By Jon Springer Contributor:
“Business and finance have not always taken society and the environment into account as stakeholders to manage from a risk perspective or to leverage from a competitive perspective… There is a cost to ignoring such stakeholders. This is as true in frontier markets like Nepal as anywhere.”
Jon Springer: In 2003, you went to Nepal for the first time. This leads to a charitable fund (Dolma Development Fund) and a private equity impact fund (Dolma Impact Fund I). What role did your career prior to the trip to Nepal play in the vision you had for these projects and your ability to execute them?
Tim Gocher: In 2003, pretty much nothing. My background was in finance, investment banking and technology. None of those were particularly applicable to a desperately poor country in the grips of a civil war.
I remember feeling quite frustrated. I felt if I was a teacher, I’d be able to do some good. I suppose being a businessman was useful in figuring out how to both raise money for kids’ education and to develop ecotourism businesses that generated money for the education.
I managed to get individuals, friends at first, to sponsor children through the charity. These donors, who track the progress of their students, have grown more than I could have hoped. In that sense, there was some use in the end.
At that point in 2003, I didn’t think a commercial investment – or my day job, so to speak – would be useful. It was only in about 2011 that light switched on.
Springer: In 2003 when you started the charity, you didn’t make a connection that the charity was very similar in function to how a private equity fund would function there, albeit on a different scale?
Gocher: No. It was completely different. It was just based on philanthropy and poverty alleviation. Mainly education. We tried a few things. We tried putting in water pumps, putting in bridges over rivers, various things to help the communities. Those projects were very difficult to manage. People didn’t have the implementation skills. The money often didn’t effectively go to where it was intended.
If you want to generate a society that is more prosperous in the long-term, it has to be education. Education is the best form of long-term poverty alleviation. It was a bit of trial and error getting to that point. Then it was clear it was education first and then ecotourism to help pay for the education.
I didn’t really think of a private equity fund. At the time I was working for the energy company E.On financing wind farms and things like that. I completely had my day job and the Dolma charity in Nepal was a voluntary labor of love.
Until 2011, the charity did some things you could call impact investing. We invested in schools to help expand them and we invested in community ecotourism. These were things that we started before the term impact investing took hold.
By 2011, four things triggered me to start a private equity fund in Nepal:
1) The rise of the impact fund, particularly in South Asia. We saw Vineet Rai at Aavishkaar in India, probably the biggest impact fund in India, and there was huge growth in impact investing there. Globally, there’s Acumen, Omidyar and many others playing a role in the growing importance of impact investing. I saw that there were impact investors in Bangladesh, Sri Lanka and Pakistan but nothing in Nepal. We also saw the pioneering work the UK Department for International Development (DFID) was doing in stimulating sustainable wealth creation in frontier markets. We worked with them from an early stage and they were a catalyst not just for our development, but for the entire private sector of Nepal.
2) The political stability in Nepal improved. The civil war finished in 2006 when the peace accord was signed. Since then, politicians have come and gone, but there has been peace. That culminated in November 2013 with a successful election with 70% turnout. The Nepali Congress Party – the establishment party so to speak – won this election after the former Maoist rebels had won the prior election. Importantly, this means that the Maoists who were previously in battle with the government have now participated in two elections, won one and formed a coalition, and now lost one and gone into opposition peacefully. The fact that the Maoists can lose an election and still form a peaceful opposition is a very good sign for future political stability.
3) The economy of Nepal is the third factor. There is a chronic issue of under-employment locally. The economy is highly reliant on remittances from citizens working abroad. According to the National Unemployed Youth Society, of the 400,000 Nepalis entering the job market each year, 350,000 leave for work abroad. And the Asian Development Bank expects the number of annual job seekers to grow to 633,000 by 2020. This is a horrific state of affairs. There is not enough local job creation.
The flip side of this negative social strain of so many being away from home is that hard currency is coming back to the country. 63% of migrant workers’ families are the rural poor. These remittances have grown as the job crisis has not improved. Just over 25% of the GDP is now remittances and it has grown at multiples over the last 5 years. There is therefore a market-driven opportunity to improve product and service availability for the poor by helping local firms expand to meet the additional demand.
4) My marriage in 2007 to a Nepali lady, Pooja Gurung. This should be perhaps the first point in this list as it is the source of greatest inspiration. Pooja and her family are an example of what Nepal as a whole can achieve. She is from an educated family that worked their way up. In her twenties, she effectively built and managed a rural school and secured a much sought-after international teaching post in Singapore before we were together. She continues to be an international school teacher while advising on Nepali education. With two Anglo-Nepali boys, we have a vested interest in a prosperous future for Nepal and we hope their lives will be enriched by their diversity.
