With COVID-19, a common perspective that found its course in the economic world was, can the pandemic become a trigger for a more sustainable and inclusive world? Would impact investing become the new mainstream and a driver for growth in the developing markets like Nepal?
What is impact investing?
The notion of impact
investing revolves around turning the capital into a more humane and
sustainable tool, that looks beyond the lucrative returns of private equity. It
focuses on the idea of doing good along with returns rather than just
maximizing returns. During the early days, this idea was considered idealistic
and impractical. But over the last decade this changed. According to a survey
done by Global Impact Investing Network (GIIN) in 2019, the impact investing
assets under management stands over USD 502 billion.[i] This amount is deployed in
both developed and developing markets across a range of sectors. The
opportunity for creating impact through the deployment of capital into
businesses that increase incomes, create employment, and provide access to essential
services is significant, and the status of the impact investing industries in
these developing countries, particularly Southeast Asian countries is worthy of
Impact investing in the context of Nepal
In Nepal as well, the concept of impact investing is gaining popularity. The political scenario has stabilized and the consumption has increased due to increased remittances. These favourable situations make Nepal an attractive geography as investors with impact objectives see it as an opportunity to address significant social needs by investing in basic services, infrastructure and business opportunities. It allows them to “impact” a larger base of the pyramid. It is a country where capital makes a clear and significant difference. Nepal is characterized by small population, low GDP and limited infrastructure compared to other countries in the region. Gaps in basic services like education and healthcare add to the poverty existing in Nepal. However, these gaps present impact investors an opportunity to achieve their social mandate, despite being a difficult market.
The risk capital market in the country is largely driven by impact investors, unlike other markets where there is an already existing set of private equity and venture capital investors. The investors consist of funds, development finance institutions (DFIs), banks, family offices and high-net worth individuals (HNIs). Investors are focused on finding investable companies irrespective of the sector, making them quite opportunistic and sector agnostic. Investors are particularly interested in hydropower, tourism and hospitality. However, with the pandemic, Nepal will be able to see a shift to investments that are more diverse. Investors will have heightened interest in businesses that will help consumers with essential services like education, healthcare and technology. Dolma Impact Fund, an impact fund invested an additional USD 1 million in Sastodeal, a leading e-commerce company in Nepal amidst the pandemic. During the lockdown, Sasto-deal saw a rise in the number of users. According to Tim Gocher, CEO of Dolma Impact Fund, the investment reflects their belief in the company and their investment in Nepal’s technology sector. [ii] Likewise, the crisis has revealed the shortage of healthcare facilities especially in the rural areas. New health care technology such as telemedicine and AI- driven healthcare technology tools will be more sought after. The nationwide lockdown also saw a switch to online education and education technology.
Private equity funds in Nepal are synonymous to impact funds to great extent as they strive towards building positive social impact. These funds mostly focus on early stage, high growth companies or infrastructure investments. They can be the catalyst for economic growth post the crisis. “Private equity has the potential to maintain jobs and bring companies back to revenue after the crisis”, says Willem Grimminck, founder of One to Watch.[iii] Such funds can not only invest in companies but also cover them with financial and technical assistance during the crisis. For example, one of Dolma Impact Fund’s investors, FMO, has provided a grant for personal protective equipment (PPEs), hygiene management training and awareness programmes for workers and community members.[iv] Funds in Nepal aren’t fully invested yet and still have cash reserves that are needed to invest. Srini Nagarajan, Managing Director and Head of Asia for CDC believes that “Nepal has decent medium-sized businesses, which are successful and commercially sustainable as well. There’s a clear opportunity in Nepal to encourage these young entrepreneurs. It’s incumbent upon investors like us to encourage them to grow.”[v] Increased investments by existing impact funds and tapping on new investors that are looking to deploy funds in developing nations could be the way to move forward for businesses in Nepal.
Challenges and way forward
However, the country faces its own set of challenges, which need to be tackled. The government has to play a pivotal role in shaping the impact investment industry. The foreign direct investment process is inefficient and extremely time-consuming, sometimes even taking upto a year. Regulations are rigid on paper, but not as clear and well defined in practice, making it difficult to predict and follow regulatory processes. As a result, the investor confidence is low. The government along with the regulators should take necessary steps to relax the process of approval and make it more advanced and automatic. This is because funds globally are beginning to think what purpose is our money serving and there is more money to be deployed in frontier markets. The current focus of global investors is on healthcare, technology and renewable energy, which aligns with the budget priorities of fiscal year 2020/21. So the government should act immediately to tap onto this opportunity. This will pave way for economic development and employment.
[i] Abhilash Mudaliar, Hannah Dithrich. “Sizing the Impact Investing Market”, Global Impact Investing Network (GIIN), 1 April 2019. Retrieved from – https://thegiin.org/assets/Sizing%20the%20Impact%20Investing%20Market_webfile.pdf
[ii] “Dolma Impact Fund invests additional USD 1 million in Sastodeal.com”, The Kathmandu Post, 17 June 2020. Retrieved from- https://kathmandupost.com/money/2020/06/17/dolma-impact-fund-invests-additional-1-million-in-sastodeal-com?fbclid=IwAR3ckUPtbEKqI0fZEmh02j8r850meuN3qDK5QPT3P9A4VSOsANlm6_kkM_o
iii]“Investing in Nepal: Where patience breeds great reward” , CDC Group, Accessed on 19 June 2020.Retrieved from- https://www.cdcgroup.com/en/news-insight/insight/articles/nepal-where-patience-breeds-great-reward/?fl=true&utm_source=Master+List+CDC+Group+PLC&utm_campaign=473705a30a-EMAIL_CAMPAIGN_2019_08_21_03_13_COPY_02&utm_medium=email&utm_term=0_e6d7d8d8fb-473705a30a-223552069
[iv] Tim Gocher. “Private equity and the pandemic”, The Kathmandu Post, 15 June 2020.Retrieved from- https://kathmandupost.com/columns/2020/06/15/private-equity-and-the-pandemic
[v] “Investing in Nepal: Where patience breeds great reward”, CDC Group, Accessed on 19 June 2020 Retrieved from- https://www.cdcgroup.com/en/news-insight/insight/articles/nepal-where-patience-breeds-great-reward/?fl=true&utm_source=Master+List+CDC+Group+PLC&utm_campaign=473705a30a-EMAIL_CAMPAIGN_2019_08_21_03_13_COPY_02&utm_medium=email&utm_term=0_e6d7d8d8fb-473705a30a-223552069
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