ILLUSTRATION: SHUTTERSTOCK
DOLMA IMPACT Fund began 2026 with a tax dispute that has since become a cautionary tale for every investor eyeing Kathmandu. Last year Nepal’s Inland Revenue Department ruled that the fund, registered in Mauritius, would not owe capital gains tax on the sale of shares in Nepali companies, citing a double taxation treaty signed in 1999. Critics called the arrangement a shell game and the reprieve short-lived. The Department reversed itself later on. Dolma, which has deployed more than $100m across renewable energy, healthcare and technology since 2014, now faces an uncertain exit path for its first vehicle, and its experience has rippled through a market already nervous about whether money can leave the country at all.
The dispute matters. Nepal’s private equity and venture capital industry has spent a decade promising that patient capital would transform a bank-dominated economy. In 2024 it delivered its most persuasive argument yet: funds deployed $64m across forty deals, nearly 40 per cent of all capital invested since records began in 2012. Nine funds were active, three for the first time. More than 74 per cent of that money came from domestic vehicles licensed under the Specialised Investment Fund framework introduced in 2019, a shift from the donor-led offshore experiments that had defined the sector. The numbers looked like proof that risk capital had finally taken root.
The exits suggest otherwise. Of 137 investments recorded since 2012, only 11 or so have been fully sold. Another eight were partial exits. That is a completion rate of roughly 8 per cent across more than a decade of activity. The average holding period runs past five years. Fund managers who raised money in 2020 face a 2030 deadline to return capital, meaning a company that took investment in 2025 has five years to engineer an exit that its predecessor had a decade to prepare for. Nepal’s stock exchange is too small to absorb significant stakes without depressing share prices. Domestic acquirers with balance sheets big enough to buy a growing company can be counted without removing a glove. As one fund manager in Kathmandu put it, the most common exit strategy is waiting for divine intervention.
The regulatory response has compounded the difficulty. In May the Securities Board of Nepal finalised plans to extend the mandatory lock-in period for PEVC-owned shares from one year to two following an initial public offering. The change targets funds that had been timing investments to ride near-term IPOs in the hydropower sector, buying cheaply before listing and selling immediately after the lock-in expired.
SEBON’s own study committee found that these rapid withdrawals dumped overvalued shares onto retail investors. But extending the lock-in does not create new exit routes. It merely delays the moment when a fund must find a buyer in a market that has precious few. Manish Thapa of Global Equity Fund noted that lock-in flexibility had made the model more attractive to funds, but argued that regulators must ensure it aligns with the sector’s original development goals.
The main problem is that the fund model imported into Nepal was built for a different economy. Limited partnerships with ten-year horizons, two-and-twenty fee structures and exit assumptions drawn from Silicon Valley or Mumbai assume deep public markets, enforceable legal systems and institutional investors comfortable with decade-long lock-ups. Nepal has none of these.
An estimated 85 to 90 per cent of Nepali businesses are family-owned. They rarely acquire one another, and founders are unwilling to cede control, making buyouts nearly impossible. Public markets are shallow and illiquid. The pipeline of companies with the financial controls and governance structures that institutional investors require remains narrow. Fund managers raised more capital than the market could responsibly absorb. Pressure to deploy at pace inflated valuations, and assets once priced as if they were in large, active markets are still recorded at values no new investor would pay.
The concentration of capital has made the trap worse. Renewable energy, predominantly small hydropower projects, has absorbed $55.2m cumulatively, the largest single sector, with an average deal size of $23m. Hydropower investments are structurally ten-to-fifteen-year propositions, tied to power purchase agreements, grid construction and commissioning timelines. The 2023 power trade accord with India gave those positions an exit logic that did not exist before, but it also locked capital into a sector where patience is measured in decades and not fund cycles.
Meanwhile, healthcare has attracted just $11.1m or so cumulatively, pharmaceuticals $2.1m and agri-business $8.2m, sectors where Nepal has comparative advantages and where capital could make a more immediate difference.
The wider investment climate has deteriorated alongside the industry’s internal strains. Private investment as a share of GDP has fallen from 21.7 per cent in the 2021-22 fiscal year to 14.7 per cent in 2024-25, according to the Nepal Rastra Bank. Demand for private investment is about 30 per cent lower than it was four years ago. Foreign direct investment commitments fell by roughly 7 billion rupees in the last fiscal year, to 58.1 billion, as foreign investors showed little appetite for large infrastructure or manufacturing projects. More than 98 per cent of the 1,116 projects approved were small-scale. The government’s subsidised startup loan scheme, which has disbursed 1.88 billion rupees to nearly 1,500 entrepreneurs over three fiscal years, has produced little visible impact. A large majority of recipient startups fail within a year.
Nepal’s PEVC industry is not collapsing. Nineteen licensed Specialised Investment Fund managers now operate under SEBON oversight, up from a single pioneering firm a decade ago. The Employees’ Provident Fund, the Citizen Investment Trust and the Social Security Fund, which together manage more than 900 billion rupees in public savings, have been authorised to invest in private equity and venture capital. That institutional base gives the market a foundation it lacked during its donor-backed infancy.
But foundations do not generate returns. Exits do. And until Nepal’s funds can sell what they buy, the capital that flooded in will remain stranded in portfolios that grow older by the year, waiting for buyers who have not yet arrived. ■