Taking into account these four drivers, we launched fundraising in 2011 for Dolma Impact Fund I which successfully concluded in 2013/2014. We are an impact fund answering a market demand. Our job is indeed to be commercially successful in order to generate sustainable employment. The two outcomes will be very closely correlated. So when we generate our impact reports, jobs is the metric that looms above all at the portfolio level.
Springer: According to your third point, 7 out of 8 new jobs created in the Nepali economy are for Nepalis working abroad. What are the cost-benefit consequences of this?
Gocher: Job seekers are leaving Nepal often for construction and other blue-collar work, and often in poor conditions. It was recently highlighted by The Guardian that 185 Nepali migrant workers died in 2013 on the World Cup projects in Qatar alone.
There is a lot of ill treatment of these people. They are purely economic migrants. But, of course they do it because they can earn far more money than they can in Nepal and they send money back.
What this does, because most of these families receiving the remittances are mostly the rural poor, is put spending power into the families of the poor. For the first time, they have disposable income. What do people who are emerging from poverty for the first time spend their money on? Put the lights on, health care, clean water, education, maybe open a bank account. These, of course, are also key impact sectors.
Companies in Nepal have few options for equity growth capital. Friends and family is only possible if you have a wealthy network. There is no institutional venture capital or private equity except for the pioneering work being done by IFC [part of the World Bank] and other multilateral institutions. The debt market is relatively mature for a frontier market, but unsecured lending is almost unheard of.
Basically, it is very difficult to raise capital to meet the growing demand from the remittance boom. So without the ability to expand facilities, entrepreneurs have no choice but to import their production inputs, largely from India. This is a tragedy. The sweat, tears and even deaths of migrant workers gives Nepal spending power, but the missing growth capital means that there isn’t resulting job creation. I have a chart that shows that remittances and imports from India rising hand in hand year on year.
What we hope is that the labor market slowly rebalances providing more jobs locally that pay enough to persuade more Nepali workers to stay at home.
Springer: You have suggested the hydropower potential of Nepal could reach 83,000 megawatts. There are already some projects in progress. However, some people may be concerned about the environmental impact of creating hydropower. Where is the balance between economic impact, environmental impact and social impact?
Gocher: We only do small-scale run of river projects with very strict environmental, social and governance compliance commitments both locally and to our investors.
With run of river projects, basically the water is not dammed. The turbine is put in the water and it uses the river flow to create energy. You may divert some of the flow to go faster downstream through a tunnel and then rejoin the river, but the fundamental difference is the river is not dammed.
This is a far lighter environmental issue. There are still some issues and we must do an exhaustive environmental impact assessment for each project.
The provision of energy is an enormous social and economic foundation that Nepal lacks. At the moment, it is very difficult for businesses. Currently there are power cuts of about 12 hours a day in the capital, Kathmandu, in the dry season. It is a bit less in the monsoon season because the rivers are running. Businesses we may invest in – manufacturing, agriculture – all of them need power. If you need to buy diesel and run a generator, it is much more expensive.
For the bigger question about where the balance is between social progress, people having access to power and the environment: I think Nepal is blessed by having hydro potential. The current level of power outages is absolutely horrific. The lack of investment in Nepal means they are unable to capitalize on their natural resources. They could be the Saudi Arabia of clean energy.
I think the current demand in Nepal is only a few thousand megawatts. The potential of the country is 83,000 megawatts just for hydro energy. So, let us say the country’s need goes up to 10,000 megawatts, there’s still an enormous overcapacity and India next door, a country that doesn’t have sufficient natural resources for its energy supply.
The Nepal Investment Board and other groups are doing a good job on the megaprojects for hydro energy, up to 500 megawatts or 750 megawatts. We might do a 10 to 25 megawatt project which is very good for a remote region. For the larger projects, China’s Three Gorges Dam company has shown interest in one of these megaprojects. Obviously, Nepal will not get to the potential of 83,000 megawatts of energy without megaprojects. The larger projects will probably have more of an environmental impact, but our Dolma Impact Fund would not be involved in those projects.
This is a long time away. It could be decades before Nepal services properly its own power demand.
Corruption And Governance
Springer: In your blogs for the Collier Institute of Private Equity at the London Business School you are quite candid about the issues of corruption and corporate governance in Nepal. These things often improve slowly and incrementally. How do the Dolma funds navigate this environment? Do your funds have a role to play in these improvements?
