Nepal's small and medium sized
companies have growth potentials but often lack capital and skills to invest.
Dolma Impact Fund (DIF), which was founded in September 2014, is helping has
been providing capital and expertise to such companies. It is the only
international private equity fund focused purely on Nepal. It has so far raised US$ 26 million
for the purpose.
Rudra Pangeni of Republica talked with Tim Gocher, CEO and Founder of DIF, to know more about the fund.
Rudra Pangeni of Republica talked with Tim Gocher, CEO and Founder of DIF, to know more about the fund.
You have so far assessed about a
dozen Nepali companies and have committed capital for two hydropower companies.
Could you share your experience about assessments you carried out with those
companies?
We are not sector specific. We have been very impressed with the quality of entrepreneurs who can operate in challenging environment. They are the masters of risk management, even operating through earthquakes and political uncertainties.
A certain type of entrepreneurs is drawn to us and we are drawn to them. We provide growth capital or risk capital. We are not a debt provider; we are minority shareholders and share the risk with promoters. In fact, we take more risks than banks. So we are looking for entrepreneurs that share our ambitious outlook for Nepal's market opportunities.
Entrepreneurs want to reach international standards in terms of product, market, compliance, good corporate governance and an ambitious growth strategy. We have seen here in Nepal that markets are not developed yet and there is a lot of opportunity for local entrepreneurs. We want to share these goals. We have international reach to export products and import technology and best practices.
What are basic requirements you look for in those companies aspiring to receive equity investments?
Some of the companies may have made mistakes in the past and they are not perfect. But we do not mind. As long as there is full disclosure on both sides, we are good with that. We don't mind mistakes, but we don't like surprises further down the line.
We have a screening process that may last a week or two. We then evaluate their business plans further and give an 'in principle' approval before proceeding with due diligence. We invest in the range from half a million dollars to four million dollars per project. We like companies to have at least half a million dollars annual revenue although this is not a fixed rule where high growth is seen. The most important factor in our decision is promoters sharing our ambition for growth and international best practices and technology. It is more about how do we get on with the people.
What's your role in the company management after you begin to invest?
We are minority shareholders and sit on the board of the company. But we do not manage on our own. We take up to 49 percent stake of the company and our investment is for up to ten years. We do not buyout the company and control the business. We help by guiding from the board level, help with strategy level, and use our contacts to bring in best practices and hopefully revenue growth. We believe in local management team. We are not investing to replace the management team.
What is your expected goal by being a strategic partner with Nepali companies looking for growth capital and skills?
We are a ten-year fund with the possibility of extending. Our expectation of the rate of returns varies depending on the industry. Our investors want to show that Nepal can show commercial success through our investments while also setting an example for other foreign investors to increase the investment capacity available in Nepali businesses. Important in this is how efficient the FDI process is shown to.
Good returns will guide other investors to Nepal despite the risk. We are an impact fund and also want to see a positive social and environmental impact in addition to commercial successes. The world is looking to us, and other important investors in Nepal, including IFC, BO2, One2Watch and others, to see whether the returns compensate for the high perceived political risk of investing in Nepal. The rate of return on most investments should be higher than that for India, if some of the large investors in India are to be persuaded to come to Nepal. The FDI process is more complex in Nepal, and the political risk is higher.
There are several good start-up companies. Why don't you take them as your potential partners?
We look for companies in the middle stage of growth; startups are not in our target groups. Early stage company risk compounds with political risk. We want to invest in the first fund for Nepal that are more likely to succeed, and in future we hope this will attract other funds that specialize in early stage investments.
Investors from around the world are interested in developing economies like Nepal, and many are fascinated having been here as tourists. The best way to market Nepal as an investment destination is to show success by foreign investors.
What is your exit plan after the fund matures? Are exit policies of Nepal investor-friendly?
We share the risk with promoters and we make money when they make money. We are not a bank that charges interest. We need to sell our shares within our ten-year horizon.
