ILLUSTRATION: KATMANDU JOURNAL
WHEN A development finance institution (DFI) wants to invest in a Nepali company, it faces a specific problem. The company may be legitimate, but determining whether it can survive and prosper in a frontier economy requires local knowledge. Most DFIs are based in London, Washington, Amsterdam or Helsinki. They have no office in Kathmandu. They cannot run the due diligence themselves without the kind of local presence that makes individual investments economically inefficient. The solution they have largely settled on is the same one institutional investors use everywhere: give the money to a local fund manager who does have the knowledge, and let that manager do the work.
Between 2013 and 2023 DFIs including the Dutch FMO, the British BII, Sweden’s Swedfund, the United States International Development Finance Corporation, the World Bank’s IFC and Finland’s Finnfund collectively invested some $105.56m in Nepal’s private equity and venture capital funds, according to data from the Nepal Private Equity Association, an industry body. The single most successful vehicle for this capital has been Dolma Impact Fund. Dolma’s first fund raised $27.81m, predominantly from DFIs. Its second fund raised $71.96m from the same community—making it the largest dedicated Nepal-focused PE/VC vehicle in the country’s history. The DFIs that backed Dolma did not invest directly in Foodmandu, or in the hospital, or in the logistics company that Dolma’s portfolio contains. They invested in the fund, and the fund made the investments. The fund manager, not the DFI, sat on the boards and monitored the businesses.
This model is sometimes called blended finance, and it has a particular advantage beyond the practical one of outsourcing due diligence. When a credible DFI invests in a fund as a limited partner, it signals to other investors that the fund manager has been validated. The DFI’s presence is a form of endorsement that helps the fund raise its remaining capital from investors who are less willing to be first but happy to be second. Dolma’s second fund attracted not only DFI capital from FMO, BII, Swedfund, DFC and IFC—who committed $50m in a single 2021 round—but also a $10m commitment from JICA, the Japanese development agency, as the anchor investors brought in further capital from institutional investors who followed them. The anchor investor model is how most new fund ecosystems in frontier markets get started. Nepal’s is no different.
The regulatory framework that allows all of this to happen is relatively recent. Nepal’s Securities Board, known as SEBON, introduced its Specialized Investment Fund rules only in 2019, giving private equity and venture capital a formal legal home for the first time.
Before that, funds like Business Oxygen (Nepal’s first private equity vehicle, registered in 2012 with IFC backing) operated under the Companies Act, a structure designed for operating businesses rather than investment pools. The 2019 regulation was a step forward. It recognised PE and VC as distinct asset classes, set standards for fund managers and created a licensing process. SEBON initially licensed five fund managers under the new framework and has expanded the pool since, with a growing number of firms also operating through earlier structures or offshore arrangements.
The problem that the ecosystem has not yet solved is scale. The DFI capital that has arrived has concentrated in the same two or three vehicles, with Dolma accounting for the big majority of what has been raised. The companies that do not fall into Dolma’s deal criteria—the sector focus, the ticket size, the governance standards it requires from investees—have no comparable alternative in Nepal’s formal investment market.
There is also a regulatory misalignment that the ecosystem has been managing around rather than through. Nepal’s SEBON SIF framework and its Foreign Investment and Technology Transfer Act were not designed together, and they do not fit together cleanly. A foreign DFI investing in a SEBON-regulated fund faces approval processes from multiple agencies—SEBON, the Department of Industry, the NRB—that can stretch the time from commitment to deployment to many months. Team Ventures, one of Nepal’s earlier fund managers, has described the approval process as taking so long that the business opportunity being chased has sometimes moved on before the capital arrived.
Addressing this is the kind of boring regulatory plumbing that finance ministers rarely announce in budget speeches. Wagle’s budget for the coming year includes provisions for the Alternative Development Finance Fund—a vehicle with authorised capital of Rs100bn and initial paid-up capital of Rs25bn, backed by the Employees Provident Fund, Citizens Investment Trust, Social Security Fund and insurance companies alongside a 51% government stake. Whether that fund complements the DFI-backed private model or substitutes for it—by crowding out the commercial returns that attract private capital—will depend on how it is structured and managed.
The DFIs are watching. They have deployed a big sum in Nepal’s PE/VC fund market over a decade, overwhelmingly through Dolma. Nepal’s startup ecosystem has grown, its regulatory framework has improved. And a new government has signalled the right ambitions. The patient capital is here. The question is building enough credible fund managers to deploy it. ■