Gocher: Very much so. This is one of our crusades. I find corruption a truly vicious cycle.
I try not to look at it from a moral perspective. People are not corrupt because they are evil. Some perhaps, but generally people are good citizens. But, the people are locked into an ecosystem where competition is often driven by negative activity – corruption, tax evasion and so on. What I mean is, for example, I can sell cheaper products than you because I am paying less taxes or I’m getting a cheaper license from the government or whatever it is.
That’s a very negative cycle. The under-payment of taxes exacerbates fiscal dependency on bilateral and multilateral aid organizations who often step in to fund the difference. If not propping up deficits, more of this money could be used for infrastructure and other more progressive projects in poor nations. Yet, if you put yourself in that entrepreneurial situation – and I’m not justifying it for a second – you can understand why you simply won’t have a business unless you engaged in those activities that your competitions does as well.
Our intent to bring improved and more transparent practices in Nepal is reflected in our board of directors. These include Rameshore Prasad Khanal, Former Nepal Finance Secretary (well known locally for his stand against corruption), and David Grigson, former Reuters CFO, current chairman and director of large UK public companies and an expert in corporate governance.
Springer: Corruption is often another term for how business is done in a country. If it is standardized to the point that everyone is doing it in the same way, right or wrong, it is the process of how things are normally done in that country, isn’t it?
Gocher: It is absolutely systemic.
There is another reason that keeps coming up. Take tax payment again. Taxpayers in Nepal often have a moral problem handing over their money to the government when they are concerned that a chunk of it will end up in an official’s pocket. There is therefore a lack of trust on both sides.
I can see it from both ways. It is a completely systemic problem.
This problem is not unique to Nepal. It is fairly common in many emerging and frontier markets.
Our focus to address this problem is on competitive dynamics. I’ll start with a macro-utopian vision and then I’ll talk about how we’ll deal with corruption on a day-to-day deal basis. The macro-utopian vision is that we create – through our investments and associated efforts in growing companies – corporate champions in the markets and industries of Nepal. We create them not only to be successful but also to give examples to others that proves that one can compete not just on saving money, tax evasion et cetera; but on sound strategy, investment, better facilities, more efficient technology and production techniques, better management and more healthy competitive dynamics. If we are successful at creating champions within industries we are investing in then I think other firms will have to look at alternative models of competition.
How do you create those champions? We will often find situations that are not perfect. But we operate under very strict compliance guidelines, especially from our sovereign investors. There needs to be a very strict plan to turn a business’ operations, finances and tax affairs to full compliance. What some entrepreneurs may think as we negotiate with them is something like this: if I take Dolma Impact Fund money I have extra compliance costs ahead, I have to pay more tax, I have to pay full price for government licenses, et cetera. Do I believe that by applying this new capital in this new compliant way that I will make more money than I will lose with these new practices?
I think this is the business calculation and if they feel the growth story is not sufficient to offset the effect of corruption, they won’t take our money. They may not say that is the reason, but that will be it. Thus this is a commercial discussion, not just a moral one. We need to find entrepreneurs who are up for growing in this way and becoming industry champions that can be both compliant themselves and a beacon to others.
Impact Fund Formation
Springer: If you are the first fund of its kind in Nepal, presumably there was no-one in Nepal with direct private equity or impact investment experience. How did you find the necessary talent for your team?
Gocher: Other than myself, all other members of our investment and administrative team are Nepali. Our first hires were Non-Resident Nepalis (NRNs) who had attained Master’s degrees and experience abroad and returned home to work for Dolma. For example, Shabda Gyawali, a US MBA graduate with strong global experience, joined at the start of fundraising over two years ago. He has been instrumental in building our pipeline and relationships in Nepal and deploys an ideal blend of international best practices and local knowledge. Nikita Bajracharya came with a Master’s, experience from the UK and a great deal of drive.
Our most recent and most senior hire was local. Bidhya Sigdel was Head of Business at a Nepal development bank. He is a chartered accountant and joined us as Investment Director. We therefore have a blend of international and local experience. Most importantly we all share one thing: a passion for the nation’s development and a belief in its entrepreneurs. With their impressive education and CVs, there are easier ways for the team members to make money abroad. I respect their dedication to their country and their hard work.
Springer: Do you model yourself after any other private equity funds backed by IFC and other development banks?