We will list shares of hydropower companies we invest in on the stock market which is already familiar with this sector. Our preference is to list on the stock market for all exits as current regulations prevent listing at a market price (which is the norm around the world). Listing in Nepal is difficult for most sectors. If, for example, a promoter has worked hard to build a valuable company worth Rs 50 per share, and have ploughed their profits back into growth instead of declaring dividend who would sell at Rs 100? India has already adopted a form of market pricing, and that could be a model to follow.
This is the main reason why Nepal Stock Exchange has very few sectors, beyond banks and financial institutions and hydropower. We think this is a shame, as if more companies are listed, there would be better regulation and reporting, and more opportunities for local and international investors. We have shared these problems with the authorities and suggested reforms
Other ways of exit can be trade sale such as selling to Nepali or Indian companies. We may also consider offering buyback option for promoters.
While much work is needed for reforms, the good news is that Nepali institutions are matured compared to some other challenging markets. We have had a good experience working with the Department of Industry and Nepal Rastra Bank at the highest levels. So for us with a team on the ground, it has not been too much of a problem. However, reforms are needed to make Nepal attractive to large foreign investors who operate from the world's financial centers.
We believe that Nepal should adopt an automatic route for priority sectors, as India has done. This will reduce time going to different agencies to receive FDI approvals which discourages investors. It's a barrier to entry, and given other risks in the country, Nepal should make investment as easy as possible. Again the good news is that these changes are not large -- they don't require extensive institutional changes. We find the core institutions sound and are impressed with those that run them.
What are your suggestions for removing the barriers?
Removal of barriers to the entry and exit of investors could dramatically increase domestic and foreign investment in the economy. First, allow an automatic route for FDI in priority sectors such as hydropower. Second, allow listing of shares at the market price. And third, allow non-promoter investors to sell their shares after launching IPO, and not to be locked-in for three years.
Imagine us as a ten-year fund. If we feel it will take us over seven years to help build a successful company, and then we have to add three years before we can sell, we simply won't be able to invest in the first place. India has made similar reforms and now ranks fifth in the world for FDI. By enacting such relatively simple reforms, Nepal will have phenomenal opportunities for economic growth.
What do you say to the investors who are on the fence?
They should come to Nepal first. If you look at Nepal and FDI complexity from abroad and also add political risks to that, it may look difficult. Come here and talk to regulators and business communities who are wide open. Don't judge Nepal by international indicators. Come and see yourselves the opportunities and spirit of the business communities in Nepal.
We are not sector specific. We have been very impressed with the quality of entrepreneurs who can operate in challenging environment. They are the masters of risk management, even operating through earthquakes and political uncertainties.
A certain type of entrepreneurs is drawn to us and we are drawn to them. We provide growth capital or risk capital. We are not a debt provider; we are minority shareholders and share the risk with promoters. In fact, we take more risks than banks. So we are looking for entrepreneurs that share our ambitious outlook for Nepal's market opportunities.
Entrepreneurs want to reach international standards in terms of product, market, compliance, good corporate governance and an ambitious growth strategy. We have seen here in Nepal that markets are not developed yet and there is a lot of opportunity for local entrepreneurs. We want to share these goals. We have international reach to export products and import technology and best practices.
What are basic requirements you look for in those companies aspiring to receive equity investments?
Some of the companies may have made mistakes in the past and they are not perfect. But we do not mind. As long as there is full disclosure on both sides, we are good with that. We don't mind mistakes, but we don't like surprises further down the line.
We have a screening process that may last a week or two. We then evaluate their business plans further and give an 'in principle' approval before proceeding with due diligence. We invest in the range from half a million dollars to four million dollars per project. We like companies to have at least half a million dollars annual revenue although this is not a fixed rule where high growth is seen. The most important factor in our decision is promoters sharing our ambition for growth and international best practices and technology. It is more about how do we get on with the people.
What's your role in the company management after you begin to invest?
We are minority shareholders and sit on the board of the company. But we do not manage on our own. We take up to 49 percent stake of the company and our investment is for up to ten years. We do not buyout the company and control the business. We help by guiding from the board level, help with strategy level, and use our contacts to bring in best practices and hopefully revenue growth. We believe in local management team. We are not investing to replace the management team.
What is your expected goal by being a strategic partner with Nepali companies looking for growth capital and skills?
