
Societal Norms!
NonGovernment Institutions !
Infrastructure! Support Professions !
2011 Daniel Isenberg!
Government Policy Leadership Finance Financial Capital Success Stories Culture Societal Norms NGOs Supports Infrastructure Support Professionals Labor Human Capital Educational Institutions Networks Markets Early Customers
Elements Initiatives (investment, support) Financial support (R&D, jump-start funds) Regulator framework incentives (tax incentives) Research institutes Venture-friendly legislation (bankruptcy, contract enforcement, etc.) 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 Wealth generation for founders 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 Legal, accounting, investment bankers, technical experts Skilled and unskilled Serial entrepreneurs Professional and academic degrees Specic entrepreneurship training University linkages, collaboration Business incubators Entrepreneurs, diaspora, universities, multinationals, investment professionals Expertise in commercializing First reviews Early adopters for proof-of-concept Distribution channels
Source: Daniel Isenberg, Introducing the Entrepreneurship Ecosystem: Four Dening Characteristics, Forbes Online Magazine (May 2011), < http://www.forbes.com/sites/danisenbe rg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-dening-characteristics/>
programsscaling them to maximize the impact of the initiatives corresponding investments. there is substantial value to be gained by complementing growth capital with startup capital and entrepreneurial 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 scalebut entrepreneurs also need to know that growth capital is available, if their companies reach that stage, while venture and growth funds rely on entrepreneurs having successfully navigating the startup phase. these initiatives are thus symbiotic and their prospects of success improve if state pursues them in tandem. By using the Pii to address the full stream of the business cyclestartup to growth capital and supportstate will better address deficiencies in the Pakistani market and achieve greater impact. the overwhelming demand for entrepreneurship training and services that we observed during our fieldwork in Pakistan is reinforced by a national development strategythe Framework for Economic Growththat calls explicitly for entrepreneurship support and inter-university alliances to foster research and the commercialization 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 quantitative analysis of countries growth patterns, finds that those that followed an entrepreneur-led growth strategy sustained their growth and that, in the short term, support for entrepreneurship efforts could be expanded even without national governance reform.11
complements & alternatives
there 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 approach, as well as complementary elements that could enhance its impact. the initiatives, below, do not constitute an exhaustive list of either parallel or substitute policy optionsbut we identify these as some of the most promising and feasible, and those with the greatest potential for impact. Entrepreneurial Ecosystem Support the call for directly supporting entrepreneurship in Pakistan is resounding. During our fieldwork, promoting entrepreneurship was one of the most-cited and mostimpassioned recommendations we heard for strengthening U.s. private sector assistance to Pakistan. Proponents of this type of support also made some of the most compelling arguments for its inclusion. state has already made an effort to support Pakistans young entrepreneurs. in march 2012, for instance, the U.s. embassy and the islamabad chamber of commerce 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 Pakistans 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.
Perhaps the best argument for supporting entrepreneurs, however, lies in the expected return on investment. the probability that any major commercial success will emerge from a U.s.-backed incubator is of course smallbut 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 returnsnot just financially, but in both development impact and public goodwillwould be immense. Defining the Entrepreneurial Ecosystem an 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 domainsconducive culture, enabling policies and leadership, availability of appropriate finance, high quality human capital, venture-friendly markets for products, and a range of institutional and infrastructural supportsthat interact in complex ways. alone, each dimension is conducive to entrepreneurship, but insufficient to sustain it.12 in Pakistan there exists a small but promising network of organizations and initiatives in place to support entrepreneurship.* But there is a need to further develop and
* When we refer to the entrepreneurial ecosystem and Pakistans network of entrepreneurial organizations, we are referring to organizations and programs that promote the growth of professional entrepreneurial companies, such as software development firms. Previous U.s.-sponsored interventions, such as Usaids Pakistan entrepreneurs program, have aimed to lift low-income, vulnerable populations out of poverty by fostering micro-enterprise development. While such programs are vital to Pakistans long-term stability, we focus our entrepreneurial assessment and recommendations on activities that possess the most potential to strengthen Pakistans private sector and attract investment. micro-enterprise development is an appropriate intervention for poverty reduction, but not for attracting professional
integrate Pakistans existing entrepreneurial infrastructure, 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 placebut a state-sponsored initiative 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 Pakistans entrepreneurs. 2) University programs there is a shortage of highquality entrepreneurial education programs within Pakistans university system. in 2006, Usaid launched an initiative with the institute of Business administration to establish a center for entrepreneurial development, but later diverted financing to support flood relief operations.13 While such programs 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 entrepreneurs we met, there was a common call to establish business incubators in Pakistans universities. ininvestment and fostering entrepreneurial companies that may grow to be large firms. Business incubators are programs designed to support the successful development ofentrepreneurial companies through an array of business support resources and services. More specifically, business incubators can enable technology transfer and innovation, assist disadvantaged communities or individuals with projects, promote
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cubators can be housed within existing university building space; universities can use them as platforms to integrate entrepreneurs across the country. Given greater resources availability, building 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 university in Pakistan. While some universities may resource their incubators with hightech equipment and a full staffsuch as nUstother universities would likely benefit from a simple physical space from which to work and the part-time assistance of a professor.
Fig. 29 Business Incubator Model!
Community Linkages! Business Development Strategy ! Technical Assistance! Funding Streams!