Gocher: I’ve noticed in this market of frontier impact private equity, a lot of the fund managers talk and have been extremely helpful to me. It is a small world and we’re not really competitive in any way at this point. I often swap notes with the likes of Pragati, Aavishkaar, Leopard Capital and others. I’ve been inspired by everybody. Each model is a bit different. I’m glad that other people have plowed the brave path before me and are willing to share their war stories, experiences and know-how.
Springer: Much of the funding for your private equity Dolma Impact Fund comes from three European sovereign funds. In addition, I understand you are working with agencies such as the UK Department for International Development (DFID). The role of private equity is often to invest in businesses that are rough around the edges, improve them to a higher standard and add value to the company. Where is the sweet spot between the high compliance standards of your investors that have to answer to their own government mandates and helping Nepali businesses meaningfully?
Gocher: DFID have provided grants and guidance so we can together tackle some of the systemic hurdles in the Nepal market – in other words issues of public good that benefit all potential investors in Nepal. For example, DFID has helped with regulatory hurdles for incoming equity and how equity funds could be best structured to both put money into Nepal and to exit. So DFID’s role is to make sure that the learnings we gain, and the changes we are able to advocate, are there for all the market both in Nepal and possibly other challenging markets where they operate. They call us a “capital bridgehead”. They make our findings available in the public domain so that any future funds can benefit from that work.
DFID has been a vital catalyst for the fund. They have reduced the risk of setting up and helped clear some of the regulatory hurdles. They don’t usually invest directly and they don’t in us, but they stimulate a tremendous amount of private investment and private sector development around the world. I think they’re very much leading the charge on private sector stimulus – very much aligned to what I’ve said about aid dependency – and I think their goal is to do themselves out of their job; to move countries away from aid dependency through wealth creation.
As to the compliance required by our sovereign limited partners, they are realistic. They are all experts in investing in frontier and emerging markets. This is why Development Financial Institutions make such good partners for such a fund; they will take the risks that pension funds and other investors might not. As a result they have become experts in risk mitigation and compliance in these environments. We learn a lot from our investors and they also help us meet other funds they have invested in so we can benchmark best practices.
In terms of compliance, it is strict environmental, social and governance reporting. From a corruption perspective, we need to stamp it out; we need to have a plan with each company we invest in. We welcome these strictures. I have managed funds and investments before and we don’t find it overly burdensome, but reasonable.
Nepal’s Wealth Spectrum
Springer: In 2013, Nepal had its first billionaire in Binod Chaudhary as noted in the pages of Forbes. What role does his Cinnovation/Chaudhary Group have to play in improving how business is done in Nepal and Nepal’s global image?
Gocher: We don’t have any direct dealings with Chaudhary Group. Binod has two brothers, Arun and Basant. I have only met Basant who himself is working on some promising environmental and social businesses. We are looking more for companies that can be Nepali champions that do not have reasonable and easy access to capital.
The fact that there is a billionaire in the country is a good thing. It shows there is a possibility that people can become wealthy in Nepal.
Springer: The Dolma Development Fund is a charity with the twin mandates to foster education and sponsor entrepreneurship. The Dolma Impact Fund I is a private equity fund that has investors who expect an investment return. How do these funds and mandates interact?
Gocher: Well, my personal, overall goal is poverty alleviation. There are a number of tools for that.
Some people take the view, especially in places with a lot of NGOs, that there are only two sides of a fence like Thatcher’s conservatism vs. Labor; some people believe that the market is the solution and some people believe that aid is the solution. When you have purists in those camps, it doesn’t always work out. I’m not a purist, I think there’s a range of tools from pure philanthropy to subsidized impact investment to market driven impact investment. I believe this is a spectrum.
Now, when you go into a remote Nepali village and there’s a kid in rags with no education, there’s no business or revenue to be had. You just send the kid to school and make sure they don’t get sick. That’s philanthropy. And that is a great thing. That is a necessary tool for that kind of poverty.
When you speak to a businessperson in Kathmandu who has a reasonably successful business but just can’t meet his demand, he does not need a grant. In fact, a grant could be damaging. Free money can become a dependency and doesn’t bring alongside the alignment of interests that an equity partner would have in growing that business. What these business people need is a commercial partner to help them grow their business.
Then there are those groups in the middle. They may not meet a market return criteria. But, these types of businesses may make 5% return and create hundreds of job and be fantastic. They are valid too.
