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1. After my last thread detailing why it's painful to invest in Pakistan, a couple people, including @aatif_awan & @Sahmed06, opined that Pakistan still benefits even if foreign holding structures are used. I had promised a response which required a new thread. Here it goes...
2. When an investor chooses to invest in Pak thru a foreign holding Co, the investment still has to come INTO Pak, so now the holding Co, instead of the investor, faces all the issues I alluded to. So without a biz friendly, secure, easy forex i/o env, the challenge remains.
3. Alternatively, investors structure hold Co to drip fund Pak Co opex while moving all intangible assets (most valuable for IT companies) into ownership of hold Co. Value accrues in hold Co, & Pak Co remain a back office service provider that's never even profitable.
4. Also, invariably, in a setup like that, the hold Co will become the rev/profit center & Pak Co will only get opex capital. Given the critical CAD position, Pakistan should aim to not only get all investment capital into the country but all revenue/retained earnings as well.
5. Despite how well the hold Co is doing, Pak Co and its sponsors will not be able to build a banking/credit profile with local banks to allow Pak Co or future endeavors of sponsors to tap into debt capital for expansion or new ventures.
6. Needless to say, txn, accounting, admin, audit, reporting costs increase which become a deterrent for very small ticket investments. For 10 investments, that's 20 entities to manage. Also, importantly, depending on hold Co jurisdiction, taxes, if any, benefit hold Co country.
7. Lastly, come exit time, the foreign hold Co will see the exit. It will be a silent transaction, so the tax authorities are not alerted. No one will hear of a nice, juicy, Pakistani exit story. Many sponsor shareholders will choose to keep their wealth abroad & may relocate.
8. But these are all short term & transactional issues. The real strategic loss to the state of Pakistan is the continued perception that it is not safe to invest in it directly, that investors' assets may not be safe, that regulators & regulations r inadequate, that judicial ...
9. ... recourse will not be swift, that disputes may go unsettled, that investor's wealth may remain stuck in Pakistan, that tax regime is unpredictable and enforced selectively. Foreign hold Cos scream at the world: "jaagday rehna, Pakistan tay na rehna"
10. Yes, conviction & patriotism plays some role in diaspora led funds but even for these fund managers, and all the more for foreign investors w no connection to Pak, the decision to invest in Pak has to be commercially sound and safe.
11. Therefore, the state of Pak needs to roll out the red carpet for every1 investing in Pakistan regardless of the amount. We need to scream at the world that we r a safe bet. We'll protect your assets. We will tilt the scales in ur favor if u invest HERE instead of elsewhere.
12. Pak should aim to be like Singapore in 5 yrs & not back-office of world. A place where not only investors invest directly but create hold Cos for their investments in other countries. It will start w facilitating small investors today, understanding/fixing their challenges.
13. To wrap up, as trailblazing VC investors, we all need to think beyond transaction optimization & help the state address the systemic issues we all face so it can become an attractive investment & business creation destination like Singapore.
14. In order to address market failure, the state may have to create incentives for global investors to invest in Pakistan in short term, but in the long term, taxes from income & capital gains earned will create fiscal space for development in the country.
15. Otherwise, 5 yrs down the road, it will only be a bunch of Pakistanis like us trying to invest in Pakistan driven by our passion for the country while the rest of the commercial capital of the world will write us off & choose more business friendly jurisdictions to invest in.