tual property resulting from university research.* there are, however, substantial differences in the research strengths of Pakistans universities. for this reason, the focus and structure of each incubator will likely differ to some degree. nevertheless, it is vital to establish a clear set of objectives for each incubator, as well as for the larger network of incubators. clear goals and a framework will guide critical decision points that arise during the planning process. Decision Points
Fig. 30 Incubator Program Decision Points!
Rural! Location! Urban! Incubator! Level of Technology! Hi-Tech Low Tech! Cluster Non-Cluster!
BUSINESS INCUBATOR !
ENTREPRENUER! ENTERPRISE! EMPLOYMENT !
GROWTH!
Focus Area !
IT, Agro, Manufacturing, Services, Generalist!
Knowledge Attainment and Sharing! Cross-University Linkages! Management Training!
Initial State Funding!
Focus Area: Business incubators can be designed to promote specific industries or take a more generalist approach. Generally, incubators are aligned with the capabilities and resources of the host university, although a more generalfocused incubator is appropriate for most institutions. Level of Technology and Support: available resources and sector focus, if any, will drive the technology requirements and the type of business support services of the incubator. Location: Location will dictate whether or not the incubator can leverage existing business clusters, influence which constituencies will have access, and shape the program managers 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 cluster. if jumpstarting a new cluster, a cluster strategygeographical, sector-based, horizontal, or verticalshould be selected.14
it is also important that the Pii takes a broad view in terms of university programming, and seeks relationships beyond just the most elite institutions (like LUms and iBa), and beyond the biggest cities (Karachi 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 Pakistans entrepreneurs. almost every entrepreneur we met cited the importance of mentorship. strengthening existing entrepreneurial networks, leveraging U.s. private-sector expertise, and connecting entrepreneurs with business leaders in Pakistan are all important, tangible interventions state could undertake to address this need. 4) Linkages current entrepreneurial initiatives in Pakistan are disjointed and exclusive. improving linkages should be a component of any entrepreneurial support program in Pakistan. state should emphasize establishing linkages among universities, domestically and abroad, and connecting entrepreneurs 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 commercialize research and know-how. * Presently, there are a few incubators housed in Pakistanthe national 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 2008but the quality and productive output of these programs are unknown at the time of this report. our recommendation focuses on expanding and improving Pakistans incubator network by strengthening existing incubators and establishing new incubators in Pakistans 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 constituencies, such as the U.s.-Pakistan Business council, in the United states, and the american Business council, in Pakistan, to advocate for a more progrowth regulatory environment. Going Forward the guidelines, below, constitute a set of concrete steps the Pii could take to help strengthen Pakistans entrepreneurial ecosystem. this list is informed by our field research, but it is not comprehensive, so we suggest further research to flesh out and refine these prescriptions: Evaluate existing entrepreneurial programs and networks in Pakistan there is a budding network of entrepreneurial 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 identify 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 Pakistans entrepreneurial sector. it can be used as a starting point for this assessment. Develop clear objectives and a framework for the incubator program there are many incubator types and structures. Generally, universities develop incubators to commercialize the science, technology, and intellecopportunities and linkages to financing sources, as well as, other universities and the private sector within the university-based business incubator model.
evaluation results and the objectives and framework of the program. moreover, universities selected for the program should demonstrate a long-term commitment to strengtheningor starting and strengtheningtheir business incubators, as well as the will and capacity to allocate physical space, professional support, and financing, if possible. The programs overarching objective should be to improve and integrate the incubators. as a guideline, successful business incubators typically include: clear, well-communicated goals; an incubator manager responsible for tenant selection, day-to-day operations, the setup and coordination of business development services and outreach, 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 computers, 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 criteria to ensure the incubator support the people and business ideas that fit its mission.15
Select, improve, and integrate University and affiliate 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 governments 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 objectivesbusiness creation, technology transfer/innovation, job creation, and commercialization of university know-howare generally shared. The Framework for Economic Growth identifies several preexisting pseudo-clustersthe it cluster in Karachi, automotive manufacturing in Port Qasim, textile and leather in faisalabad, sports and surgical equipment in sialkot, furniture in Gujranwala, light engineering in Gujrat, heavy industries in Wah, and light weapons manufacturing in Landikotalbut stresses the need to develop stronger clusters more proactively. See: http://www.pc.gov.pk/hot%20links/growth_document_english_version.pdf. highlights of the development cluster strategies listed above include: 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 resources, such as best practices; and 4) vertical: entire supply-chains work together to make the systemfrom production to salemore competitive.
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 stepsfrom the startto judiciously select partners, engage key stakeholders throughout the design phase, and to build on promising entrepreneurial programs already in place will best ensure success. 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 participating universities. More specifically, recommendations for integration will depend on other factors, such as the focus and location of each incubator.
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develop and launch successful businesses is shortsighted. 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 entrepreneurial pursuits possible. While there is noticeable interest and support for the incubator program, predicting how people will respond to the program is difficult. To mitigate 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 contract 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 resultsi.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 opportunitythe business incubatoris 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 highperforming initiatives. siBs are not bonds in the conventional sensewhile 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 regard, 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 Kingdomfor instance, to fund programs to reduce recidivism among released prisoners. new initiatives, such as instiglio, seek to extend the model to developing countries. siB programs have been successful in targeted social reform programs and could provide a unique opportunity to leverage private sector strengths to promote reform initiatives in Pakistan. siBs are a particularly appealing way of attracting diaspora fundingi.e., patriotic capitalas expatriates can invest directly in programs at home with the promise of impact, but also hope to earn a financial return.
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 lenders 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 Guarantee 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 commercial banks.17 although the programs are ongoing, they have already increased commercial lending to Pakistans smes, and could offer state an alternative approach for financing SMEs. if circumstances dictate, state should explore the possibility of implementing a partial credit guarantee program as an alternative to the Pii. Usaids development 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 Energy a 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 producers 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 improvements: Under tariff reduction schedules, tariffs decline on predetermined dates over the lifespan of the contract 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 firstcome-first-served basis, thus incentivizing companies 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 Pakistans 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.
More on this model is available at: http://www.socialfinance.org.uk/ work/sibs See: http://www.instiglio.org/.
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soURces
1 taxonomy of Private equity, illinois Private equity association (accessed march 2012), 1. http://www.illinoisvc.org/filebin/PDFs/IV_Private%20equity%20taxonomy.pdf 2 how funds Work, overseas Private investment corporation (accessed may 2012). http:// www.opic.gov/investment-funds/how-fundswork 3 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 developing countries, harvard Business school, 2008. 5 dilip Ratha, sanket mohapatra, and ani silwal, Migration Remittances Factbook 2011, Wordl Bank migration and Remittances Unit (2011). http://siteresources. worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/Top10.pdf 6 david Wilton (ifc), characteristics of successful GPs in emerging markets, emerging markets Private equity association (accessed may 2012) http://www.ifc.org/ifcext/cfn.nsf/AttachmentsByTitle/Characteristics_of_Successful_GPs_in_EM_by_D_Wilton/$FILE/Characteri stics+of+Successful+GPs+in+EM_D+Wilton_ IFC_EMPEA+editorial.pdf. 7 Ibid. 8 heino meerkatt (BcG) and heinrich Liechtenstein (IESE), New Markets, New Rules: Will emerging markets Reshape Private equity? (november 2010), 10. 9 munter, clinton commend Pakistani entrepreneurial spirit, Pakistan Today (march 28, 2012) http://www.pakistantoday.com.pk/2012/03/28/ news/profit/munter-clinton-commend-pakistanientrepreneurial-spirit/ 10 Government of Pakistan, Planning commission, Pakistan: Framework for Economic Growth (may 2011), 55. 11 Robert Looney, entrepreneurship and the Process of Development: A Framework for Applied expeditionary economics in Pakistan, Kauffman foundation Research series (february 2012). http://www.kauffman.org/uploadedfiles/pakistan_ee_framework.pdf 12 daniel isenberg, introducing the entrepreneurship Ecosystem: Four Defining Characteristics, Forbes Online Magazine (may 2011). http:// www.forbes.com/sites/danisenberg/2011/05/25/ introducing-the-entrepreneurship-ecosystemfour-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-earliercommitment-to-provide-iba-with-5-million/ 14 m.n. shivram, Promoting Business and technology incubation for improved competitiveness 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 Pacific (May 25, 2004). http://www.unescap.org/ tid/publication/indpub2323_part2ivc.pdf 149 15 teresa Gillotti and Ryan Ziegelbaue, seven components of a successful Business incubator, Lets Talk Business (July 2006). http:// www.uwex.edu/ces/cced/downtowns/ltb/lets/ LtB0706.pdf 16 A New Tool for Scaling Impact: How Social impact Bonds can mobilize Private capital to advance social Good, social finance (february 2012). http://www.socialfinance.org.uk/sites/ default/files/small.socialfinancewpsinglefinal.pdf 17 credit Guarantee schemes of sBP imple-

mentation thereof, state Bank of Pakistan, annual Performance Review of SBP BSC - FY11 (december 2011). http://www.sbp.org.pk/sbp_ bsc/apr/Perf-10-11/Ch-07.pdf 18 haris anwar, Pakistan offers Renewableenergy incentives to tackle shortages, Bloomberg Online (august 25, 2011). http://www. bloomberg.com/news/2011-08-25/pakistanoffers-renewable-energy-incentives-to-tackleshortages.html 19 nancy Birdsall, Wren elhai, and molly Kinder, Beyond Bullets and Bombs: Fixing the U.S. Approach 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.pdf 20 tara Beteille and Kalpana Kochhar, Pakistans 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/endpovertyinsouthasia/pakistan%E2%80%99s-most-favored-nationstatus-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
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 chinas preeminence in the renewable energy industry heightens the appeal of using a fit to develop affordable energy alternatives in Pakistan. Trade Assistance trade assistance includes any initiative or program that facilitates access to markets. extending Pakistans trade freedom by reducing trade barriers would facilitate an expansion of exports and imports and, as a result, increase domestic efficiency and generate new business opportunities for export-based businesses. this recommendation is not new and has been put forth a number of times, including in a study submitted to congress from the center for Global development (CGD): As part of an overall plan to spur private investment and job creation in Pakistan, we urge congress and the administration to work together to extend dutyfree, 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 cGds call to continue removing bar* More on this model is available at: http://www.nrel.gov/docs/fy09osti/45549.pdf
riers to trade in Pakistan, but recognize the limitations of such broad recommendations. although comprehensive trade reform is a complicated, politically difficult issue, efforts should be madewhere possibleto complement private sector development initiatives with targeted trade assistance. additionally, Pakistans decision to grant india mostfavored 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.
Recommendation 8 incorporate an explicit component to develop Pakistans 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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risk & impAct AnAlysis