The way our mandate delineates it is very clear. The Dolma Impact Fund I is a market driven fund. It is trying to generate market returns to prove that Nepal can generate such returns in a clean and transparent all-tax paid businesses. If we do that, then we believe we prove that there is a viable commercial model in Nepal to the world. Vineet Rai started Aavishkaar in India with $1 million over a decade ago and made some exits. He now manages well into the nine figures and we estimate India’s impact investment market in terms of assets under management to be around $600 million, some say much more depending on the definition. Money follows money in markets, but we have to start somewhere. We hope Dolma Impact Fund I provides such a stimulus.
The Dolma Development Fund covers everything else that involves some subsidy to the market; whether that is a subsidized impact investment, taking on more risk, or an investment with no market return or pure philanthropy. We are building health clinics, sending kids to school, investing in schools, investing in community ecotourism, et cetera. These are the kind of things the Dolma Development Fund does. It is a charity.
The income of the Dolma Development Fund is small, about $500,000. The Development Fund would normally invest between $10,000 and $50,000 in a project whereas the Dolma Impact Fund I will invest $500,000 to $3 million per transaction.
We need to maintain complete separation between these two entities. There are no cross operations, no cross ownership. We would never invest from the impact fund in something the development fund had invested in. We don’t want any issues with conflict of interest. Thus, they remain completely separate. The only reason there’s a common brand is because this is my spectrum of poverty alleviation, but the teams that are working in each separately are there to do their own thing. However, 10% of the carried interest [profit share] of the Dolma Impact Fund is donated to the charity.
From Charity To Private Equity
Springer: When the Dolma Development Fund was founded in 2003, you saw no possibility to raise capital for a commercial fund. In the end, you concluded that the only way to raise funds for Nepal was philanthropic. Things have changed a lot in 11 years. How is the engagement of profitable private equity investment with its partners – small and medium enterprises (SMEs), developing countries, development banks and agencies – all changing the development opportunities in developing countries for the people who need it?
Gocher: For the Dolma Impact Fund I – the commercial fund – our mandate is as a finance first impact fund. In frontier markets at least, I don’t believe there is a trade-off between market returns and social benefit. In fact, I believe there is a correlation between business models that promote environmental and social sustainability, and better risk management and ultimately more competitive models. To generate sustainable employment, the companies must be fully commercial, or sooner or later the subsidies will run out. That may generate less jobs, make our investments less sustainable and ultimately lose the opportunity to act as a catalyst for future commercial capital to the country. We need to quantify that we add market value in a risk-managed way that also creates a social good.
If we take Dolma Ecotourism, a business model followed by our Dolma Development Fund charity, we provide a completely unique experience because it is a community driven project. You go on holiday and live in a remote Nepali or ethnic Tibetan village. You use that as base camp to trek. If there is a wedding, you join it. If there is a funeral, you join it. You’re immersed into this beautiful culture. As opposed to your normal trek through Nepal where you might stop in a village, take a photo, buy a souvenir and move on. There is a great sense of immersion, making friends and creating bonds with people who are completely remote and inspiring with their sustainable lifestyles.
We found that this is a better sales proposition than a glitzy travel company arranging treks to the Himalayas. It drives direct value into the community because there is no middleman. The wages and profit go back into the community to be used for education. We are not making it cheap or subsidizing it, we are putting the community at the center of the business model to make it more competitive. In doing so, we are also reducing the risk that this community will one day get fed up with foreigners traveling through their village when the village has no fully vested interest in the foreigners visiting their community.
This is the same with hydro plants. If you don’t include a pool of local equity, if you don’t include the local community in the hydro projects, they will resist.
Models that ignore the society ignore the risk to the business from a community not included. Society and the environment are stakeholders in any business, just like shareholders. If they don’t get their fair share, something will go wrong and you will pay for that financially. That’s my point.
This is not only social conscience speaking, it’s core business strategy and risk management. It’s not about making profits and giving to the poor. That’s what CSR is for. It’s about embedding social and environment principles into the competitive strategy and risk management of a business.
Springer: Can you quantify how running the charity for eleven years has helped lay the foundations for the impact fund?
Gocher: Firstly, the charity and my family connections have helped me know the country well. More specifically, the charity has made some small investments. The experience from this is helpful. I also think that running a charity makes you more socially aware as an investor. You are more focused on the welfare of the people. You want to include the society’s development in the development of business plans. In this sense, the experience with the charity has helped shape our new fund as an impact fund instead of a straight private equity fund.
Political Data Points
Springer: Nepal’s GDP is growing if one looks at a chart. Yet, 25% of GDP is remittances, people sending money home. Are the policy makers of the country laying the foundations to grow jobs domestically?