We are a ten-year fund with the possibility of extending. Our expectation of the rate of returns varies depending on the industry. Our investors want to show that Nepal can show commercial success through our investments while also setting an example for other foreign investors to increase the investment capacity available in Nepali businesses. Important in this is how efficient the FDI process is shown to.
Good returns will guide other investors to Nepal despite the risk. We are an impact fund and also want to see a positive social and environmental impact in addition to commercial successes. The world is looking to us, and other important investors in Nepal, including IFC, BO2, One2Watch and others, to see whether the returns compensate for the high perceived political risk of investing in Nepal. The rate of return on most investments should be higher than that for India, if some of the large investors in India are to be persuaded to come to Nepal. The FDI process is more complex in Nepal, and the political risk is higher.
There are several good start-up companies. Why don't you take them as your potential partners?
We look for companies in the middle stage of growth; startups are not in our target groups. Early stage company risk compounds with political risk. We want to invest in the first fund for Nepal that are more likely to succeed, and in future we hope this will attract other funds that specialize in early stage investments.
Investors from around the world are interested in developing economies like Nepal, and many are fascinated having been here as tourists. The best way to market Nepal as an investment destination is to show success by foreign investors.
What is your exit plan after the fund matures? Are exit policies of Nepal investor-friendly?
We share the risk with promoters and we make money when they make money. We are not a bank that charges interest. We need to sell our shares within our ten-year horizon.
We will list shares of hydropower companies we invest in on the stock market which is already familiar with this sector. Our preference is to list on the stock market for all exits as current regulations prevent listing at a market price (which is the norm around the world). Listing in Nepal is difficult for most sectors. If, for example, a promoter has worked hard to build a valuable company worth Rs 50 per share, and have ploughed their profits back into growth instead of declaring dividend who would sell at Rs 100? India has already adopted a form of market pricing, and that could be a model to follow.
This is the main reason why Nepal Stock Exchange has very few sectors, beyond banks and financial institutions and hydropower. We think this is a shame, as if more companies are listed, there would be better regulation and reporting, and more opportunities for local and international investors. We have shared these problems with the authorities and suggested reforms
Other ways of exit can be trade sale such as selling to Nepali or Indian companies. We may also consider offering buyback option for promoters.
While much work is needed for reforms, the good news is that Nepali institutions are matured compared to some other challenging markets. We have had a good experience working with the Department of Industry and Nepal Rastra Bank at the highest levels. So for us with a team on the ground, it has not been too much of a problem. However, reforms are needed to make Nepal attractive to large foreign investors who operate from the world's financial centers.
We believe that Nepal should adopt an automatic route for priority sectors, as India has done. This will reduce time going to different agencies to receive FDI approvals which discourages investors. It's a barrier to entry, and given other risks in the country, Nepal should make investment as easy as possible. Again the good news is that these changes are not large -- they don't require extensive institutional changes. We find the core institutions sound and are impressed with those that run them.
What are your suggestions for removing the barriers?
Removal of barriers to the entry and exit of investors could dramatically increase domestic and foreign investment in the economy. First, allow an automatic route for FDI in priority sectors such as hydropower. Second, allow listing of shares at the market price. And third, allow non-promoter investors to sell their shares after launching IPO, and not to be locked-in for three years.
Imagine us as a ten-year fund. If we feel it will take us over seven years to help build a successful company, and then we have to add three years before we can sell, we simply won't be able to invest in the first place. India has made similar reforms and now ranks fifth in the world for FDI. By enacting such relatively simple reforms, Nepal will have phenomenal opportunities for economic growth.
What do you say to the investors who are on the fence?
They should come to Nepal first. If you look at Nepal and FDI complexity from abroad and also add political risks to that, it may look difficult. Come here and talk to regulators and business communities who are wide open. Don't judge Nepal by international indicators. Come and see yourselves the opportunities and spirit of the business communities in Nepal.
Source: Republica
The
world is watching to see whether the returns compensate for 'political
risk' of investing in Nepal - See more at:
http://myrepublica.com/interview/story/33271/the-world-is-watching-to-see-whether-the-returns-compensate-for-political-risk-of-investing-in-nepal.html#sthash.GzOSOE9a.dpuf
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