This program faces two principal types of risk: financial and politicalthough, of course, these are interrelated. it is important to acknowledge these risksto the extent they can be mitigated, they should be. But some risk systematic riskis unavoidable, and this sets limitations on the Pii. Financial Risks the most pressing risk for the Piilike with any investment vehicleis that it will not earn a return. historically, Pakistan has been both economically and politically volatileboth chief reasons why investors have been waryand a crisis of either kind could spawn a crisis of the other. there are also severe market distortions (e.g., monopolies, corruption, bureaucratic inefficiency), which could stymie the prospects of even promising 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 catalyze further investment. the success of this strategy depends on the success of Pii funds themselvesif the program does not work well as an investment vehicle, no other positive externalities will follow.
Fig. 34 Densities of Annual Returns on Equity Indices! 19612011!
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Fig. 36 Estimated Likelihood of 75% Success RateGiven Three Trials at Actual Probabilities of .65, .75, & .85over 50 Investments!
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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 pointbut it is important to consider. one way to think about this risk is with Bayesian analysis.* each new investment in the Pakistani market provides outside observersinvestors in waitinga chance to update their priors (i.e., their previous assessments 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. indeed, Kse stocks on average typically earns higher returns than do american stocksbut they are also much more volatile, and thus riskier. to account for higher risk, investors seem to seek returns roughly twice what they would see in the United states. anecdotally, foreign investors seek minimum iRRs of 3035%. this is 2025% above returns earned on average in the U.s. market. so, to proxy this high hurdle rate, assume they estimate a one-third probability 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-inthree chance that Pakistani businesses really earn high enough returns to justify their increased risk, and a twoin-three chance their returns are more modest and thus not worth this risk. (in actuality, there is also downside risk to equity investmentsi.e., that investors will lose money. But to simplify, we assume they are merely judging the probabilities of success versus failure.)
2!
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velopment impacts. if the fund does not perform well, this will be much more visible than poor performance in a traditional development project. it will thus be more subject to criticism in the case of failure, or even performance below expectations
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!
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Making investments in specific businesses risks the appearance of favoritism. if investment decisions are not transparent or well-justified, critics could indict state for picking winners and losers in the Pakistani market. though no discussion during our research suggested this was a major concern, it is important to note that, by working directly with Pakistans private sector, state is explicitly not working with the government. 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 american aid.
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50 trials than they were before. their experience is also highly sensitive to changes in the actual success probabilityif this moves to 85%, for instance, an investors 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 illuminate a core problem for the Pii and the Pakistani market as a whole: There is little good evidence on investment performance in Pakistan because there has been so little activity to date. moreover, the fund is limited in what it can accomplishit 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 capabilities 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 diversify its portfolio, and to maximize the number of positions it takes (without reducing the quality of those investments), the greater the demonstration effect is likely to be, and the less randomness will play a pivotal role. Political Risks Pakistan, of course, also presents a difficult political climate. as with any U.s. program in Pakistan, even the slightest mishap is in danger of ballooning into a crisis. Recent eventsthe Raymond davis incident, the Bin Laden raid, the border post confrontationhave 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 appetite for a U.s. initiative that invests directly in Pakistans private sector, and significant enthusiasm for trying something new and innovative when it comes to economic development, this approach also poses certain political risks: financial returns are easier to measure than de-
more than this, though, the Piis success also depends on investors forming close relationships with investees. trust in Pakistans business world is already very weakconspiracy theories associated with U.s. involvement could doom the Piis 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 Impact the uncertainties inherent even with high probabilities of success, as well as the challenges of the current political context, reinforce the importance of taking every step to maximize the Piis likelihood of success. Ultimately, the Piis performance as a business, development, or diplomatic venture hinges, above all, on its functioning well as an investment vehicle. Research shows that there is a positive relationship between fund performance and development impact in emerging market private equitystate will best catalyze follow-on effects and foster improved engagement with actors in the Pakistani economy by adopting a wellmanaged, commercially viable investment approach that supports business growth and delivers strong returns.* this starts with hiring the best fund managers availableby looking widely and especially locally for topquality private sector partners, and by paying them market rates. additionally, it includes giving managers the broad flexibility to exercise their judgment and
* the experience of the ifc, for instance, shows that investment 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.
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Fig. 35 Annual Volatility vs. Returns for KSE100 & S&P500! 19612011!
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We use Bayesian updating to model the continually updated probability of an investor, over 50 investments, given actual success rates of 65%, 75%, and 85%, using a random variable. If iterated infinitely, the investors updated probability would converge to the true probability. 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 inference to update a prior probability, given new informationones new probability estimate (a) is conditioned on the experience (B).
P(B | A)P(A) P(A | B) = . P(B)
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expertise and not placing undue constraints on their decision-making authorities, while providing clear objectives 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 programs prospects for impact are the following: Incentive Compensation incentive compensation is essential to attract and retain talented fund managers and motivate performance. many impact investment funds have endorsed impactbased incentive structures that link at least a portion of GP compensation to social and environmental performancerather 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 constraints 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 economybut 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 structuresbased on the standard 2&20 compensation modelare proven tools for incentivizing fund manager performance and should be incorporated into the Pii design for optimal impact. Investment Policy & Oversight Mechanism it is important that Pii fund managers have principal discretion over investment decisions. state, however, can play an important role in overseeing and, where necessary, 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 Policydeveloped by state and adopted by fund managers upfrontcan serve as a tool for encouraging sound investments 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 guidelines 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 48 in emerging markets is its focus on helping underlying portfolio companies to grow, both by providing capital and by improving business practicesthe role of fund managers in helping to raise esG standards is an integral part of this process. there is a growing recognition in the Pe industry that integrating esG standardsinto both investment decision-making and management activitieshelps to better align the interests of LPs, GPs, and portfolio companies, and ultimately generates both superior returns for investors and more sustainable local markets.*2 cdc, for instance, makes a strong business case for fund managers to factor in analysis of ESG risks and opportunities, alongside financial performance considerations, when valuing and managing investments. in particular, sound esG management has been found to improve portfolio company financial performancethrough cost savings, risk reduction, productivity improvements, brand enhancement, and greater market and capital access, for instanceand to add significant value to investments over time.3 oPic, the ifc, and cdc offer useful models for structuring an appropriate investment policy, which specifies necessary requirements and exclusions and defines the boundsin broad termsof permissible investment practices, without placing overly burdensome constraints on fund managers. the Un Principles for Responsible investment (UnPRi) also provide an essential underlying framework for addressing esG integration. 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 techniques. the millennium challenge corporation (mcc), for instance, uses economic rate of return (eRR) estimates and sensitivity analysis during the pre-investment stage to forecast the sustainability and likely economic 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, CDCs Investment code, and the ifcs 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 mccs 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 institutions 20112015 business plan, is also establishing 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 development and financial effectiveness of the PII. Information Collection & Learning Pii funds will require access to useful market information and performance data to adapt to an evolving investment environment. state should incorporate information 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 enterprise assistance fund (seaf), dfis such as the ifc and cdc, and the emerging markets Private equity associations (emPea) Library of development indicators for Private equity funds are useful resources for identifying and measuring the broader performance of fund investments. seaf uses the eRRwhich quantifies the overall development impact of an investment by combining the financial rate of return with net social returnsas well as a measure of the multiplier effect of each investment. similarly, the ifc and cdc evaluate the overall development outcome of each fund investment by merging indicators that measure progress
posed investment (e.g., financial expenses) and the potential benefits of those costs (e.g., expected increases in household income or value added of firms). To calculate ERR, MCC compares the expected 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 investment 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 assess an investments overall development impact, see an economic framework for assessing development impact (Benjamin esty, carrie ferman, frank Lysy, harvard Business school, 2002).
along four key parameters, including: financial performance, economic performance, environmental and social performance, and broader private sector development effects. Transparency & Branding transparency is critical to insulate the U.s. against political 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 investments and performance, and the development of systems to disseminate this information to external audiences 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 undermine the intended diplomatic objectives. the Pii will face systematic risk that cannot be controlled forit 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 investments prospects for success. high-quality fund management, effective oversight, information collection and evaluation, and transparency, in particular, are essential features for driving fund performance. Ultimately, unless a fund can exit its investments, it cannot earn a return. state can best improve the possibility of profitable exits and broader economic impact by allowing investments the time to see success and by drawing in new investorseither as equity partners, or merely as conscious observers of the Pakistani market, with an eye toward future investment.
soURces
1 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 effective 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.com Fig. 35 Ibid. see cdc evaluation methodology for a complete description of the framework and indicators.
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recommendAtions
In order to best serve the financial needs of Pakistans private sector, as well as capitalize on opportunities for investment 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 4
Disaggregate 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 prospectstarget investments in companies led by promising entrepreneurs who have vision but lack the financial and institutional support to scale.
Recommendation 5
Recommendation 1
Establish a vehicle to address Pakistans immediate financing needs, but acknowledge its limitationsultimately, 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.
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.
Recommendation 6
Recommendation 2
invest 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 partnershipboth are important for Pii success and attracting new investment.
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 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 3
Recommendation 7
Remain sector-agnostic absent any more specific objectives, but seek diversification across sectors with high potential for growth and multiplicative impact in Pakistans economy. Prioritize further information collection, collation, and dissemination to address the deficit of good market data in Pakistan and attract new private investment.
structure Pii fund partnerships using one or more feasible implementing mechanisms that allow for maximum flexibility, commercial sustainability, and leverage of U.S. Government resourcesprioritize the GDA model but use more traditional contracts and grants as required. seek substantial Pakistani private sector involvement in sourcing and levering investments.
Recommendation 8
incorporate an explicit component to develop Pakistans 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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We also offer a set of complementary considerations and more specific action steps. We highlight these points 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 investmentfrom startup to growth capital. specify key Pii features and terms in alignment with private equity standards. structure an investment policy and oversight mechanism. create a framework for measuring impact. Define U.S. added value. formulate transparency and branding guidelines. determine how to leverage the Pii to support longer-term policy reform.
Key considerations
Performance incentives determine a feasible compensation model, management fee structure, and general partner commitment leveladopt the standard 2&20 carried interest model and require fund managers to make significant equity contributions to Pii funds to best align GP-LP interests. Policy for handling investment proceeds determine, for instance, whether financial returns will be reinvested in Pakistans economy or go back to the U.s. Government.
Two Potential Models for the PII
Create a framework for evaluating results incorporate rigorous performance monitoring and evaluation into the funds design. Define a set of core performance indicators to identify and measure the financial and development effects of the fund. consider using measures of economic rate of return, as used by the ifc, millennium challenge corporation, and acumen fund, to gain a broader perspective on the impact of investments.
Address the full stream structure the Pii to implement all three proposed componentsentrepreneurial ecosystem support, venture capital, and growth equitysimultaneously, as part of an overarching and flexible strategy to promote entrepreneurship and business growth. ensure the three elements are interlinked, rather than compartmentalized in vertical silos, to best address deficiencies in the Pakistani 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 structuresof several optionsare shown, at right. consider leveraging the partnership with seaf for entrepreneurship support and startup investments, given the organizations track record investing in early-stage businesses and managing business accelerator programs through its center for entrepreneurship and executive development (ceed). Partner with two or more additional private investment firms to establish the growth equity and venture capital components.
Define and measure U.S. added value Leverage americas greatest resourcesits business and academic communitiesto multiply the Piis impact. in addition to serving as a source of capital, acting as a catalyst for third-party investment, and supporting 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 American knowledge, networks, and market access connections in support of Pakistani entrepreneursfor example, by creating linkages between U.s. and Pakistani businesses, assisting local firms in registering and filing patents, establishing university-touniversity 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, innovation, and new private investment triggered as a result of this assistance.
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 design 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 successe.g., breaking even or some combination of returns and development impact. additionally, decide on trigger points that warrant a suspension or termination of the U.s. resource commitment.
Structure an oversight mechanism develop an oversight mechanism to ensure fund managers operate in alignment with U.s. requirements and esG standards, as well as to collect information and provide guidance. Use partnership agreements to clearly define the U.S. roleincluding questions regarding the authorities of state to veto transactions, suspend funding, and change fund terms in the face of violations or poor results. otherwise, safeguard the discretion 53
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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 provide parameters for responsible fund investments and define exclusions, drawing from the UNPRI and dfi best practices. form a Pii advisory Board with split Pakistani-american membershipand explicitly define member rights and responsibilities in Pii partnership agreements. 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 guidelines ensure that information on Pii funds is as visible as possible, to demonstrate the broader value of private equity to Pakistans economy and attract new commercial investment. Require fund managers to disclose detailed informationfinancial, operational, portfolio, risk management, etc.regarding fund investments, while observing commercial confidentiality requirements. determine reporting requirements for fund managers and create mechanisms for collecting and disseminating information on Pii fund investmentsincluding a consolidated, state-of-the-art database that is publicly accessible. Prioritize transparency but avoid the temptation to oversell americas contribution and the value of the Pii prematurelythe initiative inherently entails a long-term investment horizon and recent experience highlights the dangers of raising false expectations 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 commissions Framework for Economic Growth is a forward-thinking documentbut it faces an uphill battle. Use the Pii as a platform to engage with public- and private-sector actors in the ongoing dialogue about how to improve Pakistans business environment and relax the underlying constraints on growth. incorporate in the Piis design a function to collect and disseminate information on Pakistans investment opportunities and problematic aspects of the business environment that stifle entrepreneurship or limit existing firms productivity. Leverage this information and the Piis network of partners to inform the Pakistani government about obstacles and propose policy solutions to incentivize new investment and business activity. 55
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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 Pakistans private sector and ensure the responsible stewardship of U.S. dollars. We understand that results matter, and we believe that our analytical approach and recommendations reflect that understanding, but to discount the human element of our research would 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 relationshipin particular, by forming new bonds with Pakistans dynamic private sector leaders and entrepreneurs.
Private Investment Initiative
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Pakistan
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vestment. Pakistan suffers from longstanding shortcomings in its physical and educational infrastructure; the World economic forums Global competitiveness Index (WEF/GCI) mentions inadequate supply of infrastructure as the fourth-most problematic factor for doing business. electricity shortages, in particular, impose a huge burden on the economy.* measured by other indicators, however, Pakistans infrastructure is comparable to its neighbors in south asia. as well, recent policies focused on the development of large public sector infrastructure projects have not successfully 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 inadequately educated workforce is among the top concerns when it comes to doing business in Pakistan. But returns even for those who receive a good education are not highhighly 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 incapacitating nor fundamental. they are instead symptoms of the same, underlying problems that constrain growth more generally. Government Failures vs. Market Failures Government policies are a major impediment to fostering risk-taking and innovation in Pakistan, which is critical 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 competitiveness.4 Four of the five-most problematic factors for doing business in Pakistan are related to government failures. similarly, the World Banks Worldwide
* Pakistan has one of the worlds 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).
Appendix A: ABridged growth diAgnostic