Gocher: There is definitely a willingness in Nepal among the regulators and the new cabinet just formed to be business friendly. I must say that the prior government was not unfriendly to business, but the new government has more of a mandate to be so. Senior regulators come and meet our investors when I bring them to Nepal which I find incredible for such a small fund. This is a sign of just how keen the nation is in attracting responsible foreign equity.
There is a very strong concern and caring to make things better at the top of regulatory agencies. I find them engaged and very easy to talk to. We discuss regulatory changes that would smooth the path for foreign investment. They always listen, debate and often acted.
I would describe the tops of the regulatory agencies I’ve dealt with as quite enlightened. Some may be surprised to hear me say that, but that is frankly my experience. Of course, bureaucracy is an issue, but not a show-stopper.
In a country like Nepal with around 30 million people, we can make an impact that we could not in a larger country. We can have reasonable conversations with people at the top and effect change when they are convinced what we suggest betters their country.
The government is definitely trying to be warm and friendly to foreign investors and improve their regulatory environment.
Springer: Political stability has been an issue in the past with Nepal, notably with the civil war for the 10 years until 2006. Are there risks to political stability going forward?
Gocher: There’s always risk. It is far from an efficient system, but in my 11 years of being involved in Nepal, this is the most stable and positive political outlook I’ve seen. I think what is not a risk anymore is a return to conflict.
After the recent elections, where the Maoists lost and peacefully assumed their role in opposition, I think it is almost impossible at this point to see a return to conflict. In 2013 they completed the peace process and decommissioned the peace committee. Enemy combatants have either been integrated into the army or they have been given a payment and gone back to their homes.
The objective now of the government is to write a constitution within a year. The major parties are working together on this.
The real heroes of Nepal are the entrepreneurs that have operated businesses over the last 10 years during a very difficult period. These people are the ultimate risk managers. We in the so-called “West” think we have a level of risk to deal with; they operate in a different league of uncertainties.
Springer: What are the primary sectors the Dolma Impact Fund I will invest in and what are some exemplary projects?
Gocher: For the private equity fund, there are six natural sectors we focus on: clean energy (mostly hydropower), education, water and sanitation, agriculture, healthcare and financial inclusion. Financial inclusion would include mobile banking and other ways to include people in the formal banking market that don’t have good access now.
We see across the board an over-demand and under-supply in the economy. As an example, we are looking at investing in an agricultural company. It has done well and lacks the capital to grow. It’s hard for them to grow their own capacity due to a lack of equity capital. They also want to secure imports into their production process that are locally sourced. If they are importing from India: a) they are at the mercy of spikes in commodity prices; b) there are often strikes and similar issues; c) they are at the mercy of border issues.
A lot of entrepreneurs would prefer to source inputs into their process from local sources (instead of India) but the problem with local sources has been quality. If we make an investment into such a company, then their objective is to backwards integrate into the local supply chain. In terms of agricultural inputs, this means providing silo storage around the country to allow farmers to store grain and sell at the right market time instead of as soon as it is harvested. What you start to see then is a fantastic multiplier impact from the investments not only in the company but also in the entire supply chain.
I think the same story plays out in a pharmaceuticals company that makes low cost drugs. They are a local company that reengineers production of products to sell them at a very low cost suitable to lower-income consumers. They have a need for inputs. They would prefer to source them locally. They need capital to build that local ecosystem and drive up the input quality. They need the money to expand and build the supply chain locally. So across the sectors we are investing in with the impact fund, this is the case. We may be investing in one company but there is a vertical impact in the system that is larger than the investment in that one company.
I think what’s happening here is that if you want to capture the demand and you want to drive broad-based employment and prosperity from the existing demand, you not only have to help companies expand their own production facilities, you need to help them expand into the local supply chain. This is not driven by impact. It is driven by a necessity because of the difficulties of importing everything and being at the mercy of risks beyond your control. If supplies are held up at the border, they can be out of business. For me, it is an impact multiplier that you generate jobs and prosperity both for the company and the local supply chain. There’s a very positive upstream and downstream effect.
We have about 35 companies in our prospective pipeline. Hydro is quite important because there is such a shortage of power and our other projects can be in any of those six sectors I mentioned.
Springer: As we’ve discussed already, one type of project the charitable Dolma Development Fund invests in is ecotourism. For people who have not been to Nepal, what is the sale’s pitch from Dolma Ecotourism to our readers?
