22 July 2022

Impact investing in a frontier market

Raising funds to invest in Nepal is challenging but highly impactful, Dolma founder Tim Gocher tells Peter Cripps

Tim Gocher's journey as a pioneering impact investor in Nepal began with a two-week holiday to the country nearly 20 years ago.

While trekking in the Himalayas, Gocher, from Essex in the UK, fell in love with the nation, its people and their "spirituality".

His love-affair for the rugged country led him to set up a charitable foundation to help alleviate the poverty that blights the country. He went on to marry a Nepalese lady he met through the foundation, and eventually launched the country's first private equity fund.

Dolma Impact Fund I closed in 2014, raising nearly $37 million. A second fund followed in "a terrific vindication of the strategy": Dolma Impact Fund II has raised a total of $50 million at its second close, and it hopes to reach a final hard close of $75 million by November.

Tim GocherThe funds, which focus on Nepal's energy, healthcare and technology sectors, provide growth capital to small and medium-sized enterprises (SMEs), and renewable energy projects. They were established to generate private sector growth and jobs, positive social and environmental impact, and risk-adjusted market returns.

Raising funds to invest in a frontier market such as Nepal has been a labour of love, but it is also one of the most impactful places in which to invest, says Gocher, who is founder and CEO of Dolma Fund Management, and founder and chair of the Dolma Foundation.

Nepal is one of the poorest countries in the world, with 25% of its population surviving on less than 50 cents a day, and 39% of children under the age of 59 months suffering chronic malnutrition, according to the World Food Programme. It was badly impacted by the pandemic, which effectively halted its income from tourism.

"We have contributed to the lights being on"

Nepal struggles to attract investment from the 'global North'. However, Gocher, who spent three years raising the first fund, says this leaves rich pickings for his fund.

"There's a lot of [investor] focus on China and India, the two giant bordering countries, but much less focus on Nepal, which means you have a better pick of the investment opportunities," he argues.

His efforts to help the country's development have already been recognised, when he was awarded the title of Officer of the Order of the British Empire (OBE) for his services to investment in Nepal. He told Environmental Finance at the time: "Investing in developing countries is the most sustainable and dignified way to improve lives."

The fund has already made what Gocher describes as "a great exit", when it sold half its stake in Cloud Factory as part of a growth equity funding round in 2019.

Cloud Factory manages data that can be used in automation and artificial intelligence. Dolma invested in 2017.

That was the first – and only – exit so far, but Gocher hopes more will follow shortly. Dolma is exploring exit opportunities for its two hydropower plants. One of them, Swet Ganga, has embarked upon an initial public offering on the Nepalese stock market. It is set to be the first hydro or energy IPO in Nepal to be backed by institutional foreign direct investment.

Renewables are a significant investment theme for the funds, with much of the population still lacking access to electricity, and the country's mountainous terrain providing potential for more hydropower.

"When we started investing, the power was often out, and there was loadshedding for 16 hours a day. We, and many others, have contributed to the lights being on."

As well as two hydro plants, Dolma also financed the first on-grid solar project to sign a power purchase agreement (PPA) in Nepal. These three plants will have a combined generating capacity of 47.5MW.

Fund II is in the process of committing to another hydro plant and is on the lookout for commercial and industrial solar plants, he adds.

However, tech has been the fund's biggest allocation, says Gocher, particularly firms focusing on artificial intelligence and ecommerce.

"Foodmandu is our latest investment – it's an Uber Eats for Nepal. I love the name!"

When asked which aspects of the funds he is most proud of, Gocher's answer is: "Job creation in one of the poorest countries in the world. We now have about 10,000 jobs created in our portfolio companies as a result of our investment. That's 10,000 families that can pay the bills."

He also points out that the renewables projects his funds have financed have helped an additional 1.8 million households to have access to electricity.

Currently, the majority of the investors in the funds are development finance institutions (DFIs), alongside a handful of high net-worth individuals.

Gocher says his "goal in life" is to attract institutional investors as the funds build up the track record of investment.

He points out that one of the problems facing Dolma is that Nepal does not have a credit rating, as it has never issued a sovereign bond. This, he argues, rules it out for many Western impact investors' portfolios, as it is deemed too risky.

"If you go to a pension fund or asset manager, they are going to require things like an investment-grade sovereign credit rating. And Nepal doesn't have a credit rating, let alone an investment-grade one.

"That greatly underplays the country, as it has a 100% record of paying its power purchase agreements, has never defaulted on an external loan, as far as I know, and has a low debt-to-GDP ratio."

"Nepal is not an economic basket case. It is having an issue with foreign currency reserves as tourism declines, but its institutions pay the bills."

He hopes that Nepal will issue a sovereign green bond to help secure a credit rating.

In addition to impact, there is a strong financial rationale for investing in the Dolma funds, Gocher argues. The funds target gross returns of 20% per annum. Fund I is on track to meet these targets, he says.

He adds that "the correlation between Nepal and S&P 500 is zero".

"As well as higher growth and risk, you are buying diversification. Then there are the spectacular levels of impact on top of that."

"As well as higher growth and risk, you are buying diversification. Then there are the spectacular levels of impact on top of that"

When asked if he would be happy with his pension going into one of Dolma's funds, he responds that he would be happy for "a bit" of it to be allocated: "It has a lot of upside."

Meanwhile, Gocher has set up a renewable energy focused company – Dolma Himalayan Energy (DHE) – that can extend its reach to other nearby frontier markets beyond Nepal. It plans to develop renewables and battery storage in the Himalayan region.

Gocher says 600 million people in the bordering states of India are already suffering the effects of climate change and are at risk of glacier melt, which is being accelerated by soot from coal-burning and vehicles.

DHE is currently developing a bespoke peak energy management system combining solar PV with an energy storage system to ensure an accessible and affordable supply of power to Nepal's grid, helping to address energy shortages in the dry season, according to its website.

DHE's plans to raise capital took a hit during the pandemic, when it was forced to put its fundraise on hold, which forced some of the backers to pull away.

However, Gocher is confident that these investors will return, and he's actively seeking to get the venture up and running.

Read Gocher's piece for Environmental Finance about the venture here.

Tim Gocher