Low Demand for vs. Low Supply of Financing* The cost of finance does not appear to be the binding 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 firms ability to reliably capture the future profits of investments made today. A countrys savings is a good indicator of access to financelower savings indicates a greater need for other sources of financing. Pakistans gross national savings rate was 22.3% of GdP in 2010 and has consistently been below those of regional peers in south asia. Pakistans savings rate ranks 107th of 142 globally.1 Real lending interest rates, however, have also remained loweven dropping below zero in the last 10 years. since 2000, Pakistan has had by far the lowest average real interest rate in south asia. Pakistans low real interest rate would suggest that there is high bank liquidity and that lenders chase borrowers, 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 declining in recent years. despite the availability and affordability of capital, there is weak demand for Pakistans limited savings, suggesting that there must be other factors constraining investment. for instance, investment has been relatively 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 increased, the investment rate remained relatively stable. since 2008, as the savings rate increased further, the investment rate experienced a decline. so the investment rate appears to be insensitive to movements in the savings rate. as well, while fdi has been declining in recent years,2 Pakistans 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 Ped130, Why are so many countries Poor, Volatile, and Unequal? with Prof. Ricardo hausmann, harvard Kennedy school. (Ped-130 final Assignment: Growth DiagnosticPakistan, 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. Pakistans 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 economies (Planning commission, Framework for Economic Growth).
ing current account indicate little pressure to mobilize foreign savings. Pakistans foreign debt is high compared to neighbors in south asia and has been climbing since 2006but the current debt is still a remarkable improvement from the 1990s and early 2000s.** While the current account deteriorated from 2003 to2008, the balance has been improving over the last two years and registered a deficit of only 0.85% in 2010. moreover, if Pakistans economy were constrained by low aggregate savings, then an increase in foreign savings would result in increased investment and growth. But in Pakistans case, rising foreign assistance and remittance rates have not translated into productive investments or sustained growth. increases in foreign aid and remittances in 2008 and 2009 corresponded with a decline in the investment rate. despite these recordhigh remittances and increasing total reserves, Pakistan is actually experiencing astonishing capital flight. Access to finance is consistently mentioned as a top concern for doing business in PakistanPakistan is one of the worlds least banked nations. as noted above, the financial sector has been prospering on a high spread between lending and deposit rates,*** indicating a profitable Pakistani banking industry. Commercial banks are highly liquid and capable of increasing financial 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 diversify 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 financial sector point to deeper governance-related problems that hamper competition and innovation. Low Social Returns vs. Low Appropriability Returns to physical and human capital are low in Pakistan, but these also do not seem to be constraining inExternal 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 formation, growth has never been sustained. Access to finance is ranked the sixth-most problematic factor for doing business in Pakistan (World economic forum, Global competitiveness index). Only 415% of Pakistans total population has access to basic financial services (auerswald et al.). *** the interest rate spread was 7.58% in march 2011 (ministry of finance, 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).
**
Governance Indicators (WB/WGI) show Pakistan performing poorly across all six governance dimensions. In the WEF/GCI, Pakistan has one of the worst rankings worldwide for its macroeconomic environment (138/142). Uncertainty due to Pakistans macroeconomic risks has likely increased investor concerns about the possibility of policy shifts that could lead to unpredictable movements in private returns. Pakistans poor country credit rating may also have weakened investment as a result of expected losses associated with a debt crisis. similarly, the governments negative budget balance can increase fears of future inflation and taxation to service the debt, further discouraging investment. Pakistan, however, has enjoyed sustained real exchange rate stability since 2008.5 moreover, past improvements 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 macroeconomic stability represent the main constraint on investment and growth. A number of sector- and firm-specific risks resulting from a weak institutional environment also weaken the appropriability of returns, howeverand the governments role in the economy poses a number of microeconomic 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 actively intervenes in every sector of the economy and represents more than 50% of national income, presenting significant barriers to private sector entry and expansion.6 While privatizations in the early-2000s decreased public participation in sectors like telecommunications, banking, and finance, the government has since expanded its role in other industries, like agriculture, construction, and transport. Pakistans 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 Banks Doing Business report (WB/DB) supports the view that Pakistans regulatory environment is not conducive to innovation, entrepreneurship, or investment.* tax rates and tax regulations rank among the most problematic factors for doing business in Pakistan. the tax environment is one of the most burdensome on domestic firmsmedium-sized firms spend twice the time preparing, filing, and paying taxes compared 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, Pakistan has one of the worlds 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 regulating entry, the government encourages ubiquitous rent-seeking in the private sectormany 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 enterprises generate annual losses of 1.5% of GdP. Untargeted 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 propertythereby weakening claims to private returns. Beyond the increasing cost of business due to terrorism and violence, Pakistans weak institutional environmentparticularly in the judicial systemplaces a host of informal taxes on investors. According to the WB/DB and WEF/GCI, Pakistan 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 years rank. Business surveys identify corruption as a top concern for doing business in Pakistan. e.g., transparency internationals corruption