Gocher: It is a unique immersive environment. The guest visits communities in small groups capped at 8 people visiting these villages. We have renovated properties so there are toilets, showers and such things. The community really hosts the visitors. An English speaking Buddhist Monk joins the trips, not because it is a religious vacation, but because Buddhism is so core to these cultures. He helps explain the rituals and theology behind village life. It is very cultural and local. And perhaps the best way to see Tibetan culture is just outside of Tibet because you don’t have the Chinese administrator in the village telling tour guides what to say. It’s a very good way to see the beautiful Tibetan culture on the Tibetan border. I don’t think people choose it because it is a non-profit with all profits going towards education. I think they choose it because it is a unique customer proposition.
Springer: It is clear from the Dolma websites that enhancing education in Nepal is important to you. It is both one of the six sectors of focus for the impact fund as well as a primary focus for the charity. What makes this focus dear to you?
Gocher: The charity is clear, we basically send kids to school with scholarships. We also have helped schools build boarding schools wings so the poorest children can come and attend the school because it is too far to walk.
For the impact fund, we are looking at technology that can help teaching, particularly in rural areas. There is a very common situation that a village school may have about 20 kids covering 10 academic years. There will be one or two teachers that cannot possibly know the curriculum for all those years. One company we’re looking at is a very good education content software company that updates itself over the Internet when the Internet is available. The teachers get these animated teaching aids following the Nepali curriculum from the company.
Many village schools close down because there are not enough kids and the teachers are not good enough to get the kids into school consistently. We think through this remote technology we can bring quality education, filming of other teachers, tele-education, to the classrooms of the remote areas of the country. And we think people will pay a small amount for this as a licensing fee. Our interest is in what technology can do to keep those villages and village schools alive, and improve the quality of education.
Nepal is the most rural country in South Asia. 80% of people live in rural areas. It is also the fastest urbanizing country in South Asia, so you can expect that number to drop. Half the rural country is in the south that is relatively flat and half the rural country is in the Himalayas. Things are a lot more difficult in the Himalayas where when you need to travel two kilometers that may also mean you have 6,000 vertical meters to get where you are going.
It is very difficult to build economies of scale for many businesses and social needs of Nepal. This is why I think tele-medicine and online education – using the new technology available – is the way forward to improve these services.
Springer: Is the Dolma Impact Fund I making any investments to capitalize on the trend of urbanization?
Gocher: I think both funds are trying in a way to stem the urbanizing trend that is also putting a stress on the infrastructure of Kathmandu. I think we are trying to create reasons where it makes economic sense for people to stay in the villages. In many ways, the villages are beautiful places to live with clean running water from the Himalayas and a less polluted environment than Kathmandu. Through economic necessity people move out of the villages to the city, not through lifestyle choice. If we can give them a livelihood in their villages, they will be more likely to stay. I hope this also helps to preserve the fascinating cultures.
I think those cultures are beautiful, valuable and very relevant to western society. I think the way Tibetan Buddhism works is fascinating, a very harmonious egalitarian society. I think these cultures have a lot to teach us.
When I first went to Nepal I was blown away by how sustainable it really is in the true sense of the word: they have lived within the limits of their land for thousands of years perched on a mountainside. They know exactly that they cannot over-cultivate or deforest too extensively. There is no regulation required there, as they are conscious of their limitations whereas we in the West are trying to be carbon neutral and all these things because we screwed up the world. They never screwed up the world in the first place and are living a very harmonious life within the natural restrictions. There is so much these cultures can teach people.
They don’t know how precious and special they are, because they don’t know the outside world. Some have no idea why people are interested in them. But I think if we lose those cultures and skills, the world loses a lot. This is my personal view and it doesn’t really affect our investment mandates, but it certainly is something the charity focuses upon. If we are going to make an intervention into, say, education, how do we make sure the school isn’t too far away so that the kids can go home on weekends and holidays? Or how we can integrate the community and parents into the schools? A lot of the things we do with the charity are trying to help maintain the culture while building education.
On the other hand, you have to understand the motivations for people. Why would you move from a clean beautiful mountainside where you grow your own organic food? Once a remote culture comes into contact with a road, they see things like T-shirts, sweaters, training shoes and clothing that seems better, or at least different, from their traditional clothes. They see schools and other children who have a better education than them. They are exposed to modern medicine for the first time.
As any parent would, they want that better life for their children. To better their lives, without any economic mobility prospects in their village, they move to Kathmandu; they’ll sacrifice anything for their children; they’ll work in terrible labor conditions with dreadful health and safety; but their kids will get an education. You have to respect that. You can’t keep people in a museum. Times change.
The more that we can improve education, healthcare and the economics of the people in the rural areas, the more likely they are to stay. I think this is good for everyone long term.
