BSEC body suggests closed-end IF for pvt equity, venture financing

A committee has recommended incorporation of a provision for creating closed-end Investment Fund (IF) in the proposed rules on private equity and venture capital financing to facilitate funding arrangements for prospective private firms.
The committee also suggested changing the title of the existing rules from 'Mutual Fund' to 'Alternative Investment' or 'Collective Investment' to address the whole gamut of collective or structured investment funds.
The three-member body, formed earlier by the Bangladesh Securities and Exchange Commission (BSEC), made the recommendations in its report, submitted to the Commission on Wednesday, after reviewing the rules of private equity and venture capital funds, operated in other countries.
Arif Khan, a BSEC commissioner, said venture financing companies fund the firms at their early stage.
 "After maintaining a sizeable operation, such firms get fund supports through equity investments. Companies like GOOGLE and Facebook overcame fund supply shortage at their pre-mature stage through venture financing," Mr. Khan told the FE.
He said the securities regulator took the initiative of formulating the rules on venture financing and equity investment, considering fund shortage and prospects of many local firms.
 "After framing the draft, the regulator will receive public opinions, and finalise the rules on venture financing and private equity. Then it will be clear who will get licences for forming such kind of financing companies in accordance with their capital," Mr. Khan added.  
Presently, Bangladesh has four venture capital firms, with Grameen Fund pioneering the sector in the early 1990s.
According to the committee's report, the proposed title - 'Alternative Investment' or 'Collective Investment' - will include rules for covering respective investment schemes, such as Mutual Funds (MFs), Exchange Traded Fund (ETF), private equity, venture capital and hedge funds.
As per its suggestion, venture capital firms will provide funds through the 'investment funds' whose nature of operations is similar to that of the mutual funds.
"Since there are existing rules to approve and regulate the mutual funds, their structures may also be applicable for private equities and venture capital," the report mentioned.
The mutual funds are managed by the asset management companies (AMCs).
The committee said investment managers will manage the investment funds by taking licence from the securities regulator. Such funds should also have trustee.
 "Foreign investors and investment managers are interested to invest in Bangladesh. So, there should be provisions for foreign investments in the private equity and venture capital fund structure," suggested the BSEC committee.
In case of domestic structure of the fund, the committee said initial fund is to be collected from one or more sponsor(s). The trust is to be managed by a trustee, whereas the Investment Fund is to be managed by investment manager.
 "The fund is invested to one or more suitable portfolio companies in the form of private equity or venture capital investment," the report said.
It also suggested that investors of private equity and venture capital financing companies 'must be restricted' to institutions and high net worth individuals who can understand the risk of such investments.
 "No public subscription should be allowed in such funds. There should be a minimum investment size for each investor."
The committee's recommendations also included that the funds invested by designated investors should be locked-in for a certain period.
 "A time lag between private equity and venture capital investment and IPO (initial public offering) of the portfolio company concerned may also be imposed," it added.
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