Ultimately, if government failures that disincentivize investment are the most binding constraint on Pakistans private sector, then an investment fundwhich increases the supply of financingis not the ideal solution to this problem. that said, there is more than one constraint on the Pakistani economyand, in the short term, Pakistans circular debt, interest rate spread, devalued 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 reasonably addressand the financing gap is the one it is best-placed to fill. Alsoimportantlythere is stratification in the Pakistani economy: while, overall, access to capital may not be the paramount problem, for certain segments of the economynamely, small- and medium-sized businessesit 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, secondary 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 stronger 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 courseby 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.
1 Klaus schwab (ed.), Global competitiveness Report 20112012, 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/indicator 3 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 20102011, ministry of finance (2011). 6 Pakistan: Framework for Economic Growth, Planning commission, Government of Pakistan (may 2011), 12. http://www.pc.gov.pk/ hot%20links/growth_document_english_version.pdf 7 Doing Business 2012: Doing Business in a More Transparent World, international finance corporation, World Bank (october 2011). http://www.doingbusiness.org/~/media/FPDKM/Doing%20 Business/Documents/Annual-Reports/English/DB12-FullReport.pdf 8 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 University (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

POTENTIAL PII INVESTMENT FUND MANAGERS & LOCAL PARTNERS (Sources: Capital IQ, interviews in Pakistan)
PAKISTANI FIRMS Company Name Investment Type Company Type Business Description AKD Securities Ltd. is one of the leading securities rm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and nancial 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 diversied sectors including investment banking, gases manufacturing, electronic media, steel, electrical equipment, real estate, cement, power and a host of other sectors. Arif Habib Corporation Limited (AHCL) is the holding company of the Arif Habib Group. The Company has a diversied 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. BMA is amongst the leading nancial 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 rm specializing in industry consolidation investments. 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. Cyans Growth Equity portfolio will provide investors with an opportunity to participate in attractive sectors of the Pakistans 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 Pakistans core strengths. 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 ofces in Pakistan. 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 rm specializes in investments in expansion capital, growth capital, and buyout investment opportunities. It invests in privately held companies and makes PIPE investments. The rm makes Greeneld investments. The rm 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 rm 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. Pakistan Kuwait Investment Co., Investment Arm specializes in seed stage investments. Main Ofce Contact
AKD Securities Ltd. (AKDS)
Private Equity Investing
Financial Service Investment Arm
Karachi, Pakistan
www.akdsecurities.net
Arif Habib Group Pakistan Private Equity Management Ltd.
Venture Capital Investing; Private Equity Investing
Karachi, Pakistan
www.arifhabib.com.pk
BMA Capital, Investment Arm
Karachi, Pakistan
www.bmacapital.com
Cyan Limited
Private Investment Firm
Karachi, Pakistan
www.cyanlimited.com
Indus Basin Holding Ltd.
Mauritius
www.indusbasin.com
JS Private Equity
Karachi, Pakistan
www.js.com/investmentopportunity.asp
Pakistan Kuwait Investment Co., Investment Arm TMT Ventures Limited
Venture Capital Investing Venture Capital Investing
Financial Service Investment Arm Private Investment Firm
Karachi, Pakistan
www.pkic.com www.tmtventures.net
United Bank Limited (UBL)
Commercial Bank
soURces
TMT Ventures Limited is a venture capital rm specializing in startup investments. The rm prefers to invest in telecom, media, and technology sectors. It typically invests in companies Karachi, Pakistan based in Pakistan. TMT Ventures Limited is based in Karachi, Pakistan. 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 fty 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 nancing 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. Karachi, Pakistan 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 rms 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
FOREIGN FIRMS
www.ubl.com.pk
Company Name
Investment Type
Abraaj Capital
Venture Capital Investing; Private Equity Investing; Mezzanine Investing
Abu Dhabi Group, Venture Venture Capital Capital Arm Investing
Abu Dhabi Commercial Bank, Investment Arm
Abu Dhabi Investment Company, Investment Arm
Actis Capital, LLP
60
Business Description Abraaj Capital is a private equity and venture capital rm 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 rm 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, Private Investment logistics, agribusiness, energy, and food industries. It invests in companies based in the Middle Firm 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 rm prefers to invest between $100 million and $300 million in its portfolio companies. It acquires controlling or signicant interest and seeks board representation in its portfolio companies. The rm typically exits its investments within a period of three years to ve 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 ofces across Asia. Financial Service Abu Dhabi Commercial Bank, Investment Arm is an investment arm of Abu Dhabi Commercial Investment Arm Bank. Abu Dhabi Group, Venture Capital Arm is a venture capital arm of Abu Dhabi Group specializing Corporate Investment in investments in Pakistan, Bangladesh, Iran, Uganda, Republic of Congo, and the Middle East. Arm The rm is based in Abu Dhabi, United Arab Emirates. Abu Dhabi Investment Company, Investment Arm is the private equity and venture capital rm specializing in direct and fund of fund investments in specializes in buyouts, growth capital, mid to late stage, and expansion capital. The rm seeks to invest in acquisitions. It also invests proprietary and client capital in private equity funds. It does not invest in real estate. The rm typically invests in healthcare; education; media; technology; telecom; consumer goods; infrastructure projects like greeneld assets, transport networks, power, water, and health and Financial Service education facilities; logistics; and distribution sectors. It seeks to invest in the MENA region Investment Arm Egypt, Saudi Arabia, Pakistan, North Africa, the United Arab Emirates, and Turkey. The rm to make equity investments between $25 million and $200 million in companies with enterprise values between $50 million and $500 million. The rm prefers to acquire majority control or signicant 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. Actis Capital, LLP is a private equity and venture capital rm specializing in expansion capital, PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going private transactions, property development nance, and mezzanine nance investments in emerging and growing companies. The rm primarily seeks to invest in business services, consumer services, healthcare, nancial services, industrials, infrastructure, logistics, and real estate. The rm 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, Private Investment from development or expansion capital to acquiring mature operational assets and focuses Firm 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), nancial institutions, knowledge-based services, manufacturing, and oil and gas. The rm typically invests in the range of $8 million and $35 million in this region. The rm 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 ofces in Africa, Latin America, South Asia, and South East Asia.
Company Type
Main Ofce
Contact
Dubai, UAE
www.abraaj.com
Abu Dhabi, UAE Abu Dhabi, UAE
www.adcb.com www.adcb.com
Abu Dhabi, UAE
www.investad.ae/en/OurBusiness es/PrivateEquity.aspx
London, UK
www.act.is
61
Company, Investment Arm
Investing; Private Equity Investing
Investment Arm
Actis Capital, LLP
Acumen Fund
Venture Capital Investing
Aga Khan Fund for Economic Development
AIDEC Management Co. Pte. Ltd.
Asian Finance and Investment Corporation Ltd.
Venture Capital Asian Infrastructure Fund Investing; Private Advisers Ltd. Equity Investing Venture Capital Investing; Private Equity Investing
Augustus Ltd.
Capital Advisors Partners Private Equity Asia Pte Ltd. Investing
Catalyst Micronance Investment Company
Catalyst Private Equity
DIB Capital, Investment Arm
Draper Fisher Jurvetson (DFJ)
EMP Daiwa Capital Asia Limited
EMP Global
ePlanet Capital
Venture Capital Investing; Private Equity Investing Venture Capital Investing; Private Equity Investing
62
Euro Asia Capital & Equity Pte Ltd.
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 rm to make equity investments between $25 million and $200 million in companies with enterprise values between $50 million and $500 million. The rm prefers to acquire majority control or signicant 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. Actis Capital, LLP is a private equity and venture capital rm specializing in expansion capital, PIPEs, replacement capital, acquisitions, industry consolidation, management buyouts, going private transactions, property development nance, and mezzanine nance investments in emerging and growing companies. The rm primarily seeks to invest in business services, consumer services, healthcare, nancial services, industrials, infrastructure, logistics, and real estate. The rm 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, Private Investment from development or expansion capital to acquiring mature operational assets and focuses Firm 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), nancial institutions, knowledge-based services, manufacturing, and oil and gas. The rm typically invests in the range of $8 million and $35 million in this region. The rm 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 ofces in Africa, Latin America, South Asia, and South East Asia. Acumen Fund is a venture capital rm specializing in growth, direct equity investments, debt, guarantees, quasi-equity, and lab investments. The rm 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 rm typically invests between $0.3 million and $2 million in equity or debt with exit period ranging from ve to seven years. The rm seeks to invest between $2 million and $4 million in Kenyan healthcare businesses and Private Investment manufacturers of health consumables in 2011. It seeks to invest in business models that can be Firm effective in reaching the billions of poor without access to clean water, reliable health services, or formal housing options. The rm primarily invests in non-prot organizations, small and medium for-prot companies in need of capital, and larger companies that are starting specic business units to serve the poor. The rm 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 ofces in Maharashtra, India; Nairobi, Kenya; and Karachi, Pakistan. 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 Corporate Investment seeks to invest in tourism, aviation services, and nancial services sectors. The rm primarily Arm 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. AIDEC Management Co. Ltd. is a venture capital rm, which provides start-up/early stage nancing and growth capital to small and medium sized companies operating in the consumer related, computer related, electronic related, communication, energy, transportation and Private Investment construction industries. The rm's investments are focused in the South East Asia, Indian SubFirm Continent, and Far East Asia. The rm's minimum investment is 20% of capital (negotiable). AIDEC also provides nancing for private sector infrastructure projects (i.e., electricity, gas, airports, ports, roads, water and sewage) through debt nancing, loans and equity-linked investments. 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 Private Investment Pacic region. the company provides from $1 to $10 million equity or equity and loans, in Firm exchange for a minor stake in the portfolio company and a seat on the Board of Directors. AFIC specializes in mezzanine or bridge nancing, turnaround and restructuring and later stage transactions. It operates in the Asia Pacic region and in a wide spectrum of industries. Asian Finance and Investment Corporation has ofces in Manila, Philippines. Asian Infrastructure Fund Advisers Ltd. is a principal investment rm specializing in start up, development, and turnaround / restructuring stage businesses. It seeks to invest in Asia. It Private Investment targets investing between $10 and $75 million. It seeks board representation in its investee Firm company. The rm 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. 