Springer: One of the most rewarding days for an impact investor has to be the day you exit from an investment and leave a capable entrepreneur in charge of his or her own business without need of further capital or input from you. Although the Dolma Impact Fund is only beginning to deploy funds, what is your typical timeline and strategy to exit investments?
Gocher: Our target IRR is mid-teens to return to shareholders in US dollars.
In terms of deploying funds, we are now setting up the entities. We expect it all to be ready by the summer and make our first FDI license application for our first deal shortly afterwards.
We are a 10-year fund. Our typical holding period goal would be 3 to 7 years. The exit potential is either on the local stock exchange that is actually good for hydroelectric power; less good for other industries due to some restrictive policies.
Separately, Indian FDI growth into Nepal is over 50% per year. There are a lot of Indian corporates that are successful which will look at a natural expansion into Nepal. There is the benefit of a fixed currency peg so there’s no currency risk for them between India and Nepal; and there is also an open border for labor. Thus I think second best exit strategy would be trade sales to Indian corporates.
Springer: You have become not only an advocate for impact investing but for an idea you coined in one of your London Business School blogs: Quoted Impact Innovation Funds. Do you see signs of progress toward that?
Gocher: In terms of publically listing impact investing and my history, I have set up other early stage venture capital funds, sometimes university spinouts, and I find that model quite good. There are a number of listed funds in the UK that do early stage highly risky financing. I think that if you could get an AIM-listed impact fund in the UK, you have this mechanism of tracking the performance and utility.
Since I wrote my blog on this topic in October 2011, some places like London Social Stock Exchange [LSSE] have started up effectively doing a similar thing. It isn’t an exchange you list on. The LSSE provides a space for existing listed public companies to attach the social and environmental criteria that investors may want to track. Since I wrote my blog, a lot of these things have happened because this is a societal trend. For example there is the IIX, the Impact Investing Exchange, in Singapore. There are a number of exchanges or add-ons to exchanges evolving that allow investors to look at the impact of their investments as well as the financial return.
Springer: What is your vision for the direction impact investing is going?
Gocher: Sovereign or multilateral Development Financial Institutions – e.g. IFC, CDC, FMO – are not strictly impact investors. They require funds to be compliant with high environmental, social and governance standards, but this is a bit like “don’t do evil.” Impact investing is “go out there and do good.” It’s more proactive. This is how I categorize the two.
The Development Financial Institutions are now evaluating ideas from the impact world. How do they measure the proactive elements of impacts as opposed to only measuring if the projects are compliant and not doing anything bad?
There are discussions among the Development Financial Institutions now on how to do this while at the same time they are very sensitive to overburdening the fund managers with so many things to measure that we’re spending more time measuring than growing and developing businesses.
I think impact investing is a bit like a fringe political movement that moves toward parts of it being taken on by the mainstream. This is happening already and that’s a positive thing.
My analogy would be that it is like the UK Green Party. They are unlikely to ever get in power but the mainstream parties will take on elements of their policies. The impact investment movement in its purest form, like at Acumen Funds, may not become the mainstream model for private equity. However, bits of their pioneering approach will be taken on by the mainstream; and parts will be folded into the typically expected environment, social and governance compliance.
I don’t think impact investment will take over the world, but I can see parts going mainstream. This can be seen with the Development Financial Institutions exploration of compliance models. With one of our investors, we have offered to be a guinea pig to test some of these ideas, trying to measure our contribution to GDP, jobs and other economic figures and report that on a more proactive basis than is typically expected by traditional compliance models.
Business and finance have not always taken society and the environment into account as stakeholders to manage from a risk perspective or to leverage from a competitive perspective. I think that’s something that has been lacking in business. I think the way business schools are teaching this has gone from a post-crisis moral crusade – my goodness us business and finance folk need to be better people and not oversell mortgages or whatever bad thing we have recently been doing – to moving on to a more pragmatic debate about risk management and competitive dynamics. That’s the right approach. This is a pragmatic thing. There is a cost to ignoring such stakeholders. This is as true in frontier markets like Nepal as anywhere.
:: In this interview, Tim Gocher discusses running the first Nepal-only international private equity fund, his 11-year-old Nepal dedicated charity and lends his uniquely candid and clear voice to the broader global issues of development and impact investing.
For an introduction to this interview, please see the summary of Mr. Gocher’s résumé that is part one of this two article series: Opportunities In Nepal To Vest And Invest With Dolma Funds.
At the end of our 90-minute conversation, Mr. Gocher summarized his global vision:
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