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 Private Investment equities, commercial real estate and art. He is also a substantial shareholder of the NYSE-listed Firm IHS Inc, an information services company with a market cap in excess of $5billion . The ThyssenBornemisza family is one of Europes oldest and most distinguished industrial families. Capital Advisors Partners Asia Pte Ltd. is the private equity arm of CIMB Group Sdn Bhd. The Financial Service rm seeks to invest in infrastructure sector. It typically invests in in South-East Asia and Central Investment Arm Asia. Capital Advisors Partners Asia Pte Ltd was founded in 2006 and is based in Singapore with additional ofces in Kuala Lumpur, Malaysia; Jakarta, Indonesia; and Bangkok, Thailand. Catalyst Micronance Investment Company is a venture capital rm specializing in start-up and growth capital investments. The rm seeks to invest through its fund. It primarily seeks to invest in emerging micro nance institutions with a focus on banks, non-bank nancial institutions, cooperatives, and NGOs which are willing and able to transform into a commercial for-prot Private Investment institution. The rm invests in companies based in Asia and Africa. It also considers investments Firm through equity, equity-linked securities, debt, and convertible debt instruments. The rm prefers to invest in newly issued equity of greeneld institutions, recently established institutions and/or in existing institutions. It typically holds its investments for a period of ve to seven years. Catalyst Micronance Investment Company was founded in 2005 and is based in Utrecht, Netherlands with an additional ofce in Dhaka, Bangledesh and Andhra Pradesh, India. Catalyst Private Equity is a private equity rm specializing in investments in small and mediumsized enterprises. The rm seeks to invest in water and energy sectors, and in industrial product and technology companies and environmentally-friendly technologies including water treatment Private Investment and alternative energy technologies. It prefers to invest in Jordan, Lebanon, Egypt, West Bank, Firm and certain OPIC-eligible countries in the MENA region. The rm also invests in Pakistan and Afghanistan. Catalyst Private Equity was founded in 2005 and is based in Amman, Jordan. DIB Capital, Investment Arm specializes in expansion capital, turnarounds, early and late stage seed nancing, management buy-outs and buy-ins, family-owned enterprises, privatizations, and greeneld. It invests in Shariah-compliant transactions. The rm prefers to invest in the nancial Financial Service services, energy, telecom, transportation & logistics, healthcare, retail, hospitality, and real estate Investment Arm 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 rm may also invest in companies located in China, India, and Pakistan. DIB Capital, Investment Arm is based in Dubai, United Arab Emirates. 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. EMP Daiwa Capital Asia Limited is a private equity rm and venture capital rm specializing in middle market, growth capital, and buyouts. It prefers to invest in telecoms, transportation, power, and natural resources. The rm primarily invests in companies based in Greater China, Private Investment India, South Korea, Southeast Asia, and Japan. For Japan, it also acquires and provides growth Firm capital to Asian subsidiaries of Japanese companies and partners with Japanese companies in their regional expansion in Asia. The rm 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. EMP Global is a private equity rm 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 rm seek to make equity and quasi-equity investments in infrastructure; xed 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 rm seeks to invest from $10 million to $100 Private Investment million. The rm prefers to invest in control position as a sole investor or in partnership with other Firm nancial investors and can consider minority positions in companies controlled by either a reputable local sponsor or an international strategic investor. The rm seeks to structure its investments as hybrid debt and equity securities. It considers investing in "greeneld" 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, offtake agreements, etc. EMP Global was founded in 1992 and is based in Washington, D.C. with additional ofces in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a subsidiary of BMB Group. 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 rst venture Private Investment capital rm to utilize a global model with ofces in Asia, Europe and the United States. ePlanet Firm consists of a team of more than 30 professionals across the globe in our ofces located in Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and Euro Asia Capital & Equity Pte Ltd. is an independent venture capital rm that focuses on technology, internet, telecommunications, manufacturing, utilities and environmental products in Private Investment Asia Pacic. The company invests in start-ups, early stages, later stages, turnaround, Firm 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 nancial advice in
Abu Dhabi, UAE
es/PrivateEquity.aspx
ePlanet Capital
Venture Capital Investing; Private Equity Investing Venture Capital Investing; Private Equity Investing
London, UK
www.act.is
Euro Asia Capital & Equity Pte Ltd.
Global Capital Management Ltd.
New York, NY, United www.acumenfund.org States
Geneva, Switzerland
Venture Capital Global Environment Fund Investing; Private Equity Investing www.akdn.org/agency/akfed.html
Singapore, Singapore NA
Global MENA Financial Assets Limited
Singapore, Singapore www.acltd.com IFU Venture Capital Investing
Hong Kong
NA
Monaco
NA JAFCO Investment (Asia Pacic) Ltd. Venture Capital Investing; Private Equity Investing
Singapore, Singapore www.cap-asia.net
Mauritius
www.catalyst-micronance.com
Kellett & Singleton Investments Ltd.
Amman, Jordan
www.catalystpe.com
Kuwait Finance & Investment Company, Investment Arm
Dubai, UAE
www.dibcapital.com/PrivateEquity .aspx
Leopard Capital LP
Menlo Park, CA, United States
www.dfj.com
Maybank Meacp Pte. Ltd, Investment Arm
Venture Capital Investing; Mezzanine Investing Venture Capital Middle East & Asia Capital Investing; Private Partners Pte., Ltd Equity Investing; Mezzanine Investing
reputable local sponsor or an international strategic investor. The rm seeks to structure its investments as hybrid debt and equity securities. It considers investing in "greeneld" 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, offtake agreements, etc. EMP Global was founded in 1992 and is based in Washington, D.C. with additional ofces in Africa, Brunei, Bahrain, Tunisia, and Hong Kong. It operates as a subsidiary of BMB Group. 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 rst venture Private Investment capital rm to utilize a global model with ofces in Asia, Europe and the United States. ePlanet Firm consists of a team of more than 30 professionals across the globe in our ofces located in Beijing, Bangalore, Seoul, London and Silicon Valley. It is also represented in Hong Kong and Euro Asia Capital & Equity Pte Ltd. is an independent venture capital rm that focuses on technology, internet, telecommunications, manufacturing, utilities and environmental products in Asia Pacic. The company invests in start-ups, early stages, later stages, turnaround, Private Investment restructuring, privatization, bridge loan, and public market purchase. It will provide only equity or Firm equity and loans, from $250,000 to $20 million, and active management and nancial advice in exchange for a major stake in the company and a seat on the Board of Directors. 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 rm prefers to invest in oil and gas, consumer durables and apparel, education services, hotels, restaurants and leisure, energy, manufacturing, real estate, healthcare and healthcare Financial Service equipment, pharmaceuticals, laboratories, hospital construction services, transportation and Investment Arm logistics, retail, infrastructure, telecommunications, utilities, education, and nancial 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 Pacic 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 ofces in Cairo, Egypt; Dubai, UAE; Istanbul, Turkey; Saudi Arabia; and Safat, Kuwait. Global Environment Fund is a private equity and venture capital rm 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 efciency 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 efcient. In emerging markets it seeks to invest in clean energy, integrated Private Investment waste management, water and wastewater treatment, clean industrial technology, and healthcare Firm services. The rm primarily focuses on China, India, Brazil, Turkey, Mexico, South Africa, Southeast Asia, and Eastern Europe for emerging markets. The rm 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 rm typically holds its investment for ve 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 ofces in Johannesburg, South Africa; Sao Paulo, Brazil; and Mumbai, India. Global MENA Financial Assets Limited specializes in middle market investments in turnaround and PIPE transactions. It seeks to invest in the nancial services sector. The fund prefers to Public Fund invest in Middle East, North Africa, India, China, Pakistan, and Hong Kong. IFU is a venture capital rm specializing in nancing private-sector projects in the developing countries. The rm 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 OECDs DAC list of development aid recipients. It nances both small and large projects, including pilot projects, green-eld projects, expansion of existing projects, and privatization of state-owned enterprises. The rm seeks to nance projects in collaboration with the Danish trade and industry. It seeks to participate as a partner in the joint Private Investment ventures through committing equity capital and granting loans. The rm seeks to co-invest with Firm 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 rm 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 nancial years. It also provides advisory services to business investments in developing countries. The rm prefers to exit its investments within ve to seven years. IFU was founded in 1967 and is based in Copenhagen, Denmark with additional ofces in Beijing, China; New Delhi, India; Nairobi, Kenya; Accra, Ghana; and Johannesburg, South Africa. JAFCO Investment (Asia Pacic) Ltd is a venture capital rm specializing in investments in technology and technology related companies. The rm typically invests in companies based in Asia Pacic 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 Private Investment Kong. It prefers to have board representation in its portfolio companies. The rm seeks to exit its Firm investments through an IPO or a trade sale. JAFCO Investment (Asia Pacic) Ltd was founded in 1990 and is based in Singapore with additional ofces in Taipei, Taiwan; Seoul, South Korea; Shanghai, China; London, United Kingdom; Central, Hong Kong; and Beijing, China. JAFCO Investment (Asia Pacic) Ltd. operates as a subsidiary of JAFCO Co., Ltd. Kellett & Singleton Investments Ltd. is a principal investment rm specializing in investments in seed stage and early stage companies. The rm generally provides expansion capital and growth capital to the portfolio companies. It seeks to invest in shipping services including ship operations Private Investment and chartering, aviation, logistics, advertising and marketing, oriculture, tea, information Firm technology, consulting, asset management, commodities, hospitality FF&E, and marine sectors. The rm 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. Kuwait Finance & Investment Company, Investment Arm is the private equity arm of Kuwait Finance & Investment Company. The rm invests through its fund KFIC Private Equity Fund. It Financial Service seeks to make investments in telecommunications, banks, investments, insurance, real estate, Investment Arm 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. Leopard Capital LP is a private equity and a venture capital rm specializing in investments in early stage venture, emerging growth, growth capital, buy-out, and mid-market companies. The rm invests in nancial 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, Private Investment India, Bangladesh, Sri Lanka, Maldives, Nepal, Bhutan, Pakistan, Kazakhstan, Kyrgyzstan, Firm Uzbekistan, Azerbaijan, Tajikistan, Mongolia, and North Korea. It prefers to invest in an average of $3 million per transaction. The rm may make a controlling or minority investments. The rm 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 ofces in Central, Hong Kong; Grand Cayman, Cayman Islands; and Colombo, Sri Lanka. A 50/50 joint venture between Mayban Ventures Sdn Berhad ("Mayban Ventures"), a subsidiary Corporate Investment of Malayan Banking Berhad ("Maybank") and Mumtaz Khan, founder of Middle East & Asia Arm Capital Partners Pte. Ltd. ("MEACP").

San Jose, CA, United www.eplanetventures.com/ States
Safat, Kuwait
www.globalinv.net/contentdisp.as p?pageid=553
Maryland, United States
www.globalenvironmentfund.com
Grand Cayman, Cayman Islands
www.gmfa.com
Copenhagen, Denmark
www.ifu.dk
Singapore, Singapore www.jafcoasia.com
Dubai, UAE
www.kellettsingleton.com
Safat, Kuwait
www.kc-kw.com/sub.php
Phnom Penh, Cambodia
www.leopardasia.com
Singapore, Singapore www.maybankmeacp.com Singapore, Singapore www.meacp.com
Middle East & Asia Capital Partners Pte., Ltd is a private equity rm. 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.
Hong Kong
www.asia.empglobal.com
Nederlandse FinancieringsMaatschappij voor Ontwikkelingslanden NV, Investment Arm
Washington, D.C., United States
www.empglobal.com
New Silk Route
Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV, Investment Arm specializes in direct and fund of fund investments. The rm invests in seed capital, mezzanine nancing, small, mid sized enterprises, and regional private equity funds. The rm seeks to invest in agriculture and sheries, mining, agribusiness, manufacturing industry, service sector, and banking and insurance industry. It primarily invests in the in the housing, nance, energy, Netherlands 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 rm 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 rm makes seed capital investments of minimum 1 million ($1.43 million) per company or fund. New Silk Route is a private equity and venture capital rm specializing in growth capital and buyout investments. It prefers to invest in the consumer services, education, infrastructure, New York, United telecoms, manufacturing, IT, engineering, medical devices, restaurant chains, and nancial services sector. The rm prefers to invest in India, South Asia, Middle East, and other emerging States Asian economies. New Silk Route was founded in 2006 and is based in New York, New York with additional ofces in Bengaluru, India; Dubai, United Arab Emirates; and Mumbai, India.
www.fmo.nl
www.nsrpartners.com
San Jose, CA, United www.eplanetventures.com/ States
63

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 rm makes equity and loan investments in expansions and leveraged buyouts. It also invests in small and medium enterprises and investment rms. The rm also provides mezzanine loans. The rm seeks to invest between 500,000 ($708,660) to 20 million ($28.34 million) per Venture Capital transaction in private equity and 2 million ($2.83 million) to 100 million ($141.73 million) per Investing; Private Corporate Investment PROPARCO SA transaction in senior loans, junior loans, mezzanine debt, and subordinated loans. The rm also Equity Investing; Arm provides guarantees including bond guarantee; bank loan guarantee; local currency loan Mezzanine Investing 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 nancial market. The rm seeks to co-invest. PROPARCO SA was founded in 1977 and is based in Paris, France with an additional ofces in Brazil, China, Egypt, Kenya, Nigeria, Morocco, South Africa, Thailand, and Tunisia. RHT Partners is an independent investment management rm 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 Private Investment RHT Partners a post investment focus on generating industry-leading returns on the capital it deploys. RHT's Firm 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. SEDCO Dubai is a Shariah-compliant private equity rm specializing in growth capital investments for expansion, acquisitions, scaling up of operations, and management buyouts. The rm 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, Private Equity Private Investment Malaysia, Indonesia, Singapore, Thailand, and Vietnam. The rm seeks to make investments SEDCO Dubai Investing Firm 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 rm usually takes a signicant 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. 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 Venture Capital Small Enterprise Private Investment traditional sources of capital. Through its network of ofces around the world, SEAF invests in Investing; Private Assistance Fund (SEAF) Firm (Non-Prot) entrepreneurs to build successful businesses, realizing both attractive returns for our investors Equity Investing and a measurable development impact in local communities. 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 nancial Private Equity Financial Service services sectors. The arm focuses geographically on the Middle East and North Africa region. It Swicorp, Investment Arm Investing; Mezzanine Investment Arm prefers to invest between $15 million and $150 million in its portfolio companies. Swicorp, Investing Investment Arm was founded in 2004 and is based in Dubai, UAE with additional ofces in Riyadh, Saudi Arabia, Jeddah, Saudi Arabia, Tunis, Tunisia and Algiers, Algeria. Temasek Holdings (Pte), Ltd. is a sovereign wealth fund of the Government of Singapore specializing in growth capital, restructuring, and divestiture transactions. The rm 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 Temasek Holdings (Pte) Private Equity Private Investment estate, nancial services, property, industrial, life sciences, transportation and logistics, Ltd. Investing Firm consumer and lifestyle, education, energy and resources, infrastructure, engineering and technology, and healthcare, pharmaceuticals and biosciences sectors. The rm 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 ofces in India; China; Hong Kong; Shanghai, Brazil; Mexico; and Vietnam. The Carlyle Group is an investment rm 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 nance, and venture and growth capital nancings. The rm typically invests in agriculture, Venture Capital aerospace, defense, automotive, consumer, retail, industrial, infrastructure, energy, power, Investing; Private Private Investment healthcare, software, technology, real estate, nancial services, transportation, business The Carlyle Group LP Equity Investing; Firm services, telecommunications, and media sectors. It seeks to invest in companies based in SubMezzanine Investing Saharan Africa, Asia, Australia, Europe, Middle East, North America, and South America. The rm 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 ve years. The Carlyle Group was founded in 1987 and is based in Washington, D.C. with additional ofces across North America, Latin America, Asia, Africa, and Europe. 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 rm seeks to invest in companies throughout the Levant and Middle East, North Africa, and Venture Capital South Asia regions including Egypt, Pakistan, India, Jordan and countries in the Gulf Cooperation The National Investor Financial Service Investing; Private Council. It focuses its investments in consumer and retail, oil and gas, contracting and real Private Equity Investment Arm Equity Investing estate, nancial and business services, telecom and media among others. It acquires both controlling and minority stakes in its portfolio companies. The rm 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. TLG Capital is a private equity investment rm specializing in growth capital investments and Private Equity special situations investments. The rm prefers to invest in the frontier markets. It invests in Private Investment TLG Capital Investing; Mezzanine companies based in the emerging markets and Sub Saharan African region. The rm typically Firm Investing 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. Venture Capital Financial Service YES Bank, Investment Investing; Private YES Bank, Investment Arm is a private equity arm of YES Bank. Investment Arm Arm Equity Investing
Appendix c: interviews
Paris, France www.proparco.fr
PAKISTAN Feb. 1826, 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
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 Rebecca Ann Seweryn, consulate, Karachi Economic Officer, U.S.
Dubai, UAE
www.rhtpartners.com
Dubai, UAE
sedco.com/businessgroups/subsidiaries/sedco-dubai/
Nasim Beg, ceo, arif habib investments Ltd. Abid Butt, ceo, e2e supply chain management (Pvt) Ltd.
Isfandiyar Shaheen, head of Growth equity investments, cyan Ltd. Imran Shaikh, Vice Presidenthead of marketing, Js Bank Ltd. Rehan Shaikh, coo, hBL asset management Limited Aasim Siddiqui, director, container terminal Ltd. Pakistan international
www.seaf.com
Shahjahan Chaudhary, ceo, team ants Samad Dawood, ceo, cyan Limited and dawood corporation Nadeem Elahai, managing director and country head, the Resource Group
Dubai, UAE
www.swicorp.com/?section=pe
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 development, 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
Singapore, Singapore www.temasekholdings.com.sg
Shahid Ghaffar, ceo, hBL asset management Ltd. Fahd Haroon, cnBc Pakistan Zaid Haroon, assistant Vice President, marketing and corporate communications, Js Bank Ltd.
www.carlyle.com
Syed Samar Hasnai, director, sme finance, state Bank of Pakistan/SMEs Dr. Ishrat Husain, dean and director, institute of Business administration
Dubai, UAE
www.tni.ae/private_equity.php
Shakir Husain, ceo, creative chaos Nadeem Hussain, Microfinance Bank President and ceo, tameer
London, UK
www.tlgcapital.com
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.
Mumbai, India
www.yesbank.in
Potential PII Entrepreneurship Support Partners

Universities Local
Global
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) Associations & Networks The Organization of Pakistani Entrepreneurs (OPEN) PeaceNiche Social, Entrepreneurship, and Equity Development (SEED) Ventures Business Support Organizations Small and Medium-Size Enterprise Development Authority (SMEDA) SME Business Support Fund (BSF) Universities with Presence or Massachusetts Institute of Technology (MIT) University of Pennsylvania Wharton Business School Experience in Pakistan Babson College Harvard University Organizations with Presence or Kauffman Foundation Invest2Innovate Experience in Pakistan American Pakistan Foundation Center for International Private Enterprise (CIPE) Organizations without Presence The Unreasonable Institute TechnoServe or Experience in Pakistan Small Enterprise Assistance Funds (SEAF) Center for Entrepreneurial and Executive Development
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Appendix d: Acronyms
WASHINGTON, D.C. Dec. 710, 2011; Jan. 1820, 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., 2011Mar., 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 INTERVIEWS Nov., 2011Mar., 2012 Garrett Johnson, co-founder, sendhub; former Professional staff, U.s. senate committee on foreign Relations Richard Johnson, U.s. development (Retired) agency for international This appendix includes a list of acronyms, with their definitions, used throughout this study, in alphabetical order. 2&20 two-and-twenty incentive structure caGR compound annual growth rate cdc formerly commonwealth development corporation, now simply cdc Group (United Kingdom) ceed center for entrepreneurship & executive development cGs credit guarantee scheme cnG compressed natural gas dB doing Business report (World Bank) dca development credit authority (United states agency for international development) DFI Development finance institution dfid department for international development (United Kingdom) disco Power distribution company dod department of defense (United states) dos department of state (United states) eBitda earnings before interest, tax, depreciation, & amortization emPea emerging markets Private equity association eRR economic rate of return esG environmental, social, & corporate governance standards eV enterprise value fdi foreign direct investment fit feed-in tariff fof fund of funds FY Fiscal year Gci Global competitiveness index (World economic forum) Gda Global development alliance (United states agency for international development) GdP Gross domestic product Ge General electric Genco Power generation company Gni Gross national income GoP Government of Pakistan GP General partner iBa institute of Business administration (Karachi) iBh indus Basin holdings ict information & communications technology ifc international finance corporation (World Bank) imf international monetary fund iPo initial public offering iPP independent power producer iRR internal rate of return it information technology KLB Kerry-Lugar-Berman Bill (aka enhanced Partnership for Pakistan act) Kse Karachi stock exchange Ldi Long distance & international LP Limited partner LUms Lahore University of management sciences m&e monitoring & evaluation mcc millennium challenge corporation mit massachusetts institute of technology mof ministry of finance (Pakistan) mQm muttahida Quomi mahaz NAIRU Non-accelerating inflation rate of unemployment nis new independent states (Western nis enterprise fund) nUst national University of science & technology oPen organization of Pakistani entrepreneurs oPic overseas Private investment corporation (United states) PcG Partial credit guarantee Pe Private equity PeGcc Private equity Growth capital council PePco Pakistan electric Power company Pes Pakistan economic survey Pii Pakistan investment initiative Pio Public international organization R&d Research & development s&P standard & Poors sBa standby agreement sBP state Bank of Pakistan sci saif center of innovation seaf small enterprise assistance funds seed support for east european democracy act siB social impact bond smeda small & medium enterprise development authority (Pakistan) smes small & medium-sized enterprises sPV special-purpose vehicle tfBso task force for Business & stability operations (United states) tic technology incubator center tie the indus entrepreneurs U.K. United Kingdom Un United nations UnPRi Un Principles for Responsible investment U.s. United states Usaid United states agency for international development Usd United states dollar UsG United states Government Vc Venture capital WB World Bank Wdi World development indicator Wef World economic forum
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 ADVISOR Meghan L. OSullivan, Jeane Kirkpatrick Professor of the Practice of international affairs, harvard Kennedy school of Government POLICy AREA CONCENTRATION SEMINAR LEADERS Stephen Kosack, assistant Professor of Public Policy, harvard Kennedy school of Government Monica D. Toft, associate Professor of Public Policy, harvard Kennedy school of Government
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about the authors

Dustin Cathcart received a Masters in Public Policy from Harvard Universitys John F. Kennedy School of Government in 2012, with a concentration in Political and Economic Development, and is a Master in Business Administration candidate at Dartmouths Tuck School of Business. In the summer of 2011, he worked with the Inter-American Development Banks Private Sector Development Group in Port-au-Prince, Haiti. Earlier, Dustin served five years as an infantry officer in the United States Army, including a 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 Masters in Public Policy from Harvard Universitys John F. Kennedy School of Government in 2012, with a concentration in International and Global Affairs. In the summer of 2011, she worked with the Pakistan Poverty Alleviation Fund in Islamabad. Earlier, Meredith served as Acting Resident Country Director for the International Republican Institute in Bogot, Colombia, and has more than six years of experience working on U.S. Government-funded political and economic development 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 States Bureau of South and Central Asian Affairs, Office of Press 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 Masters in Public Policy from Harvard Universitys John F. Kennedy School of Government in 2012, with a concentration in International and Global Affairs. In the summer of 2011, he worked with the Aid Policy Unit of the Government of Pakistans Economic Affairs Division in Islamabad. Earlier, he spent more than three years with the International Rescue Committee, in Uganda, Kenya, and the United Kingdom, working on project management, budgeting, financial management, and risk analysis. He is a Harvard Kennedy School Public Service Fellow and expects to begin work with USAIDs Office of Policy in the Bureau for Policy, Planning, and Learning in the fall of 2012, as a Presidential Management Fellow. Aaron graduated from Stanford University in 2006 and is originally from New York, New York.
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Re c o m m en d ation s f oR t he

Pakistan Private Investment Initiative

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Promoting Private sector development

Looking Beyond 2014

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Structure & & Structure Implementation Implementation

Complements & & Complements Alternatives Alternatives

Low human Low human capital capital

Capitalize onon Capitalize core strengths core strengths

Angel Angel investment investment

1 partner, 1 partner, 1 fund 1 fund

Global Global Development Development Alliance Alliance

Entrepreneurial Entrepreneurial ecosystem ecosystem development development

NEED NEED OPPORTUNITY OPPORTUNITY

Poor Poor infrastructure infrastructure

FEASIBILITY FEASIBILITY IMPACT IMPACT

SME SME financing financing

Venture Venture capital capital

1 partner, 1 partner, fund of of funds fund funds

Request forfor Request proposals proposals

Social impact Social impact bonds bonds

Large capital Large capital investment investment

Growth Growth equity equity

Multiple Multiple partners partners

Grant to to public Grant public international international organization organization

Partial credit Partial credit guarantees guarantees

Promote export Promote export competitiveness competitiveness

Feed-in tariff Feed-in tariff forfor renewable renewable energy energy

Sector Sector agnosticism agnosticism

Trade Trade assistance assistance

Private Private equity equity

Risk & impact analysis

High risk High risk of of finance finance

Add U.S. Add U.S. value value

High cost High cost of of finance finance

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Private! Investment! Initiative!

SEEK MULTIPLICATIVE IMPACT!

NE ED S& OP PO RT UN ITI ES ! AS FE L IBI ITY AC MP &I T!

DEVELOPMENT! APPROACHES! TARGET! SEGMENTS!

COMPLEMENTS &! ALTERNATIVES!

RISK &! IMPACT! ANALYSIS!

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Fig. 5 Monthly Terrorism Deaths vs. Annual FDI (USD), 19942010!

400! $5b! 350!

250! $3b! 200!

100! $1b! 50!

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

Pakistan Private investment initiative

HARVARD KENNEDY SCHOOL POLICY ANAL YSIS EXERCISE

0.16! 0.14! 0.12! 0.1! 0.08!